<PAGE>
RULES 424(B)(3) AND 424(C)
REGISTRATION NO. 333-13133
PROSPECTUS SUPPLEMENT
TO PROSPECTUS DATED OCTOBER 9, 1996
AND PROSPECTUS SUPPLEMENTS DATED
NOVEMBER 6, 1996, DECEMBER 12, 1996
AND JANUARY 8, 1997
[LOGO]
U.S. Office Products (the "Company") has prepared this Prospectus Supplement
to update the Company's Prospectus dated October 6, 1996, as supplemented by
Prospectus Supplements dated November 6, 1996, December 12, 1996, and January 8,
1997, covering 37,651,948 shares of the Company's common stock, $.001 par value
("Common Stock").
On January 31, 1997, the Company announced the public offering of 10 million
shares of Common Stock at a price of $33.00 per share (the "Public Offering").
Of the 10 million shares, 8,045,331 shares were offered by the Company and
1,954,669 shares were offered by certain stockholders of the Company. The
Company intends to use the $266.5 million of net proceeds of the Public Offering
to repay indebtedness incurred under its bank credit facility.
From its founding through January 25, 1997, the Company completed 138
acquisitions. Most recently, these acquisitions included three businesses in the
computer and telecommunications network services markets; one business in the
software and management information systems market for the office products
industry; two businesses in the forms management market; one business in the
corporate travel services market; and one business which is an office products
wholesaler.
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 financial information as of
October 26, 1996 and for the years ended April 30, 1996, 1995, and 1994 and for
the six months ended October 26, 1996 and October 31, 1995, reflecting
acquisitions through January 25, 1997 and the Company's Public Offering; (ii)
the Company's supplemental financial statements as of April 30, 1996 and 1995
and October 26, 1996 (unaudited) and for each of the three fiscal years in the
period ended April 30, 1996, and the six months ended October 26, 1996
(unaudited) and October 31, 1995 (unaudited); (iii) the financial statements of
Whitcoulls Group Limited as of June 30, 1996 and 1995 and for the years then
ended; (iv) the financial statements of SFI Corp. as of December 31, 1995 and
for the year then ended and as of September 30, 1996 (unaudited) and for the
nine months ended September 30, 1996 and 1995 (unaudited); and (iv) the
financial statements of Hano Document Printers, Inc., as of December 31, 1995
and for the year then ended and as of September 30, 1996 (unaudited) and for the
nine months ended September 30, 1996 and 1995 (unaudited).
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS FEBRUARY 3, 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 January 25, 1997. The unaudited pro
forma combined balance sheet gives effect to the 24 businesses acquired by the
Company after October 26, 1996 (the "Fiscal 1997 Post 2nd Quarter
Acquisitions"), as if all such acquisitions had occurred as of the Company's
most recent balance sheet date, October 26, 1996.
The pro forma combined statement of income for the year ended April 30, 1996
gives effect to (i) the 26 acquisitions completed during fiscal 1996 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 60 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 9 acquisitions completed after October 26, 1996 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 2nd Quarter Pooled Companies", which together with the Fiscal 1997
Purchased Companies are referred to as the "Fiscal 1997 Completed
Acquisitions"); (iv) 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 sales 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 sale by the Company of
8,045,331 shares of Common Stock in the Public Offering.
The historical financial statements of the Company give retroactive effect
to the results of the 21 companies acquired by the Company during the six months
ended October 26, 1996 and the 14 companies acquired during fiscal 1996 which
were business combinations accounted for under the pooling-of-interests method
of accounting.
The pro forma combined statement of income for the year ended April 30, 1996
includes (i) the audited financial statements of the Company for the year ended
April 30, 1996; (ii) the unaudited financial information of the Fiscal 1996
Purchased Companies for the period from May 1, 1995 to the consummation date;
(iii) the unaudited financial information 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; and (iv) the unaudited financial information of the Fiscal
1997 Post 2nd Quarter Pooled Companies for the most recently completed fiscal
year.
The pro forma combined statement of income for the six months ended October
26, 1996 includes the unaudited financial information of the Company and gives
effect to (i) the 60 acquisitions completed during fiscal 1997 accounted for
under the purchase method of accounting for the period May 1, 1996 to the
consummation date and (ii) the 9 acquisitions completed after October 26, 1996
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.
The pro forma combined statement of income for the six months ended October
31, 1995 includes the unaudited financial information of the Company and gives
effect to the Fiscal 1996 Purchased Companies and the Fiscal 1997 Completed
Acquisitions as if all such acquisitions had been made on May 1, 1995.
2
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
The pro forma combined statement of income for the years ended April 30,
1995 and 1994 includes the audited financial information of the Company and
gives effect to the Fiscal 1997 Post 2nd Quarter Pooled Companies.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
period, as assumed, or the future results of the Company. The pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this report and in other
reports filed by the Company.
3
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
OCTOBER 26, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL YEAR 1997
PRODUCTS COMPLETED PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS SUBTOTAL
------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 51,442 $ 4,297 $ (19,521)(a) $
(41,270)(a)
5,052(a)
Accounts receivable...................................... 294,175 58,039 352,214
Lease receivables........................................ 29,865 29,865
Inventory................................................ 225,616 30,667 256,283
Prepaid and other current assets......................... 38,730 4,884 43,614
------------ -------- ------------ ------------
Total current assets................................. 639,828 97,887 (55,739) 681,976
Property and equipment, net................................ 182,222 13,933 196,155
Intangible assets, net..................................... 541,422 4,746 19,098(a) 565,266
Investment in affiliate.................................... 41,270(a) 41,270
Lease receivables.......................................... 46,379 46,379
Other assets............................................... 34,380 3,638 38,018
------------ -------- ------------ ------------
Total assets......................................... $ 1,444,231 $ 120,204 $ 4,629 $ 1,569,064
------------ -------- ------------ ------------
------------ -------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................... $ 227,571 $ 20,925 $ 22,348(a) $ 270,844
Accounts payable......................................... 159,632 31,060 190,692
Accrued compensation..................................... 33,302 2,134 35,436
Other accrued liabilities................................ 98,517 10,964 109,481
------------ -------- ------------ ------------
Total current liabilities............................ 519,022 65,083 22,348 606,453
Long-term debt............................................. 383,367 17,296 (17,296)(a) 383,367
Deferred income taxes...................................... 7,824 8 7,832
Other long-term liabilities................................ 3,123 550 3,673
------------ -------- ------------ ------------
Total liabilities.................................... 913,336 82,937 5,052 1,001,325
Minority interest.......................................... 4,672 4,672
Stockholders' equity:
Common stock............................................. 46 176 (170)(a) 51
Additional paid-in capital............................... 467,687 32 11,823(a) 479,543
Cumulative translation adjustment........................ 4,988 4,988
Retained earnings........................................ 53,502 24,983 78,485
Equity of purchased companies............................ 12,076 (12,076)(a)
------------ -------- ------------ ------------
Total stockholders' equity........................... 526,223 37,267 (423) 563,067
------------ -------- ------------ ------------
Total liabilities and stockholders' equity........... $ 1,444,231 $ 120,204 $ 4,629 $ 1,569,064
------------ -------- ------------ ------------
------------ -------- ------------ ------------
<CAPTION>
PRO FORMA
OFFERING PRO FORMA
ADJUSTMENTS COMBINED
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 255,233(b) $
(255,233)(b)
Accounts receivable...................................... 352,214
Lease receivables........................................ 29,865
Inventory................................................ 256,283
Prepaid and other current assets......................... 43,614
------------ ------------
Total current assets................................. 681,976
Property and equipment, net................................ 196,155
Intangible assets, net..................................... 565,266
Investment in affiliate.................................... 41,270
Lease receivables.......................................... 46,379
Other assets............................................... 38,018
------------ ------------
Total assets......................................... $ $ 1,569,064
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................... $ (255,233)(b) $ 15,611
Accounts payable......................................... 190,692
Accrued compensation..................................... 35,436
Other accrued liabilities................................ 109,481
------------ ------------
Total current liabilities............................ (255,233) 351,220
Long-term debt............................................. 383,367
Deferred income taxes...................................... 7,832
Other long-term liabilities................................ 3,673
------------ ------------
Total liabilities.................................... (255,233) 746,092
Minority interest.......................................... 4,672
Stockholders' equity:
Common stock............................................. 8(b) 59
Additional paid-in capital............................... 255,225(b) 734,768
Cumulative translation adjustment........................ 4,988
Retained earnings........................................ 78,485
Equity of purchased companies............................
------------ ------------
Total stockholders' equity........................... 255,233 818,300
------------ ------------
Total liabilities and stockholders' equity........... $ $ 1,569,064
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to pro forma combined financial statements.
4
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. OFFICE 1996 1997 PRO FORMA
PRODUCTS PURCHASED COMPLETED PRO FORMA OFFERING PRO FORMA
COMPANY COMPANIES ACQUISITIONS ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
----------- ----------- ----------- ----------- --------- ----------- -----------
Revenues............. $1,149,691 $ 307,954 $1,227,965 $2,685,610 $2,685,610
Cost of revenues..... 848,003 214,072 847,993 1,910,068 1,910,068
----------- ----------- ----------- ----------- --------- ----------- -----------
Gross profit....... 301,688 93,882 379,972 775,542 775,542
Selling, general and
administrative
expenses........... 256,681 84,070 317,954 $ 7,835(c) 652,435 652,435
(11,573)(d)
(2,532)(e)
Nonrecurring
acquisition
costs.............. 8,057 (8,057)(e)
Nonrecurring
restructuring
costs.............. 8,092 8,092 8,092
Discontinuation of
printing division
at subsidiary...... 682 682 682
----------- ----------- ----------- ----------- --------- ----------- -----------
Operating income... 36,268 1,720 62,018 14,327 114,333 114,333
Other (income)
expense:
Interest expense... 13,115 2,761 11,899 11,941(f) 39,716 $ (17,420)(l) 22,296
Interest income.... (3,750) (682) 4,432(f)
Other.............. (1,063) (24) (796) (671)(g) (2,554) (2,554)
Equity in net income
of affiliated
company............ 1,155(h) 1,155 1,155
----------- ----------- ----------- ----------- --------- ----------- -----------
Income (loss) before
provision for
income taxes....... 27,966 (1,017) 51,597 (220) 78,326 17,420 95,746
Provision for income
taxes.............. 6,610 45 12,986 14,345(i) 33,986 6,968 40,954
----------- ----------- ----------- ----------- --------- ----------- -----------
Net income (loss).... $ 21,356 $ (1,062) $ 38,611 $ (14,565) $ 44,340 $ 10,452 $ 54,792
----------- ----------- ----------- ----------- --------- ----------- -----------
----------- ----------- ----------- ----------- --------- ----------- -----------
Weighted average
shares
outstanding........ 31,789 51,729(j) 59,774(m)
Net income per
share.............. $ 0.67 $ 0.86 $ 0.92
----------- --------- -----------
----------- --------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
5
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED OCTOBER 26, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 PRO FORMA
PRODUCTS COMPLETED PRO FORMA OFFERING PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
----------- ----------- ------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $ 996,414 $ 392,255 $1,388,669 $1,388,669
Cost of revenues................... 716,849 268,756 985,605 985,605
----------- ----------- ------------- --------- ------------- -----------
Gross profit................... 279,565 123,499 403,064 403,064
Selling, general and administrative
expenses......................... 227,245 107,188 $ 1,258(c) 332,645 332,645
(3,046)(d)
Nonrecurring acquisition costs..... 5,727 (5,727)(e)
----------- ----------- ------------- --------- ------------- -----------
Operating income............... 46,593 16,311 7,515 70,419 70,419
Other (income) expense:
Interest expense................. 18,643 3,667 (952)(f) 21,358 $ (8,710)(l) 12,648
Interest income.................. (5,382) (226) 5,608(f)
Foreign currency gain............ (3,420) (3,420) (3,420)
Other............................ (476) (711) (1,187) (1,187)
Equity in net income of affiliated
company.......................... 782(h) 782 782
----------- ----------- ------------- --------- ------------- -----------
Income before provision for income
taxes and extraordinary item..... 37,228 13,581 3,641 54,450 8,710 63,160
Provision for income taxes......... 13,948 2,809 6,857(i) 23,614 3,484 27,098
----------- ----------- ------------- --------- ------------- -----------
Income before extraordinary item... $ 23,280 $ 10,772 $ (3,216) $ 30,836 $ 5,226 $ 36,062
----------- ----------- ------------- --------- ------------- -----------
----------- ----------- ------------- --------- ------------- -----------
Weighted average shares
outstanding...................... 43,622 52,360(j) 60,405(m)
Net income per share before
extraordinary item............... $ 0.53 $ 0.59 $ 0.60
----------- --------- -----------
----------- --------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
6
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED OCTOBER 31, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------
U.S. OFFICE 1996 1997 PRO FORMA
PRODUCTS PURCHASED COMPLETED PRO FORMA OFFERING PRO FORMA
COMPANY COMPANIES ACQUISITIONS ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
----------- ----------- ----------- ------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 485,546 $ 223,016 $ 594,814 $ 1,303,376 1,303,376
Cost of revenues........ 361,534 158,215 418,960 $ 938,709 $ 938,709
----------- ----------- ----------- ------------- --------- ------------- -----------
Gross profit........ 124,012 64,801 175,854 364,667 364,667
Selling, general and
administrative
expenses.............. 106,852 55,209 153,571 5,273(c) 316,531 316,531
(4,374)(d)
Nonrecurring acquisition
costs................. 5,192 (5,192)(e)
----------- ----------- ----------- ------------- --------- ------------- -----------
Operating income.... 11,968 9,592 22,283 4,293 48,136 48,136
Other (income) expense:
Interest expense...... 4,639 2,001 6,853 7,865(f) 21,358 $ (8,710)(l) 12,648
Interest income....... (662) (40) (518) 1,220(f)
Other................. (718) 2,022 (440) 864 864
Equity in net income of
affiliated company.... 629(h) 629 629
----------- ----------- ----------- ------------- --------- ------------- -----------
Income (loss) before
provision for income
taxes................. 8,709 5,609 16,388 (4,163) 26,543 8,710 35,253
Provision for income
taxes................. 494 1,726 3,862 5,320(i) 11,402 3,484 14,886
----------- ----------- ----------- ------------- --------- ------------- -----------
Net income (loss)....... $ 8,215 $ 3,883 $ 12,526 $ (9,483) $ 15,141 $ 5,226 $ 20,367
----------- ----------- ----------- ------------- --------- ------------- -----------
----------- ----------- ----------- ------------- --------- ------------- -----------
Weighted average shares
outstanding........... 28,166 51,453(j) 59,498(m)
Net income per share.... $ 0.29 $ 0.29 $ 0.34
----------- --------- -----------
----------- --------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
7
<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
POST 2ND
U.S. OFFICE QTR. PRO-FORMA
PRODUCTS POOLINGS ADJUSTMENTS TOTAL
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenues................................................. $ 723,794 $ 182,905 $ $ 906,699
Cost of revenues......................................... 534,562 129,984 664,546
----------- ------------ ----------- ----------
Gross profit......................................... 189,232 52,921 242,153
Selling, general and administrative expenses............. 162,423 43,482 205,905
----------- ------------ ----------- ----------
Operating income..................................... 26,809 9,439 36,248
Other (income) expense:
Interest expense....................................... 6,182 1,372 7,554
Interest income........................................ (682) (167) (849)
Other.................................................. (549) 29 (520)
----------- ------------ ----------- ----------
Income before provision for income taxes................. 21,858 8,205 30,063
Provision for income taxes............................... 3,009 250 9,969(k) 13,228
----------- ------------ ----------- ----------
Net income............................................... $ 18,849 $ 7,955 $ (9,969) $ 16,835
----------- ------------ ----------- ----------
----------- ------------ ----------- ----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
8
<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
U.S. OFFICE QTR. PRO-FORMA
PRODUCTS POOLINGS ADJUSTMENTS TOTAL
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Revenues..................................................... $ 533,018 $ 146,319 $ $ 679,337
Cost of revenues............................................. 382,197 102,854 485,051
----------- ------------ ----------- ----------
Gross profit............................................. 150,821 43,465 194,286
Selling, general and administrative expenses................. 135,526 37,359 172,885
----------- ------------ ----------- ----------
Operating income......................................... 15,295 6,106 21,401
Other (income) expense:
Interest expense........................................... 4,139 1,210 5,349
Interest income............................................ (405) (1) (406)
Other...................................................... (633) 117 (516)
----------- ------------ ----------- ----------
Income before provision for income taxes..................... 12,194 4,780 16,974
Provision for income taxes................................... 1,947 292 5,230(k) 7,469
----------- ------------ ----------- ----------
Net income................................................... $ 10,247 $ 4,488 $ (5,230) $ 9,505
----------- ------------ ----------- ----------
----------- ------------ ----------- ----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
9
<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 ($19,098) in transactions accounted for as purchases
represents the excess of the cost over the fair value of the net
assets acquired. The Company amortizes goodwill over a period of 40
years. The recoverability of the unamortized goodwill will be
assessed on an ongoing basis by comparing anticipated undiscounted
future cash flows from operations to net book value.
(ii) Adjustment to reflect the investment of $41,270 representing a 49%
equity interest in Dudley Stationery Limited.
(iii) Borrowings on the Company's credit facility to cover a portion of
the purchase price of certain acquired companies and the refinancing
of debt of certain acquired companies.
(b) Adjustment to reflect $255,233 of net proceeds from the sale of 8,045
shares of Common Stock as part of the Public Offering (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 SIX
MONTHS ENDED
YEAR ENDED ------------------------
APRIL 30, OCTOBER 26, OCTOBER 31,
1996 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Fiscal 1996 Purchased Companies............................................ $ 1,570 $ -- $ 688
Fiscal 1997 Purchased Companies............................................ 6,265 1,258 4,585
----------- ----------- -----------
$ 7,835 $ 1,258 $ 5,273
----------- ----------- -----------
----------- ----------- -----------
</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 $8,057 for the
year ended April 30, 1996, $5,727 and $5,192 for the six months ended October
26, 1996 and October 31, 1995, respectively, and (ii) certain other
restructuring charges from certain acquisitions of $2,532 for the year ended
April 30, 1996.
(f) Adjustment to reflect an increase (decrease) in interest expense
resulting from the utilization of the proceeds from the sales of the February
Notes and the May Notes to effect acquisitions as if such debt had been
outstanding for the entire period. In addition, the adjustment reflects an
increase in interest expense resulting from the amortization of debt issue costs
over the terms of the February Notes and the May Notes. Adjustment also reflects
a decrease in interest income resulting from the utilization of the
10
<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)
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.
(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 43%. The
difference between the effective tax rate of 43% and the statutory tax rate of
35% relates primarily to state income taxes and non-deductible goodwill.
(j) The weighted average shares outstanding used to calculate pro forma
earnings per share is based on 51,729, 52,360, and 51,453 shares of Common Stock
and Common Stock equivalents outstanding for the year ended April 30, 1996 and
the six months ended October 26, 1996 and October 31, 1995, respectively. The
amounts are comprised of 45,698 shares outstanding for each of the periods,
5,408 shares issued for acquisitions completed subsequent to October 26, 1996
and 623, 1,254, and 347 common stock equivalents considered to be outstanding
related to stock options, for the year ended April 30, 1996, and the six month
periods ended October 26, 1996 and October 31, 1995, 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 from the Public Offering of $255,233 to repay
short term debt at an effective rate of 6.825%.
(m) Adjustment to include in weighted average shares outstanding the 8,045
shares to be sold by the Company as part of the Public Offering.
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
U.S. Office Products Company
In our opinion, based upon our audits and the reports of other auditors, the
accompanying supplemental consolidated balance sheet and the related
supplemental consolidated statements of income, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
U.S. Office Products Company and its subsidiaries at April 30, 1996 and 1995 and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended April 30, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of School Specialty, Inc., The Re-Print Corporation, SFI
Corp. and Hano Document Printers, Inc. (wholly owned subsidiaries) which
statements reflect total assets of approximately $70.7 million at December 31,
1994 and total revenues of $252.3 million, $194.4 million and $85.9 million for
the years ended December 31, 1995, 1994 and 1993, respectively. We also did not
audit the financial statements of Bay State Computer Group, Inc. and Fortran
Corp. (wholly owned subsidiaries) which statements reflect total assets of
approximately $20.5 million at March 31, 1995 and total revenues of $83.9
million, $64.0 million and $37.5 million for the years ended March 31, 1996,
1995 and 1994, respectively. Those statements were audited by other auditors
whose reports thereon have been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for School Specialty,
Inc., The Re-Print Corporation, SFI Corp., Hano Document Printers, Inc., Bay
State Computer Group and Fortran Corp. is based solely on the reports of the
other auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a reasonable
basis for the opinion expressed above.
As described in Note 1, on January 24, 1997 the Company completed
acquisitions accounted for as pooling-of-interests. The accompanying
supplemental consolidated financial statements give retroactive effect to the
mergers.
Price Waterhouse LLP
Minneapolis, Minnesota
May 31, 1996, except as to the third paragraph
of Note 4 which is as of October 26, 1996,
Note 15, which is as of July 10, 1996 and
Note 1, which is as of January 24, 1997
12
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1995 1996
---------- ---------- OCTOBER 26,
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 19,425 $ 175,390 $ 51,446
Accounts receivable, less allowance for doubtful accounts of $1,301,
$4,018 and $6,672, respectively........................................ 122,605 187,928 312,240
Lease receivables........................................................ 24,808 29,865
Inventories.............................................................. 63,056 120,622 232,676
Prepaid expenses and other current assets................................ 6,670 27,146 39,420
---------- ---------- ------------
Total current assets................................................. 211,756 535,894 665,647
Property and equipment, net................................................ 40,617 81,514 188,978
Intangible assets, net..................................................... 27,154 143,040 541,422
Lease receivables.......................................................... 47,005 46,379
Other assets............................................................... 5,620 18,974 36,533
---------- ---------- ------------
Total assets......................................................... $ 285,147 $ 826,427 $ 1,478,959
---------- ---------- ------------
---------- ---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................................... $ 62,156 $ 129,709 $ 237,624
Accounts payable......................................................... 60,727 105,893 165,894
Accrued compensation..................................................... 10,342 16,382 34,174
Other accrued liabilities................................................ 15,619 29,091 100,383
---------- ---------- ------------
Total current liabilities............................................ 148,844 281,075 538,075
Long-term debt............................................................. 32,696 188,250 390,345
Deferred income taxes...................................................... 4,357 7,056 7,824
Other long-term liabilities................................................ 1,617 1,703 3,123
---------- ---------- ------------
Total liabilities.................................................... 187,514 478,084 939,367
---------- ---------- ------------
Commitments and contingencies
Minority interest.......................................................... 6,024 4,672
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, none
outstanding Preferred stock of a pooled company........................ 1,000
Common stock, $.001 par value 500,000,000 shares authorized, 26,568,288,
41,812,480 and 48,117,248 shares issued and outstanding,
respectively........................................................... 27 42 48
Additional paid-in capital............................................... 50,855 298,255 467,822
Cumulative translation adjustment........................................ (193) 358 4,988
Retained earnings........................................................ 45,215 43,664 62,062
---------- ---------- ------------
Total stockholders' equity........................................... 96,904 342,319 534,920
---------- ---------- ------------
Total liabilities and stockholders' equity........................... $ 285,147 $ 826,427 $ 1,478,959
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
13
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
FOR THE FISCAL YEAR ENDED APRIL 30, -------------------------
------------------------------------ OCTOBER 31, OCTOBER 26,
1994 1995 1996 1995 1996
---------- ---------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 597,511 $ 798,709 $ 1,251,462 $ 535,875 $ 1,057,946
Cost of revenues................................ 427,308 586,989 918,293 397,302 759,321
---------- ---------- ------------ ----------- ------------
Gross profit.............................. 170,203 211,720 333,169 138,573 298,625
Selling, general and administrative expenses.... 151,979 181,845 282,596 118,998 242,893
Nonrecurring acquisition costs.................. 8,057 5,192 5,727
Discontinuation of printing division at
subsidiary..................................... 682
---------- ---------- ------------ ----------- ------------
Operating income.............................. 18,224 29,875 41,834 14,383 50,005
Other (income) expense:
Interest expense.............................. 4,943 7,108 14,543 5,249 19,350
Interest income............................... (405) (682) (3,750) (662) (5,382)
Foreign currency gain......................... (3,420)
Other......................................... (1,154) (1,122) (1,110) (645) (698)
---------- ---------- ------------ ----------- ------------
Income before provision for income taxes and
extraordinary item............................. 14,840 24,571 32,151 10,441 40,155
Provision for income taxes...................... 2,095 3,184 6,859 596 14,153
---------- ---------- ------------ ----------- ------------
Income before extraordinary item................ 12,745 21,387 25,292 9,845 26,002
Extraordinary item--loss on early termination of
credit facility, net of income tax benefit..... 612
---------- ---------- ------------ ----------- ------------
Net income.................................... $ 12,745 $ 21,387 $ 25,292 $ 9,845 $ 25,390
---------- ---------- ------------ ----------- ------------
---------- ---------- ------------ ----------- ------------
Weighted average common shares outstanding...... 34,208 30,585 46,041
------------ ----------- ------------
------------ ----------- ------------
Net income per share:
Income before extraordinary item.............. $ .74 $ .32 $ .56
Extraordinary item............................ (.01)
------------ ----------- ------------
Net income per share.......................... $ .74 $ .32 $ .55
------------ ----------- ------------
------------ ----------- ------------
Unaudited pro forma net income
(see Note 9)................................ $ 8,945 $ 14,916 $ 17,087 $ 5,736 $ 21,890
---------- ---------- ------------ ----------- ------------
---------- ---------- ------------ ----------- ------------
Unaudited pro forma net income per share:
Pro forma income before extraordinary item.... $ .50 $ .19 $ .49
Extraordinary item............................ (.01)
------------ ----------- ------------
Pro forma net income per share................ $ .50 $ .19 $ .48
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
14
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED APRIL 30, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED OCTOBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
------------------------ ---------------------- PAID-IN TRANSLATION RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS
----------- ----------- --------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1993............ 1 $ 1,000 18,064,225 $ 18 18,503 $ (400) $ 31,755
Transactions of Combined Companies:
Dividends.......................... (115)
Purchase of treasury stock
Adjustment to conform fiscal
year-ends of certain Combined
Companies........................... 273
Other................................ 512 (950)
Dividends of certain Pooled
Companies........................... (6,785)
Net income........................... 12,745
--
----------- --------- --- ----------- ------ -----------
Balance at April 30, 1994............ 1 1,000 18,064,225 18 19,015 (400) 36,923
Transactions of Combined Companies:
Issuance of common stock........... 251
Capital contributed by principal
stockholder...................... 1,814
Dividends.......................... (222)
Issuance of common stock in
conjunction with the formation of
U.S. Office Products............. 800,000 1
Issuance of common stock in the
initial public offering, net of
offering expenses of $4,686...... 3,737,500 4 32,686
Issuance of common stock to the
stockholders of the Combined
Companies........................ 3,078,000 3 (3)
Distributions to the stockholders
of the Combined Companies........ (11,300)
Issuance of common stock in
acquisition...................... 875,000 1 8,749
Adjustment to conform the year-ends
of certain Pooled Companies...... 2,235
Adjustment to stockholders' equity
accounts to reflect the
Mergers.......................... (12,597) 5,035
Cumulative translation
adjustment....................... 207
Conversion of warrants to equity of
certain Pooled Companies......... 13,563 201
Issuance of stock by certain Pooled
Companies........................ 739
Dividends of certain Pooled
Companies........................ (8,843)
Net income........................... 21,387
--
----------- --------- --- ----------- ------ -----------
Balance at April 30, 1995............ 1 1,000 26,568,288 27 50,855 (193) 45,215
<CAPTION>
TREASURY TOTAL
STOCK EQUITY
----------- ---------
<S> <C> <C>
Balance at April 30, 1993............ $ (5,048) $ 45,828
Transactions of Combined Companies:
Dividends.......................... (115)
Purchase of treasury stock (2,514) (2,514)
Adjustment to conform fiscal
year-ends of certain Combined
Companies........................... 273
Other................................ (438)
Dividends of certain Pooled
Companies........................... (6,785)
Net income........................... 12,745
----------- ---------
Balance at April 30, 1994............ (7,562) 48,994
Transactions of Combined Companies:
Issuance of common stock........... 251
Capital contributed by principal
stockholder...................... 1,814
Dividends.......................... (222)
Issuance of common stock in
conjunction with the formation of
U.S. Office Products............. 1
Issuance of common stock in the
initial public offering, net of
offering expenses of $4,686...... 32,690
Issuance of common stock to the
stockholders of the Combined
Companies........................
Distributions to the stockholders
of the Combined Companies........ (11,300)
Issuance of common stock in
acquisition...................... 8,750
Adjustment to conform the year-ends
of certain Pooled Companies...... 2,235
Adjustment to stockholders' equity
accounts to reflect the
Mergers.......................... 7,562
Cumulative translation
adjustment....................... 207
Conversion of warrants to equity of
certain Pooled Companies......... 201
Issuance of stock by certain Pooled
Companies........................ 739
Dividends of certain Pooled
Companies........................ (8,843)
Net income........................... 21,387
----------- ---------
Balance at April 30, 1995............ 96,904
</TABLE>
15
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED APRIL 30, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED OCTOBER 26, 1996 (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
------------------------ ---------------------- PAID-IN TRANSLATION RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS
----------- ----------- --------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995............ 1 $ 1,000 26,568,288 $ 27 $ 50,855 $ (193) $ 45,215
Issuance of warrants by Pooled
Companies........................ 473,750 672
Exercise of warrants by Pooled
Companies........................ 178,865 784
Options issued by Pooled
Companies........................ 296
Issuance of common stock in the
second public offering, net of
offering expenses of $3,902...... 4,025,000 4 53,450
Issuance of common stock in the
third public offering, net of
offering expenses of $7,594...... 5,543,045 6 121,277
Issuance of common stock in
acquisitions..................... 3,885,349 4 60,363
Issuance of common stock for stock
options exercised, including tax
benefits......................... 63,350 1,023
Issuance of common stock to repay
indebtedness..................... 419,408 3,855
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ (2,660)
Capital contribution by former
shareholders of pooled company... 1,154
Conversion of Pooled Company
preferred stock upon
acquisition...................... (1) (1,000) 1,000
Issuance of stock by certain Pooled
Companies........................ 91,000 2,164
Dividends of certain Pooled
Companies........................ 564,425 1 1,362 (24,183)
Cumulative translation
adjustment....................... 551
Net income......................... 25,292
--
----------- --------- --- ----------- ------ -----------
Balance at April 30, 1996............ 41,812,480 42 298,255 358 43,664
Issuance of common stock in
acquisitions..................... 4,327,781 4 120,202
Issuance of common stock........... 1,250,000 1 38,112
Exercise of stock options.......... 152,327 780
Exercise of stock warrants......... 166,750 1,200
Retirement of treasury stock....... 68,205 34 (34)
Capital contribution by former
shareholders of Pooled
Companies........................ 168,854 1 5,878
Issuance of common stock for stock
options exercised, including tax
benefit.......................... 77,541 1,633
Issuance of common stock for
employee stock purchase plan, net
of expenses of $25............... 93,310 1,728
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ 183
Dividends of certain Pooled
Companies........................ (7,141)
Cumulative translation
adjustment....................... 4,630
Net income......................... 25,390
--
----------- --------- --- ----------- ------ -----------
Balance at October 26, 1996
(unaudited)......................... $ 48,117,248 $ 48 $ 467,822 $ 4,988 $ 62,062
--
--
----------- --------- --- ----------- ------ -----------
----------- --------- --- ----------- ------ -----------
<CAPTION>
TREASURY TOTAL
STOCK EQUITY
----------- ---------
<S> <C> <C>
Balance at April 30, 1995............ $ 96,904
Issuance of warrants by Pooled
Companies........................ 672
Exercise of warrants by Pooled
Companies........................ 784
Options issued by Pooled
Companies........................ 296
Issuance of common stock in the
second public offering, net of
offering expenses of $3,902...... 53,454
Issuance of common stock in the
third public offering, net of
offering expenses of $7,594...... 121,283
Issuance of common stock in
acquisitions..................... 60,367
Issuance of common stock for stock
options exercised, including tax
benefits......................... 1,023
Issuance of common stock to repay
indebtedness..................... 3,855
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ (2,660)
Capital contribution by former
shareholders of pooled company... 1,154
Conversion of Pooled Company
preferred stock upon
acquisition......................
Issuance of stock by certain Pooled
Companies........................ 2,164
Dividends of certain Pooled
Companies........................ (22,820)
Cumulative translation
adjustment....................... 551
Net income......................... 25,292
----------- ---------
Balance at April 30, 1996............ 342,319
Issuance of common stock in
acquisitions..................... 120,206
Issuance of common stock........... 38,113
Exercise of stock options.......... 780
Exercise of stock warrants......... 1,200
Retirement of treasury stock.......
Capital contribution by former
shareholders of Pooled
Companies........................ 5,879
Issuance of common stock for stock
options exercised, including tax
benefit.......................... 1,633
Issuance of common stock for
employee stock purchase plan, net
of expenses of $25............... 1,728
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ 183
Dividends of certain Pooled
Companies........................ (7,141)
Cumulative translation
adjustment....................... 4,630
Net income......................... 25,390
----------- ---------
Balance at October 26, 1996
(unaudited)......................... $ $ 534,920
----------- ---------
----------- ---------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
16
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE FISCAL YEAR ENDED APRIL MONTHS ENDED
30, ------------------------
------------------------------- OCTOBER 31, OCTOBER 26,
1994 1995 1996 1995 1996
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 12,745 $ 21,387 $ 25,292 $ 9,845 $ 25,390
Adjustment to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization expense................ 8,614 10,410 14,461 5,275 14,603
Deferred income taxes................................ (165) (51) (264) 156 3,553
Write-off of deferred compensation................... (1,501)
Foreign currency gain................................ (3,420)
Changes in assets and liabilities (net of assets
acquired and liabilities assumed in business
combinations):
Accounts receivable................................ (9,964) (27,300) (3,774) (14,550) (55,743)
Lease receivables.................................. (17,705) (1,394)
Inventory.......................................... (2,615) (1,397) 209 (7,420) (2,783)
Prepaid expenses and other current assets.......... (2,464) (1,243) (9,653) (5,615) 1,519
Accounts payable................................... 4,305 7,603 3,221 14,515 (10,018)
Accrued liabilities................................ 1,625 5,453 5,482 512 (8,573)
--------- --------- --------- ----------- -----------
Net cash provided by (used in) operating
activities..................................... 12,081 14,862 17,269 2,718 (38,367)
--------- --------- --------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment.................... (7,199) (7,864) (16,858) (4,788) (11,401)
Cash used in acquisitions.............................. (18,099) (95,574) (43,406) (273,704)
Investment in affiliate................................ (5,603)
Deposits............................................... (74) (77) (256) (3,239) (9,007)
Other.................................................. (688) 274 (509) 216 1,309
--------- --------- --------- ----------- -----------
Net cash used in investing activities............ (7,961) (25,766) (118,800) (51,217) (292,803)
--------- --------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............... 8,568 6,198 156,916 6,576 225,131
Payments of long-term debt............................. (6,801) (8,107) (20,450) (6,546) (145,471)
Proceeds (payments) of short-term debt................. 1,504 3,859 (38,105) 3,565 89,188
Proceeds from issuance of common stock................. 33,454 176,287 53,454 38,113
Proceeds from exercise of stock options and warrants... 597 2,937
Proceeds from issuance of common stock in employee
stock purchase plan.................................. 1,728
Contributions of capital by stockholders of Pooled
Companies............................................ 2,557 1,848 1,802
Payments to stockholders of combined companies......... (27) (11,330) (42)
Adjustments to conform fiscal year-ends of certain
Pooled Companies..................................... 230 601 (1,015) (72) 184
Payments of dividends.................................. (7,179) (8,741) (16,506) (9,658) (7,035)
--------- --------- --------- ----------- -----------
Net cash provided by (used in) financing
activities..................................... (3,705) 18,491 257,682 49,167 206,577
--------- --------- --------- ----------- -----------
Effect of exchange rates on cash and cash equivalents.... 237 (180) (186) (11) 649
Net increase (decrease) in cash and cash equivalents..... 652 7,407 155,965 657 (123,944)
Cash and cash equivalents at beginning of period......... 11,366 12,018 19,425 19,425 175,390
--------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period............... $ 12,018 $ 19,425 $ 175,390 $ 20,082 $ 51,446
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
17
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE FISCAL YEAR MONTHS ENDED
ENDED APRIL 30, --------------------------
------------------------------- OCTOBER 31, OCTOBER 26,
1994 1995 1996 1995 1996
--------- --------- --------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid.............................................. $ 8,236 $ 11,361 $ 12,854 $ 3,294 $ 12,311
Income taxes paid.......................................... $ 3,234 $ 3,463 $ 8,524 $ 1,921 $ 10,000
</TABLE>
The Company issued common stock, notes payable and cash in connection with
certain business combinations in fiscal years ended April 30, 1994, 1995 and
1996.The fair values of the assets and liabilities of the acquired companies at
the dates of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE FISCAL YEAR MONTHS ENDED
ENDED APRIL 30, ------------------------
------------------------------- OCTOBER 31, OCTOBER 26,
1994 1995 1996 1995 1996
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable..................................... $ -- $ 23,462 $ 72,231 $ 23,576 $ 66,509
Inventories............................................. 20,074 51,425 17,309 107,086
Prepaid expenses and other current assets............... 1,779 8,914 3,845 12,111
Property and equipment.................................. 5,459 34,978 17,105 102,244
Intangible assets....................................... 21,079 118,422 45,451 398,932
Lease receivables....................................... 55,095 870
Other assets............................................ 339 1,257 872 3,732
Short-term debt......................................... (15,038) (105,814) (16,425) (8,783)
Accounts payable........................................ (15,627) (38,357) (14,384) (73,042)
Accrued liabilities..................................... (4,958) (16,244) (3,485) (99,158)
Long-term debt.......................................... (6,283) (17,949) (7,708) (114,649)
Deferred income taxes................................... (1,635)
Other long-term liabilities............................. (437) (247) (825) (1,942)
Minority interest....................................... (5,349)
--------- --------- --------- ----------- -----------
Net assets acquired..................................... $ -- $ 29,849 $ 156,727 $ 65,331 $ 393,910
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
The acquisitions were funded as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Common stock............................................ $ -- $ 8,750 $ 60,367 $ 21,925 $ 120,206
Notes payable........................................... 3,000 786
Cash.................................................... 18,099 95,574 43,406 273,704
--------- --------- --------- ----------- -----------
$ -- $ 29,849 $ 156,727 $ 65,331 $ 393,910
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
Noncash transactions:
- During fiscal 1996, one Pooled Company converted $1,385 of notes payable
to common stock.
- During fiscal 1996, the Company issued 194,447 shares of common stock to
repay $2,470 of indebtedness.
- During fiscal 1996, the Company recorded additional paid-in capital of
approximately $483 related to the tax benefit on stock options exercised.
- During fiscal 1994, one Combined Company issued $1,800 of debt in exchange
for nonvoting shares of common stock.
See accompanying notes to supplemental consolidated financial statements.
18
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1-- BUSINESS COMBINATION ACCOUNTED FOR UNDER THE POOLING-OF-INTERESTS
METHOD
Effective January 24, 1997, the Company issued 2,419,000 shares of common
stock to acquire certain companies in acquisitions accounted for under the
pooling-of-interests method. Accordingly, the accompanying supplemental
consolidated financial statements give retroactive effect to the acquisitions of
the Pooled Companies for all periods presented.
NOTE 2--BUSINESS ORGANIZATION
U.S. Office Products Company ("U.S. Office Products" and the "Company") was
founded in October 1994 with the goal of creating a world-wide office products
supplier, primarily to corporate, commercial and industrial customers.
Concurrent with the closing of its initial public offering (the "IPO") in
February 1995, the Company acquired four companies for a combination of its
common stock and cash which are referred to herein as the "Combined Companies"
and acquired two companies in business combinations accounted for under the
purchase method. The six companies are referred to as the "Founding Companies."
Simultaneously with the closing of the IPO, U.S. Office Products acquired by
merger each of the Combined Companies (the "Mergers"). The accompanying
consolidated financial statements and related notes to consolidated financial
statements are representative of what the financial position, results of
operations and cash flows would have been if U.S. Office Products and the
Combined Companies had been combined on May 1, 1993. The assets and liabilities
of the Combined Companies are reflected at their historical amounts. Capital
stock of the Combined Companies is included in additional paid-in capital. The
Combined Companies previously reported on fiscal years ending other than April
30. Commencing on May 1, 1994, the fiscal year-ends were changed to April 30
which resulted in an adjustment to retained earnings during fiscal 1994 of $273
which resulted from revenues of $8,983 and expenses of $8,710.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products,
the Combined Companies and the companies acquired in business combinations
accounted for under the purchase method (the "Purchased Companies") from their
respective acquisition dates and give retroactive effect to the results of the
companies acquired in business combinations accounted for under the
pooling-of-interests method (the "Pooled Companies") for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
19
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFINITION OF FISCAL YEAR
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1994," "fiscal 1995" and "fiscal
1996" refer to the Company's fiscal years ended April 30, 1994, 1995 and 1996,
respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany transactions
and accounts have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company invests a portion of its cash in highly
rated corporate commercial paper with original maturities of 30 days or less and
in overnight investments collateralized by U.S. government securities.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of product held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 5 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases are being amortized over the lesser of their useful lives or their lease
terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Goodwill is amortized on a straight
line basis over an estimated useful life of 40 years. Management periodically
evaluates the recoverability of goodwill, which would be adjusted for a
permanent decline in value, if any, by comparing anticipated undiscounted future
cash flows from operations to net book value.
20
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's majority owned foreign subsidiary has entered into forward
foreign currency exchange contracts (the "Exchange Contracts") with
counterparties to hedge the exposure to foreign currency fluctuations to the
extent permissible by hedge accounting requirements. At April 30, 1996, the
Exchange Contracts, in the notional amount of $4,616, hedge approximately $5,292
of foreign currency denominated assets. Discounts or premiums on the Exchange
Contracts are amortized over the life of the contracts.
The Company's majority owned foreign subsidiary has also entered into
interest rate swap agreements (the "Swap Agreements") with counterparties to
convert the interest rates associated with certain outstanding debt from
variable rates to fixed rates. The notional amount of the Swap Agreements was
$43,000 at April 30, 1996. The market risks associated with these Swap
Agreements result from short-term fluctuations in interest rates. The credit
risks related to non-performance of the Swap Agreements by the counterparties
are not deemed to be significant; however, non-performance would result in the
Company terminating the Swap Agreements and recognizing a gain or loss,
depending on the fair market value of the Swap Agreements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosure About Fair Value of Financial Instruments," the Company has
estimated the fair value of its financial instruments using the following
methods and assumptions:
- The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable approximates fair value;
- The fair value of the 5 1/2% Convertible Subordinated Notes due 2001 is
based on quoted market prices;
- The carrying amounts of the Company's debt, other than the 5 1/2%
Convertible Subordinated Notes due 2001, approximates fair value,
estimated by discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." One Combined Company and certain Pooled Companies
were organized as subchapter S corporations prior to being acquired by the
Company and, as a result, the federal tax on their income was the responsibility
of their individual stockholders. The asset and liability approach used in SFAS
109 requires the recognition of deferred tax assets and liabilities for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
21
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TAXES ON UNDISTRIBUTED EARNINGS
No provision is made for U.S. income taxes on earnings of foreign subsidiary
companies which the Company controls but does not include in the consolidated
federal income tax return since it is management's practice and intent to
permanently reinvest the earnings.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of office products to customers. The
Company also leases equipment to customers under both short-term and long-term
lease agreements. Revenue related to the short-term leases is recognized on a
monthly basis over the life of the lease. Certain long-term leases qualify as
sales-type leases and accordingly the present value of the future lease payments
are recognized as income upon delivery of the equipment to the customer.
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included as an increase to cost of revenues.
NONRECURRING ACQUISITION COSTS
Nonrecurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, investment banking fees,
recognition of transaction related obligations and various other acquisition
related costs.
DISCONTINUATION OF PRINTING DIVISION AT SUBSIDIARY
During fiscal 1996, the Company discontinued the printing division at one of
its subsidiaries and incurred a one time charge of $682, which consisted
primarily of the writedown of printing division assets to their estimated market
value.
NET INCOME PER SHARE
Net income per share for fiscal 1996 is calculated by dividing net income by
the weighted average number of common shares outstanding during the year
including common stock equivalents, if dilutive.
Net income per share for fiscal 1995 and fiscal 1994 has not been presented
as it is not considered meaningful due to the Mergers and the IPO in conjunction
with the formation of the Company during fiscal 1995.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation." SFAS 123 establishes a fair value
based method of accounting for employee stock based compensation plans and
encourages companies to adopt that method. However, it also allows companies to
continue to apply the intrinsic value based method currently prescribed under
APB Opinion No. 25, provided certain pro forma disclosures are made. SFAS 123 is
not required to be adopted by the
22
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company until fiscal 1997. The Company currently intends to continue to apply
the accounting method prescribed by APB Opinion 25 and, accordingly, the
adoption of SFAS 123 will not have a material impact on the Company's operating
results.
In March, 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. SFAS 121 is not required to
be adopted by the Company until fiscal 1997. The Company does not anticipate
that SFAS 121 will have a material effect on the Company's operating results.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of October 26, 1996 and the results
of income and of cash flows for the six months ended October 31, 1995 and
October 26, 1996, as presented in the accompanying unaudited supplemental
consolidated financial statements.
NOTE 4--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1996, the Company issued 8,440,852 shares of common stock to
acquire 14 companies in acquisitions accounted for under the
pooling-of-interests method. The Company's consolidated financial statements
give retroactive effect to the acquisitions of the Pooled Companies for all
periods presented. Certain of the Pooled Companies previously reported on fiscal
years ending other than April 30. The results of these Pooled Companies were
previously reported on June 30, September 30 and December 31 year-ends.
The accounts of these Pooled Companies for the years ended December 31, 1993
and 1994, for the years ended June 30, 1994 and 1995 and for the years ended
September 30, 1994 and 1995 have been combined with the accounts of U.S. Office
Products for the years ended April 30, 1994 and 1995, respectively. Commencing
on May 1, 1995, the year-ends of these companies were changed to April 30,
resulting in an increase to retained earnings of $2,235 during fiscal 1995.
Subsequent to April 30, 1996, the Company issued 8,525,976 shares of common
stock to acquire 21 companies in acquisitions accounted for under the
pooling-of-interests method. The Company's consolidated financial statements
give retroactive effect to the acquisitions of the Pooled Companies for all
periods presented. Certain of the Pooled Companies previously reported on fiscal
years ending other than April 30. The results of these Pooled Companies were
previously reported on January 31, March 31, May 31, June 30, August 31 and
December 31 year-ends.
The accounts of these Pooled Companies for the years ended December 31, 1994
and 1995, for the years ended January 31, 1995 and 1996, for the year ended
March 31, 1995 and 1996, for the years ended May 31, 1995 and 1996, for the
years ended June 30, 1995 and 1996, and the years ended August 31, 1995 and 1996
have been combined with the accounts of U.S. Office Products for the years ended
April 30, 1995
23
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
and 1996, respectively. Commencing on May 1, 1996, the year-ends of these
Companies were changed to April 30, resulting in a reduction to retained
earnings of $2,660 during fiscal 1996 and an increase of $183 for the six months
ended October 26, 1996.
Following is a summary of the results related to the adjustments to retained
earnings for these Pooled Companies:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED APRIL 30,
---------------------
1995 1996
--------- ---------- FOR THE SIX
MONTHS
ENDED
OCTOBER 26,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................................. $ 55,126 $ 121,722 $ (4,740)
Costs and expenses....................................... 52,891 124,382 (4,923)
--------- ---------- -----------
Net income (loss)........................................ $ 2,235 $ (2,660) $ 183
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
The separate results of operations of U.S. Office Products Company and the
Pooled Companies for periods prior to the mergers are presented below:
<TABLE>
<CAPTION>
U.S. OFFICE POOLED
FOR THE YEAR ENDED APRIL 30, PRODUCTS COMPANIES COMBINED
- ------------------------------------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
1996
Revenue.............................................. $ 488,670 $ 762,792 $ 1,251,462
Net income........................................... $ 7,828 $ 17,464 $ 25,292
1995
Revenue.............................................. $ 120,479 $ 678,230 $ 798,709
Net income........................................... $ 1,514 $ 19,873 $ 21,387
1994
Revenue.............................................. $ 76,541 $ 520,970 $ 597,511
Net income........................................... $ 1,114 $ 11,631 $ 12,745
FOR THE SIX MONTHS ENDED OCTOBER 26, 1996 (UNAUDITED):
- -------------------------------------------------------
Revenue.............................................. $ 858,093 $ 199,853 $ 1,057,946
Net income........................................... $ 15,500 $ 9,890 $ 25,390
FOR THE SIX MONTHS ENDED OCTOBER 31, 1995 (UNAUDITED):
- -------------------------------------------------------
Revenue.............................................. $ 146,491 $ 389,384 $ 535,875
Net income........................................... $ 3,734 $ 6,111 $ 9,845
</TABLE>
PURCHASE METHOD
In fiscal 1996, the Company made 27 acquisitions accounted for under the
purchase method for an aggregate purchase price of $156,727 consisting of
$95,574 of cash, $786 of notes payable and 3,885,349 shares of common stock with
a market value of $60,367. The total assets related to these 27 acquisitions
were $342,322, including goodwill of $118,422. The results of these acquisitions
have been included in the Company's results from their respective dates of
acquisition.
24
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
In fiscal 1995, in addition to the Mergers, the Company made six
acquisitions accounted for under the purchase method for an aggregate purchase
price of $29,849, consisting of $18,099 of cash, $3,000 of notes payable and
875,000 shares of common stock with a market value of $8,750. The total assets
related to these six acquisitions were $72,192, including goodwill of $21,079.
The results of these acquisitions have been included in the Company's results
from their respective dates of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 30, 1995 and 1996 as if the purchase
acquisitions described above had been consummated as of the beginning of fiscal
1995. The results presented below include certain pro forma adjustments to
reflect the amortization of intangible assets, adjustments in executive
compensation and the inclusion of a federal income tax provision:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED APRIL 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Revenues.......................................................... $ 1,299,286 $ 1,559,416
Net income........................................................ 22,069 28,343
Net income per share.............................................. 0.54 0.67
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1995 or the
results which may occur in the future.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED APRIL 30,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Land.................................................................. $ 2,715 $ 4,539
Buildings............................................................. 14,709 26,517
Furniture and fixtures................................................ 23,208 44,830
Warehouse equipment................................................... 24,969 34,336
Equipment under capital leases........................................ 5,307 8,665
Leasehold improvements................................................ 8,209 8,507
---------- ----------
79,117 127,394
Less: Accumulated depreciation........................................ (38,500) (45,880)
---------- ----------
Net property and equipment............................................ $ 40,617 $ 81,514
---------- ----------
---------- ----------
</TABLE>
Depreciation expense for the fiscal years ended April 30, 1994, 1995 and
1996 was $6,453, $8,275 and $10,868, respectively.
25
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--INTANGIBLE ASSETS
Intangible assets and accumulated amortization consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
---------------------
1995 1996
--------- ---------- OCTOBER 26,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill................................................. $ 23,944 $ 142,205 $ 544,486
Other.................................................... 8,309 8,184 7,677
--------- ---------- -----------
32,253 150,389 552,163
Less: Accumulated amortization........................... (5,099) (7,349) (10,741)
--------- ---------- -----------
$ 27,154 $ 143,040 $ 541,422
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
Other intangible assets consist primarily of non-compete arrangements which
are amortized over the term of the agreements. Amortization expense for the
fiscal years ended April 30, 1994, 1995 and 1996 was $2,161, $2,135 and $3,593,
respectively.
NOTE 7--LEASE RECEIVABLES
Lease receivables represent the present value of future lease payments
related to equipment sold to customers as sales type leases. The future minimum
lease payments to be received are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 34,146
1998.............................................................. 29,885
1999.............................................................. 17,181
2000.............................................................. 5,800
2001 and thereafter............................................... 1,647
---------
Total lease receivable............................................ 88,659
Less: Amounts representing interest............................... (16,846)
---------
Present value of net lease receivable............................. $ 71,813
---------
---------
</TABLE>
26
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Bank lines of credit, secured by accounts receivable and inventory, interest
rates ranging from prime to prime plus 2.25% (9.0% to 10.0% at April 30,
1996).......................................................................... $ 50,925 $ 22,555
Annual renewal loans provided by banks and other financial institutions of
foreign subsidiary secured by lease receivables of foreign subsidiary. Interest
rates ranging from 7.8% to 10.2% at April 30, 1996............................. 80,949
Bank lines of credit of foreign subsidiary operations secured by assets of those
operations.Interest rates ranging from 9.2% to 9.8% at April 30, 1996.......... 12,731
Other............................................................................ 3,036 2,249
Current maturities of long-term debt............................................. 8,195 11,225
--------- ----------
Total short-term debt...................................................... $ 62,156 $ 129,709
--------- ----------
--------- ----------
</TABLE>
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Notes payable, secured by certain assets of the Company, interest rates ranging
from 8.0% to 10.0%, maturities from October 1996 through 2003.................. $ 16,104 $ 9,773
Convertible Subordinated Notes due 2001, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$28.50 per share, subject to adjustment in certain events...................... 143,750
Debt facility payable over five years secured by lease receivables of the
Company's foreign subsidiaries. Interest rates ranging from 11.0% to 12.0% at
April 30, 1996................................................................. 8,943
Other............................................................................ 23,406 31,880
Capital lease obligations........................................................ 1,381 5,129
--------- ----------
40,891 199,475
Less: Current maturities of long-term debt....................................... (8,195) (11,225)
--------- ----------
Total long-term debt....................................................... $ 32,696 $ 188,250
--------- ----------
--------- ----------
</TABLE>
The 5 1/2% Convertible Subordinated Notes due 2001 (the "Notes") are
redeemable, in whole or in part, at the Company's option at specified redemption
prices on or after February 3, 1998, but may not be
27
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--CREDIT FACILITIES (CONTINUED)
redeemed prior to February 2, 1999 unless the closing price of the common stock
is at least 150% of the conversion price for a period of time prior to the
notice of redemption. Costs incurred in connection with the issuance of the
Notes are included in other assets and are being amortized over the five year
period of maturity. The fair value of the Notes at April 30, 1996, based upon
quoted market prices, totaled $211,313.
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1997.............................................................. $ 11,225
1998.............................................................. 14,823
1999.............................................................. 13,528
2000.............................................................. 2,545
2001.............................................................. 148,285
Thereafter........................................................ 9,069
---------
$ 199,475
---------
---------
</TABLE>
NOTE 9--INCOME TAXES
U.S. Office Products will file a consolidated federal income tax return for
periods subsequent to the Mergers described in Note 3. Each of the Combined
Companies and Pooled Companies will file "short-period" federal tax returns
through the dates of the Mergers and business combinations.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED APRIL
30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Income taxes currently payable:
Federal........................................................ $ 1,805 $ 1,722 $ 5,679
State.......................................................... 455 704 608
Foreign taxes currently payable................................ 809 836
--------- --------- ---------
2,260 3,235 7,123
--------- --------- ---------
Deferred income tax expense (benefit)............................ (165) (51) (264)
--------- --------- ---------
Total provision for income taxes........................... $ 2,095 $ 3,184 $ 6,859
--------- --------- ---------
--------- --------- ---------
</TABLE>
28
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory........................................................................ $ 178 $ 291
Allowance for doubtful accounts.................................................. 95 826
Accrued liabilities................................................................ 445 4
--------- ---------
Total current deferred tax assets............................................ 718 1,121
--------- ---------
Long-term deferred tax liabilities:
Property and equipment........................................................... (1,028) (2,701)
Internal Revenue Service tax assessment.......................................... (3,383) (3,383)
Other............................................................................ 54 (972)
--------- ---------
Total long-term deferred tax liabilities..................................... (4,357) (7,056)
--------- ---------
Net deferred tax asset (liability)........................................... $ (3,639) $ (5,935)
--------- ---------
--------- ---------
</TABLE>
The Internal Revenue Service ("IRS") tax assessment relates to the deferral
of a gain on the sale of land and building by a subsidiary of the Company. The
IRS has determined that a portion of the gain recorded by the subsidiary does
not qualify for deferral and has required that the Company pay additional taxes.
The subsidiary has recorded a deferred tax liability as a result of the
assessment and the related interest. The Company has filed an appeal with the
IRS relating to the above assessment; however, the IRS has not yet responded to
the appeal.
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED APRIL 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate............................................. 34.0% 34.0% 35.0%
State income taxes, net of federal income tax benefit................... 4.0 4.1 5.4
Subchapter S corporation income not subject to corporate level
taxation.............................................................. (26.9) (27.7) (26.3)
Foreign earnings not subject to U.S. taxes.............................. (.6)
Minority interest in foreign taxes...................................... 2.5
Nondeductible goodwill.................................................. 1.4 2.6
Other................................................................... 3.0 1.2 2.7
----- ----- -----
Effective tax rate...................................................... 14.1% 13.0% 21.3%
----- ----- -----
----- ----- -----
</TABLE>
One Combined Company and certain Pooled Companies were organized as
subchapter S corporations prior to the closing of their acquisitions by the
Company and, as a result, the federal tax on their income was the responsibility
of their individual stockholders. Accordingly, the Combined Company and the
specific Pooled Companies provided no federal income tax expense prior to these
acquisitions by the Company.
29
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--INCOME TAXES (CONTINUED)
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the Combined Company and the specific Pooled
Companies had been subject to federal income taxes for the entire periods
presented.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR SIX MONTHS ENDED
ENDED APRIL 30, ------------------------
------------------------------- OCTOBER 31, OCTOBER 26,
1994 1995 1996 1995 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net income per consolidated statement of income........ $ 12,745 $ 21,387 $ 25,292 $ 9,845 $ 25,390
Pro forma income tax provision adjustment.............. 3,800 6,471 8,205 4,109 3,500
--------- --------- --------- ----------- -----------
Pro forma net income................................... $ 8,945 $ 14,916 $ 17,087 $ 5,736 $ 21,890
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
NOTE 10--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office space and
equipment, furniture and fixtures under noncancellable lease agreements which
expire at various dates. Future minimum lease payments under noncancellable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
1997.............................................................................. $ 1,922 $ 14,102
1998.............................................................................. 1,390 11,410
1999.............................................................................. 743 10,179
2000.............................................................................. 446 9,248
2001.............................................................................. 320 7,920
Thereafter........................................................................ 2,541 27,438
--------- -----------
Total minimum lease payments...................................................... 7,362 $ 80,297
-----------
-----------
Less: Amounts representing interest............................................... (2,233)
---------
Present value of net minimum lease payments....................................... $ 5,129
---------
---------
</TABLE>
Rent expense for all operating leases for the fiscal years ended April 30,
1994, 1995 and 1996 was $10,409, $11,731 and $17,379, respectively.
NOTE 11--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position or results of
operations or cash flows of the Company.
30
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED)
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon change of control or
certain other events. No amounts have been accrued at April 30, 1995 or 1996
related to these agreements.
NOTE 12--EMPLOYEE BENEFIT PLANS
Certain subsidiaries of the Company have qualified defined contribution
benefit plans, which allow for voluntary pre-tax contributions by the employees.
The subsidiaries pay all general and administrative expenses of the plans and in
some cases make matching contributions on behalf of the employees. For the
fiscal years ended April 30, 1994, 1995 and 1996, the subsidiaries incurred
expenses totaling $220, $451 and $683, respectively, related to these plans.
One Combined Company entered into agreements with three officers which
provided for future compensation to those officers subsequent to termination of
employment with the Combined Company for a period of five years. The future
compensation would not be received, however, in the event that an officer
received payment under that Company's Restricted Stock Purchase Plan (the
"Purchase Plan") in excess of the purchase price of the stock paid by the
officer. No compensation expense was recorded with respect to the agreement
related to two of the officers, as it was probable that they would receive
payment under the Restricted Stock Purchase Plan. Future compensation expense of
approximately $1,030 was being recognized as expense for the third officer over
the estimated term of the officer's service to the Company of approximately
eleven years. The compensation expense equaled $95 in fiscal 1994 and $71 in
fiscal year 1995. The agreements were terminated upon closing of the Merger.
The Purchase Plan was considered to be compensatory, for the benefit of
certain officers. Two of these officers each purchased 1,000 shares of stock for
$1 under the Purchase Plan. The stock was restricted and could only be purchased
by the Combined Company at specified prices that varied upon the occurrence of
certain events. As a result, the Combined Company's future compensation expense
of $1,398, under this Purchase Plan, was being recognized as expense over the
expected periods of the officers' future service to the Combined Company of 20
and 28 years. Compensation expense of approximately $60 and $45 was recognized
in fiscal 1994 and fiscal 1995, respectively. The Plan was terminated upon
closing of the Merger.
NOTE 13--STOCKHOLDERS' EQUITY
LONG-TERM COMPENSATION PLAN
In October 1994, the Board of Directors and the Company's stockholders
approved the Company's 1994 Long-Term Compensation Plan (the "Plan"). The
purpose of the Plan is to provide directors, officers, key employees and
consultants with additional incentives by increasing their ownership interests
in the Company. The maximum number of options to purchase Common Stock granted
in any calendar or fiscal year under the Plan is equal to the greater of 855,000
shares or 15% of the aggregate number of shares of the Common Stock outstanding
at the time an award is granted, less, in each case, the number of shares
subject to previously outstanding awards under the Plan.
31
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 13--STOCKHOLDERS' EQUITY (CONTINUED)
Under the provisions of the Plan, non-qualified stock options and other
stock awards are granted at prices not less than fair market value at the date
of grant. A summary of option transactions follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE EXPIRATION
OF SHARES RANGE PER SHARE DATE
---------- ----------------- -------------
<S> <C> <C> <C>
Outstanding at April 30, 1994...................................... -- -- --
Granted.......................................................... 629,500 $8.00 - $10.00 2004
Canceled......................................................... (7,000) $10.00 2004
---------- ----------------- -------------
Outstanding at April 30, 1995...................................... 622,500 $8.00 - $10.00 2004
Granted.......................................................... 2,764,591 $11.31 - $31.75 2004 - 2006
Exercised........................................................ (63,350) $8.00 - $10.00 2004
Canceled......................................................... (16,200) $10.00 - $17.13 2004 - 2005
---------- ----------------- -------------
Outstanding at April 30, 1996...................................... 3,307,541 $8.00 - $31.75 2004 - 2006
---------- ----------------- -------------
---------- ----------------- -------------
Exercisable at April 30, 1996...................................... 132,867 $8.00 - $10.00 2004
---------- ----------------- -------------
---------- ----------------- -------------
</TABLE>
Non-qualified options are generally exercisable beginning one year from the
date of grant in cumulative yearly amounts of 25% of the shares under option and
generally expire ten years from the date of grant.
Subsequent to year-end, the Company granted options to purchase 1,132,050
shares of common stock at exercise prices ranging from $36.00 to $44.875 per
share.
COMMON STOCK
In November 1994, the Board of Directors of the Company approved a one
thousand-for-one split of the Company's common stock and changed the par value
of common stock from $1 per share to $.001 per share. The consolidated financial
statements have been adjusted to reflect the stock split. In February 1996, the
stockholders approved the amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock from 25,000,000 to 100,000,000 shares.
32
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 236,245 $ 299,630 $ 342,724 $ 372,863 $ 1,251,462
Gross profit....................................... 61,686 76,887 89,875 104,721 333,169
Operating income................................... 3,075 11,308 17,344 10,107 41,834
Net income......................................... 2,317 7,528 10,285 5,162 25,292
Pro forma net income (see Note 9).................. (1,453) 4,997 8,968 4,575 17,087
Net income per share............................... .09 .22 .30 .12 .74
Pro forma net income per share..................... (.05) .16 .26 .12 .50
<CAPTION>
FISCAL 1995 QUARTERS
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 153,278 $ 182,020 $ 236,025 $ 227,386 $ 798,709
Gross profit....................................... 41,896 48,716 64,484 56,624 211,720
Operating income................................... 3,524 6,871 15,381 4,099 29,875
Net income......................................... 2,544 4,827 12,479 1,537 21,387
Pro forma net income (see Note 9).................. 1,376 3,604 9,578 358 14,916
</TABLE>
NOTE 15--SUBSEQUENT EVENTS
BUSINESS COMBINATIONS SUBSEQUENT TO YEAR-END
Between April 30, 1996 and July 10, 1996, the Company acquired 14 companies
and the remaining 49% of Blue Star in business combinations accounted for under
the purchase method for $65,333, consisting of 1,663,692 shares of common stock
with a market value of $44,149 and cash of $21,184. In addition, the Company
considers the consummation to be probable of a total of 46 additional businesses
(the "Pending Acquisitions"). The Pending Acquisitions provide for consideration
of $286,740, consisting of 7,206,323 shares of common stock with a market value
of $254,659 and cash of $32,081.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1996 as if the acquisitions described above had been
consummated as of the beginning of fiscal 1996. The results presented below
include certain pro forma adjustments to reflect the amortization of intangible
assets, reductions in executive compensation, the inclusion of a federal income
tax provision and the removal of certain restructuring costs:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
APRIL 30, 1996
----------------
<S> <C>
Revenues.................................................................... $ 1,971,025
Net income.................................................................. 38,039
Net income per share........................................................ 0.84
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1996, or the
results which may occur in the future.
33
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--SUBSEQUENT EVENTS (CONTINUED)
ISSUANCE OF CONVERTIBLE SUBORDINATED NOTES
In May 1996, the Company completed an offshore offering and a concurrent
private placement of $230,000, principal amount of 5 1/2% Convertible
Subordinated Notes due 2003, including the underwriters' over-allotment option
of $30,000. The underwriters exercised their over-allotment option in June 1996.
The net proceeds to the Company, after deducting underwriting discounts and
commissions and offering expenses, were approximately $223,000.
NOTE 16--SUBSEQUENT EVENTS (UNAUDITED)
During the first six months of fiscal 1997, the Company completed a total of
66 business combinations, 21 accounted for under the pooling-of-interests method
and 45 accounted for under the purchase method. In the second quarter of fiscal
1997, the Company completed a total of 38 business combinations, 11 accounted
for under the pooling-of-interests method and 27 accounted for under the
purchase method.
In August 1996, the Company entered into an agreement with Bankers Trust
Company (the "Bank"), whereby the Bank, or a syndicate of financial institutions
including the Bank, will provide a $500 million revolving credit facility (the
"Credit Facility") bearing interest, at the Company's option, at the Bank's base
rate plus an applicable margin of up to 1.25%, or a eurodollar rate plus an
applicable margin of up to 2.5%. The availability under the Credit Facility is
subject to certain sublimits including $100 million for working capital loans
and $ 400 million for acquisition loans, with $180 million of the acquisition
loan submit available and expected to be used to refinance certain outstanding
indebtedness of the Company in Australia and New Zealand. The Credit Facility is
secured by a majority of the assets of the Company and contains customary
covenants, including financial covenants with respect to the Company's leverage
and interest coverage ratios, capital expenditures, payment of dividends and
purchases and sales of assets, and customary default provisions, including
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy.
In August 1996, at the Company's Annual Meeting of Stockholders, the
stockholders approved, among other things, a proposal by the Board of Directors
of the Company to adopt an amendment to Article Four of the Company's Restated
Certificate of Incorporation to increase the number of shares of the Company's
Common Stock, par value $.001 per share, authorized for issuance from
100,000,000 shares to 500,000,000 shares.
On August 20, 1996, the Company's Board of Directors approved a change in
the Company's fiscal year-end, effective for the 1997 fiscal year, from April 30
to the last Saturday of April.
Subsequent to October 26, 1996, the Company has completed 24 business
combinations for an aggregate purchase price of $227,300, consisting of
approximately $62,600 of cash and 5,407,985 shares of the Company's common stock
with an aggregate market value on the dates of acquisition of approximately
$164,800. This includes the acquisition of a 49% equity interest in Dudley
Stationery Limited ("Dudley"), an independent office products dealer in the
United Kingdom. Under the terms of the agreement, the Company agreed to invest
approximately $80,000 of working capital into Dudley over a two-year period. In
addition, Dudley plans to raise approximately an additional $80,000 in debt
financing. The Company has currently invested approximately $41,300 of the total
$80,000 in Dudley.
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors of
Whitcoulls Group Limited
Auckland
New Zealand
We have audited the accompanying consolidated balance sheet of Whitcoulls
Group Limited as of 30 June 1996 and 30 June 1995, and the related Profit and
Loss Account, and Statement of Cash Flows for the years then ended (all
expressed in New Zealand dollars). 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 auditing standards generally
accepted in New Zealand and the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of the Group at 30 June 1996 and 30 June 1995,
and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in New
Zealand.
Accounting principles generally accepted in New Zealand vary in certain
significant respects from accounting principles generally accepted in the United
States. The application of the latter would have affected the determination of
net income for each of the two years in the period ended 30 June 1996 and the
determination of stockholders' equity and financial position at 30 June 1996 and
30 June 1995 to the extent summarised in Note 22. Additional disclosures
required under US GAAP are summarised in Note 22.
DELOITTE TOUCHE TOHMATSU
20 January 1997
Auckland, New Zealand
35
<PAGE>
FINANCIAL STATEMENTS
WHITCOULLS GROUP LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30 JUNE 1996
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1996 1995
NOTE $NZ000 $NZ000 $NZ000 $NZ000
----------- --------- --------- --------- ---------
REVENUE....................................................... 2 613,763 603,455 64,070 12,089
--------- --------- --------- ---------
Less:
Operating Expenses.......................................... 512,152 509,389 530 251
Depreciation of Fixed Assets................................ 12,566 12,021 25 23
Auditors Expenses--Audit Fees............................... 246 254 10 0
--Other Services............................ 255 * 0 0
Rental and Lease Expenses................................... 38,734 33,268 0 0
Bad and Doubtful Debts...................................... 6 365 384 1,117 0
Directors' Fees............................................. 44 31 44 21
Goodwill Amortisation....................................... 2,912 2,974 (8) 8
--------- --------- --------- ---------
EARNINGS BEFORE INTEREST AND TAXATION......................... 46,489 45,134 62,352 11,786
Net Interest Expense.......................................... 2 9,636 11,293 (951) (943)
--------- --------- --------- ---------
NET PROFIT BEFORE TAXATION.................................... 36,853 33,841 63,303 12,729
Provision for Taxation........................................ 3 9,993 13,538 119 250
Minority Interests............................................ 132 115 0 0
--------- --------- --------- ---------
NET PROFIT AFTER TAXATION..................................... 26,728 20,188 63,184 12,479
Plus Retained Earnings Brought Forward........................ 67,554 59,401 9,400 9,021
Transfer (to)/from Capital Reserves........................... 15 838 65 0 0
Dividends Paid and Proposed................................... 4 (16,050) (12,100) (16,050) (12,100)
--------- --------- --------- ---------
RETAINED EARNINGS CARRIED FORWARD............................. 79,070 67,554 56,534 9,400
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
* Comparative figure not required to be disclosed due to a new Financial
Reporting Standard not applicable in previous year
36
<PAGE>
WHITCOULLS GROUP LIMITED
STATEMENT OF MOVEMENTS IN EQUITY
FOR THE YEAR ENDED 30 JUNE 1996
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1996 1995
NOTE $NZ000 $NZ000 $NZ000 $NZ000
--------- --------- --------- ---------
EQUITY AS AT 1 JULY 1995 148,100 140,411 65,195 64,816
Net Profit for the Year attributable to:
-- Parent Company........................................... 26,596 20,073 63,184 12,479
-- Minority Shareholders.................................... 132 115 0 0
Currency Translation Difference............................... 15 (412) 57 0 0
--------- --------- --------- ---------
TOTAL RECOGNISED REVENUE AND EXPENSES FOR THE YEAR 26,316 20,245 63,184 12,479
--------- --------- --------- ---------
Movement in Minority Interest................................. 102 92 0 0
Decrease in Revaluation Reserve............................... 15 (425) (548) 0 0
Distributions to Owners
-- Dividends................................................ 4 (16,050) (12,100) (16,050) (12,100)
--------- --------- --------- ---------
(16,373) (12,556) (16,050) (12,100)
--------- --------- --------- ---------
EQUITY AS AT 30 JUNE 1996 158,043 148,100 112,329 65,195
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
37
<PAGE>
WHITCOULLS GROUP LIMITED
BALANCE SHEET
AS AT 30 JUNE 1996
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- --------------------
1996 1995 1996 1995
NOTE $NZ000 $NZ000 $NZ000 $NZ000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash at Bank and on Deposit.................................. 5 9,481 0 0 0
Accounts Receivable.......................................... 6 47,925 48,783 30 32
Inventory.................................................... 7 99,243 123,383 0 0
Income Tax Receivable........................................ 1,178 1,275 1,336 536
--------- --------- --------- ---------
157,827 173,441 1,366 568
NON CURRENT ASSETS
Fixed Assets................................................. 8 100,282 111,005 35 42
Amount Owing from Subsidiaries............................... 0 0 129,270 162,833
Investments.................................................. 9 2,610 2,519 48,347 68,365
Deferred Charges............................................. 10 56 247 56 247
Goodwill..................................................... 50,009 52,158 0 158
--------- --------- --------- ---------
152,957 165,929 177,708 231,645
--------- --------- --------- ---------
TOTAL ASSETS................................................. 310,784 339,370 179,074 232,213
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES
CURRENT LIABILITIES
Bank Overdraft............................................... 5 0 11,176 1,155 1,769
Accounts Payable............................................. 62,216 64,054 6,819 6,448
Employee Entitlements........................................ 6,712 6,601 0 0
Provision for Dividend....................................... 4 0 7,260 0 7,260
Current Portion of Term Liabilities.......................... 11,12 33,042 21,134 30,000 20,000
--------- --------- --------- ---------
101,970 110,225 37.974 35,477
DEFERRED TAXATION LIABILITY/(ASSET).......................... 3 (4,914) (627) (104) 56
Non Current Liabilities
Loans...................................................... 11 55,587 79,882 7,083 46,981
Amounts Due to Subsidiaries................................ 0 0 21,792 84,504
Finance Lease Liabilities.................................. 12 98 1,790 0 0
--------- --------- --------- ---------
55,685 81,672 28,875 131,485
--------- --------- --------- ---------
TOTAL LIABILITIES............................................ 152,741 191,270 66,745 167,018
EQUITY
Issued and Paid In Capital................................... 14 55,795 55,795 55,795 55,795
Reserves..................................................... 15 22,476 24,151 0 0
Retained Earnings............................................ 79,070 67,554 56,534 9,400
Minority Interests........................................... 702 600 0 0
--------- --------- --------- ---------
TOTAL EQUITY................................................. 158,043 148,100 112,329 65,195
--------- --------- --------- ---------
TOTAL EQUITY AND LIABILITIES................................. 310,784 339,370 179,074 232,213
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The notes on pages 7 to 20 form part of and should be read
in conjunction with these financial statements.
38
<PAGE>
WHITCOULLS GROUP LIMITED
STATEMENT OF CASHFLOWS
FOR THE YEAR ENDED 30 JUNE 1996
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was Provided From:
Receipts From Customers............................................... 617,421 600,969 0 0
Interest Received..................................................... 640 154 282 62
Dividends Received.................................................... 305 0 0 0
--------- --------- --------- ---------
618,366 601,123 282 62
Cash was Disbursed To:
Payments to Employees and Suppliers................................... 527,501 553,143 55 87
Interest Paid......................................................... 10,737 11,091 8,776 7,247
Tax Paid.............................................................. 14,138 15,593 1,397 624
--------- --------- --------- ---------
552,376 579,827 10,228 7,958
--------- --------- --------- ---------
Net Cash Flows From Operating Activities................................ 65,990 21,296 (9,946) (7,896)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was Provided From:
Disposal of Fixed Assets.............................................. 6,951 4,149 2 0
Proceeds from Sale of Businesses...................................... 0 2,466 0 0
--------- --------- --------- ---------
6,951 6,615 2 0
Cash was Applied To:
Purchase of Fixed Assets.............................................. 11,533 19,627 20 10
Payments Made for Acquisition of Business............................. 17 0 0 0
--------- --------- --------- ---------
11,550 19,627 20 10
--------- --------- --------- ---------
Net Cash Flows from Investing Activities................................ (4,599) (13,012) (18) (10)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was Provided From:
Loans Received........................................................ 48,504 19,254 0 14,000
Advances from Subsidiaries............................................ 0 0 63,786 27,911
Finance Leases Received............................................... 1,548 2,081 0 0
--------- --------- --------- ---------
50,052 21,335 63,786 41,911
Cash was Applied To:
Loans Repaid.......................................................... 65,570 29,855 29,898 26,672
Finance Leases Repaid................................................. 1,333 1,731 0 0
Dividends Paid........................................................ 23,310 9,680 23.310 9,680
--------- --------- --------- ---------
90,213 41,266 53,208 36,352
Net Cash Flows From Financing Activities................................ (40,161) (19,931) 10,578 5,559
--------- --------- --------- ---------
NET CASH RECEIVED (DISBURSED) DURING THE PERIOD......................... 21,230 (11,647) 614 (2,347)
CASH AT BEGINNING OF PERIOD............................................. (11,176) 197 (1,769) 578
Impact of foreign Exchange.............................................. (573) 274 0 0
--------- --------- --------- ---------
CASH AT END OF PERIOD................................................... 9,481 (11,176) (1,155) (1,769)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The notes on pages 7 to 20 form part of and should be read
in conjunction with these financial statements.
39
<PAGE>
WHITCOULLS GROUP LIMITED
RECONCILIATION OF NET CASH FLOWS FROM
OPERATING ACTIVITIES TO NET PROFIT AFTER TAXATION
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- ---------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- ---------- ---------
NET PROFIT AFTER TAXATION.............................................. 26,728 20,188 63,184 12,479
NON CASH ITEMS
Depreciation......................................................... 12,566 12,021 25 23
Goodwill............................................................. 2,912 2,974 (8) 8
Minority Interests................................................... 132 115 0 0
Other Non-cash Expenses/(Revenue).................................... (91) 0 (64,052) 14
--------- --------- ---------- ---------
15,519 15,110 (64,035) 45
MOVEMENTS IN WORKING CAPITAL
Current Liabilities: Increase/(Decrease)
Creditors............................................................ (3,283) (10,146) 370 (355)
Amounts Due to Subsidiaries.......................................... 0 0 (159,335) 24,846
Provision for Taxation............................................... 97 (958) (799) (179)
Current Assets: (Increase)/Decrease
Accounts Receivable.................................................. 3,963 (1,068) 2 58
Tax Refund Due....................................................... 0 0 0 0
Amounts Due from Subsidiaries........................................ 0 0 150,635 (44,935)
Inventory............................................................ 26,782 (590) 0 0
Deferred Charges..................................................... 191 301 192 192
--------- --------- ---------- ---------
27,750 (12,461) (8,935) (20,373)
OTHER
(Gain)/Loss on Disposal of Assets (classed as investing activity).... 280 (443) 0 0
Increase/(Decrease) in Deferred Tax.................................. (4,287) (1,098) (160) (47)
--------- --------- ---------- ---------
(4,007) (1,541) (160) (47)
--------- --------- ---------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES............................... 65,990 21,296 (9,946) (7,896)
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
The notes on pages 7 to 20 form part of and should be read in
conjunction with these financial statements
40
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1 STATEMENT OF ACCOUNTING POLICIES
These financial statements are presented in accordance with the Companies
Act 1993 and have been prepared in accordance with the Financial Reporting Act
1993. The Company's financial statements are for Whitcoulls Group Limited as a
separate entity and the consolidated financial statements are for the Whitcoulls
Group, which includes all its subsidiaries and associate entities as disclosed
in note 17.
GENERAL ACCOUNTING POLICIES
The general accounting policies recognised as appropriate for the
measurement and reporting of profit and the financial position on an historical
cost basis are followed with the exception that certain land, buildings and
plant are recorded at valuation.
Accrual accounting is used to match expenses and revenue. Reliance is placed
on the fact that the Company is a going concern.
PARTICULAR ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include those of the parent company
and its subsidiaries and incorporate the equity share of the earnings and net
assets of the associated companies. The purchase method of accounting has been
used. All significant inter-company transactions are eliminated on
consolidation.
INVENTORIES
Inventories are stated at the lower of net realisable value and cost, using
either a first-in, first-out or weighted average basis.
Work in progress is valued at the cost of materials and labour and includes
fixed and variable overheads to the last completed stage of manufacture.
Finished manufactured goods are valued at the lower of cost and net
realisable value. Cost includes fixed and variable production overheads.
ACCOUNTS RECEIVABLE
Accounts Receivable are stated at expected realisable value.
FIXED ASSETS
The cost of purchased fixed assets is the value of the consideration given
to acquire the assets and the value of other directly attributable costs which
have been incurred in bringing the assets to the location and condition
necessary for their intended use.
Land and buildings are revalued annually by independent registered valuers
on the basis of net current value. Changes in valuation are transferred directly
to the Asset Revaluation Reserve. On the sale of an asset the balance in the
Asset Revaluation Reserve pertaining to that asset is transferred to Retained
Earnings. Where the sale value differs to the carrying value that difference is
recognised through the Profit and Loss Account.
41
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1 STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
Fixed Assets are depreciated on a straight-line basis at rate which will
write off the cost of valuation of those assets over their estimated useful
lives. The following lives have been estimated:
<TABLE>
<S> <C>
Motor Vehicles............................................... 5 years
Furniture and Fittings....................................... 5 to 10 years
Plant and Machinery.......................................... 5 to 10 years
Office and EDP Equipment..................................... 3 to 5 years
30 to 80
Buildings.................................................... years
</TABLE>
LEASED ASSETS
Finance leases are capitalised to reflect the term borrowings incurred and
the cost of the asset acquired. The finance cost portion of lease payments is
expensed and the leased asset is depreciated on a straight line basis over the
estimated useful life of the asset.
FOREIGN CURRENCIES
Foreign Currency transactions are translated to New Zealand currency at the
rate of exchange ruling at the date of those transactions. At balance date
foreign monetary assets and liabilities are translated at the closing rate and
exchange variations arising from these translations are included in the profit
and loss account.
The financial statements of independent foreign operations are translated at
the closing rate. The exchange difference arising from the translation of the
opening net investment at an exchange rate different from that at which it was
previously reported is taken to the foreign currency translation reserve.
GOODWILL
Goodwill represents the excess of purchase consideration over the fair value
of net tangible assets acquired at the time of acquisition of a business or a
subsidiary. Goodwill is amortised using the straight line method over the period
during which benefits are expected to be received. This period has been assessed
to be 20 years.
TAXATION
Taxation accounted for in the Consolidated Profit and Loss Account is the
estimated total liability including both current and deferred taxation. In
calculating the taxation payable full advantage is taken of all allowable
taxation deductions. Deferred taxation is provided on the comprehensive basis
using the liability method.
FINANCIAL INSTRUMENTS
The Group has certain financial instruments with off-balance sheet risk for
the primary purpose of reducing its exposure to fluctuations in interest rates.
While these financial instruments are subject to risk that market rates may
change subsequent to acquisition, such changes would generally be offset by
opposite effects on the items being hedged.
42
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1 STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
Interest rate swaps have been entered into to manage interest rate exposure.
The differential to be paid or received is accrued as interest rates change and
is recognised as a component of interest expense.
CHANGES IN ACCOUNTING POLICES
There have been no changes in accounting policies.
All policies have been applied on a basis consistent with those used in the
previous year.
2 PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- --------- ---------
Included in the Profit and Loss account are:
Interest Income....................................................... (731) (154) (9,704) (8,605)
Interest Expense on Finance Leases.................................... 335 251 0 0
Interest Expense on Term Loans........................................ 9,606 10,994 8,409 7,466
Other Interest Expense................................................ 426 202 344 196
--------- --------- --------- ---------
Net Interest Expense/(Income)......................................... 9,636 11,293 (951) (943)
Sales................................................................. 613,610 603,393 0 89
Dividend Income....................................................... 305 58 63,910 12,000
Share of Associates After Tax Profit/(Loss)........................... (152) 4 0 0
Profit on Transfer of Investments in Subsidiaries..................... 0 0 160 0
Gains/(Losses) on Sale of Fixed Assets................................ (280) (479) 0 0
Gains/(Losses) on Sale of Business.................................... 0 922 0 0
</TABLE>
43
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3 TAXATION
PROVISION FOR TAXATION
The current taxation charge is calculated as follows:
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- --------- ---------
Net Profit Before Taxation................................................ 36,853 33,841 63,303 12,729
Taxation at 33%........................................................... 12,161 11,167 20,890 4,201
Adjusted for the effect of:
Permanent Differences..................................................... (2,168) 2,371 (20,771) (3,951)
--------- --------- --------- ---------
Net Taxation Charge....................................................... 9,993 13,538 119 250
--------- --------- --------- ---------
--------- --------- --------- ---------
Accounted for as follows;
Current................................................................. 15,909 15,380 279 297
Deferred................................................................ (5,916) (1,842) (160) (47)
--------- --------- --------- ---------
9,993 13,538 119 250
--------- --------- --------- ---------
--------- --------- --------- ---------
DEFERRED TAXATION
Opening Balance Asset/(Liability)......................................... 627 (42) (56) (103)
Charge to P&L............................................................. 5,916 1,842 160 47
Adjustments:
Transfers............................................................... (1,629) (1,173) 0 0
--------- --------- --------- ---------
Closing Balance Asset/(Liability)......................................... 4,914 627 104 (56)
--------- --------- --------- ---------
--------- --------- --------- ---------
The balance comprises:
Future Income Tax Benefit............................................... 0 278 0 0
Deferred Taxation Asset/(Liability)..................................... 4,914 349 104 (56)
--------- --------- --------- ---------
4,914 627 104 (56)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Future Income Tax Benefits of NZ$2,788,000 relating to taxation losses and
other timing differences arising in Angus and Robertson Bookworld Pty Limited
have not been taken into account in accordance with Australian Accounting
Standards Board 1020 and New Zealand Society of Accountants Statement of
44
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3 TAXATION (CONTINUED)
Standard Accounting Practice 12. The effect on this year's tax charge in the
Profit and Loss Account is to reduce the charge by NZ$57,000.
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- ----------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- --------- -----------
IMPUTATION CREDIT ACCOUNT
Opening Balance.......................................................... 27,088 16,437 7,117 5,498
Income Tax Paid/(Refunded)............................................... 13,722 15,384 627 477
Imputation Credits on Dividends Received................................. 204 35 31,478 5,910
Less: Loss of Continuity Debits.......................................... (5,513) 0 (5,130) 0
Less: Credits Attributable to Dividends Paid............................. (11,530) (4,768) (11,481) (4,768)
Less: Loss of Continuity Debits--Post Balance Date....................... (1,360) 0 0 0
--------- --------- --------- -----------
22,611 27,088 22,611 7,117
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
4 DIVIDENDS AND BONUS ISSUE
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- --------- ---------
FIRST INTERIM DIVIDEND..................................................... 6,050 4,840 6,050 4,840
Interim dividend of 4 cents per share (1995: 4 cents per share)
SECOND INTERIM DIVIDEND.................................................... 10,000 0 10,000 0
FINAL DIVIDEND
No final dividend was proposed (1995: 6 cents per share)................... 0 7,260 0 7,260
--------- --------- --------- ---------
16,050 12,100 16,050 12,100
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
5 SET-OFF OF ASSETS AND LIABILITIES
The Group has established a legal right of set-off with the Westpac Banking
Corporation. Accordingly current accounts have been set-off against the bank
overdrafts.
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- ------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- ----------- -----------
Bank Overdraft Prior to Set-Off........................................... (6,446) (18,095) (1,155) (1,769)
Deposits on Hand.......................................................... 15,927 6,919 0 0
--------- --------- ----------- -----------
Cash in Funds/(Bank Overdraft) after Set-Off.............................. 9,481 (11,176) (1,155) (1,769)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
45
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6 ACCOUNTS RECEIVABLE
Accounts Receivable are recorded net of a provision for doubtful debts.
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
------------------------ ----------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
----------- ----------- ------------- -------------
Provision for Doubtful Debts............................................... 566 480 0 0
- -
- -
--- ---
--- ---
Bad Debts
Debts Written Off........................................................ 279 259 0 0
Movement In Provision.................................................... 86 125 0 0
- -
--- ---
365 384 0 0
- -
- -
--- ---
--- ---
</TABLE>
7 INVENTORY
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- ----------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- ------------- -------------
Finished Goods............................................................ 88,538 110,491 0 0
Work in Progress.......................................................... 2,222 2,845 0 0
Raw Materials............................................................. 8,483 10,047 0 0
- -
--------- ---------
99,243 123,383 0 0
- -
- -
--------- ---------
--------- ---------
</TABLE>
Certain inventories are subject to restrictions of title ie. Romalpa
clauses.
8 FIXED ASSETS
<TABLE>
<CAPTION>
NET
ACCUM BOOK ACCUM
COST VALUATION DEPN VALUE COST DEPN
$000 $000 $000 $000 $000 $000
--------- ----------- --------- --------- --- -----------
<S> <C> <C> <C> <C> <C> <C>
30 JUNE 1996
Motor Vehicles............................................. 792 0 348 444 0 0
Capitalised Leased Motor Vehicles.......................... 5,651 0 2,398 3,253 0 0
Plant & Machinery.......................................... 36,924 0 16,344 20,580 0 0
Office Equipment / Furniture & Fittings.................... 37,682 0 19,410 18,272 122 87
Leasehold Improvements..................................... 5,337 0 1,789 3,548 0 0
Buildings.................................................. 0 19,000 0 19,000 0 0
Land....................................................... 0 35,185 0 35,185 0 0
--
--------- ----------- --------- --------- ---
86,386 54,185 40,289 100,282 122 87
--
--
--------- ----------- --------- --------- ---
--------- ----------- --------- --------- ---
<CAPTION>
NET
BOOK
VALUE
$000
-----
<S> <C>
30 JUNE 1996
Motor Vehicles............................................. 0
Capitalised Leased Motor Vehicles.......................... 0
Plant & Machinery.......................................... 0
Office Equipment / Furniture & Fittings.................... 35
Leasehold Improvements..................................... 0
Buildings.................................................. 0
Land....................................................... 0
--
35
--
--
</TABLE>
46
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
8 FIXED ASSETS (CONTINUED)
<TABLE>
<CAPTION>
NET
ACCUM BOOK ACCUM
COST VALUATION DEPN VALUE COST DEPN
$000 $000 $000 $000 $000 $000
--------- ----------- --------- --------- --- -----------
<S> <C> <C> <C> <C> <C> <C>
30 JUNE 1995
Motor Vehicles............................................. 697 0 232 465 0 0
Capitalised Leased Motor Vehicles.......................... 4,755 0 1,752 3,003 0 0
Plant & Machinery.......................................... 36,110 0 12,413 23,697 0 0
Office Equipment / Furniture & Fittings.................... 36,914 0 17,957 18,957 104 62
Leasehold Improvements..................................... 3,932 0 1,689 2,243 0 0
Buildings.................................................. 0 28,255 0 28,255 0 0
Land....................................................... 0 34,385 0 34,385 0 0
--
--------- ----------- --------- --------- ---
82,408 62,640 34,043 111,005 104 62
--
--
--------- ----------- --------- --------- ---
--------- ----------- --------- --------- ---
<CAPTION>
NET
BOOK
VALUE
$000
-----
<S> <C>
30 JUNE 1995
Motor Vehicles............................................. 0
Capitalised Leased Motor Vehicles.......................... 0
Plant & Machinery.......................................... 0
Office Equipment / Furniture & Fittings.................... 42
Leasehold Improvements..................................... 0
Buildings.................................................. 0
Land....................................................... 0
--
42
--
--
</TABLE>
Land and Buildings are restated to valuation in accordance with valuation
reports of registered independent valuers. Valuations were prepared by Jones
Lang Wootten Ltd (report dated 30 June 1996), Colliers Jardine New Zealand
Limited (report dated 30 June 1996) and Lockwood & Associates Limited (report
dated 30 June 1996). The telephone directory press is stated at valuation
(recognised as deemed cost) as at 30 June 1991 less depreciation.
9 INVESTMENTS
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
------------------------ --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
----------- ----------- --------- ---------
Other Investments.......................................................... 106 116 5 5
Investment in Subsidiaries................................................. 0 0 48,342 68,360
Associate Companies
Shares at Cost........................................................... 1,045 1,045 0 0
Share of
--Retained Profits....................................................... 300 452 0 0
--Revaluations........................................................... 252 252 0 0
Advances to Associates................................................... 907 654 0 0
----- ----- --------- ---------
2,504 2,403 0 0
----- ----- --------- ---------
2,610 2,519 48,347 68,365
----- ----- --------- ---------
----- ----- --------- ---------
</TABLE>
10 DEFERRED CHARGES
Deferred Charges include costs incurred on raising term loans. Such costs
are capitalised and written off over the term of the loan. The amortisation in
the year amounted to $191,000 (1995: $301,000).
47
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
11 LOANS
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- --------- ---------
Loans--Secured............................................................. 85,587 99,882 37,083 66,981
Less: Included in Current Liabilities...................................... 30,000 20,000 30,000 20,000
--------- --------- --------- ---------
55,587 79,882 7,083 46,981
--------- --------- --------- ---------
--------- --------- --------- ---------
Repayable as follows:
Between 1 and 2 years.................................................... 55,587 79,882 7,083 46,981
Between 2 and 5 years.................................................... 0 0 0 0
--------- --------- --------- ---------
55,587 79,882 7,083 46,981
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The loans are secured by mortgages over all of the properties owned and by
debentures over the assets and undertakings of the parent and its subsidiaries.
Interest rates charged during the year ranged from 8.7% to 9.5%.
12 FINANCE LEASE LIABILITIES
The consolidated future lease rental payments under finance leases are:
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
------------------------ ----------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
----------- ----------- ------------- -------------
Not later than 1 year...................................................... 3,532 1,388 0 0
1--2 years................................................................. 85 1,060 0 0
2--5 years................................................................. 17 936 0 0
- -
----- -----
3,634 3,384 0 0
Less future interest expense............................................... 494 460 0 0
- -
----- -----
3,140 2,924 0 0
- -
- -
----- -----
----- -----
Representing:
Current Liability........................................................ 3,042 1,134 0 0
Term Liability........................................................... 98 1,790 0 0
- -
----- -----
3,140 2,924 0 0
- -
- -
----- -----
----- -----
</TABLE>
48
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
13 OPERATING LEASE COMMITMENTS
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- ----------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- ------------- -------------
Commitments under operating leases are due as follows:
Not later than 1 year.................................................. 34,755 31,272 0 0
1--2 years............................................................. 29,169 28,911 0 0
2--5 years............................................................. 53,153 44,607 0 0
Over 5 years........................................................... 27,592 13,701 0 0
- -
--------- ---------
144,669 118,491 0 0
- -
- -
--------- ---------
--------- ---------
</TABLE>
Included in operating lease commitments are leases of premises currently not
in use or subleased at a net loss. Decisions to vacate or sublease these
premises have generally been taken in the ordinary course of business and
benefits would be expected to accrue to the group from these decisions. The net
present value of commitments under these leases is $2,336,000 of which $839,000
has been recognised as a charge to the Profit & Loss Account in the current
period.
14 SHARE CAPITAL
ISSUED AND PAID IN CAPITAL
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- --------- ---------
121,000,398 (1995: 121,000,398) Ordinary Shares............................ 55,795 55,795 55,795 55,795
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
15 RESERVES
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- ----------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000
--------- --------- ------------- -------------
ASSET REVALUATION RESERVE
Opening Balance.......................................................... 23,984 24,597 0 0
Revaluation.............................................................. (425) (548) 0 0
Adjustment for Assets Sold............................................... (838) (65) 0 0
- -
--------- ---------
Closing Balance.......................................................... 22,721 23,984 0 0
CURRENCY TRANSLATION RESERVE
Opening Balance.......................................................... 167 110 0 0
Movements................................................................ (412) 57 0 0
- -
--------- ---------
Closing Balance.......................................................... (245) 167 0 0
- -
--------- ---------
TOTAL RESERVES........................................................... 22,476 24,151 0 0
- -
- -
--------- ---------
--------- ---------
</TABLE>
49
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
16 SEGMENTAL REPORTING
<TABLE>
<CAPTION>
NEW ZEALAND AUSTRALIA CONSOLIDATED
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1996 1995 1996 1995
BY GEOGRAPHIC SEGMENTS $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
--------- --------- --------- --------- --------- ---------
REVENUE
Sales Outside the Group................................ 485,453 472,718 128,310 130,737 613,763 603,455
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
EARNINGS BEFORE INTEREST, TAX AND AMORTISATION OF
GOODWILL............................................... 48,348 48,271 1,053 (163) 49,401 48,108
--------- --------- --------- ---------
--------- --------- --------- ---------
Amortisation of Goodwill................................. 2,912 2,974
--------- ---------
EARNINGS BEFORE INTEREST AND TAX......................... 46,489 45,134
--------- ---------
--------- ---------
TOTAL ASSETS............................................. 261,222 287,767 49,562 51,603 310,784 339,370
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
RETAIL MANUFACTURING CONSOLIDATED
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1996 1995 1996 1995
$NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
--------- --------- --------- --------- --------- ---------
BY ACTIVITY SEGMENT
REVENUE
Sales Outside the Group.................................. 514,228 502,208 99,535 101,247 613,763 603,455
--------- ---------
--------- ---------
Sales to Group Companies................................. 0 0 35,112 32,969
--------- --------- --------- ---------
514,228 502,208 134,647 134,216
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS BEFORE INTEREST, TAX AND AMORTISATION OF
GOODWILL............................................... 32,432 31,409 16,969 16,699 49,401 48,108
--------- --------- --------- ---------
--------- --------- --------- ---------
Amortisation of Goodwill................................. (2,912) (2,974)
--------- ---------
EARNINGS BEFORE INTEREST AND TAX......................... 46,489 45,134
--------- ---------
--------- ---------
TOTAL ASSETS............................................. 240,003 258,957 70,781 80,412 310,784 339,370
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
17 RELATED PARTIES
The parent company is Rank Commercial Limited. During the year Rank
Commercial Limited obtained 100% ownership of Whitcoulls Group Limited.
Related party transactions are limited to those companies which are included
within the consolidation, except for the transfer of taxation losses of
$8,359,000 from Rank Commercial Limited to the group, which has reduced the
taxation charge in the current period by $2,758,000.
50
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
17 RELATED PARTIES (CONTINUED)
Significant subsidiaries consolidated at 30 June 1996 are:
<TABLE>
<CAPTION>
% OWNED PRINCIPAL ACTIVITY
------------- --------------------------------------------------
<S> <C> <C>
Whitcoulls Limited................................ 100 Book & Stationery Retailing
London Bookshops Limited.......................... 100 Book & Stationery Retailing
Angus & Robertson Bookworld Pty Limited........... 100 Book & Stationery Retailing
GH Bennett & Company Limited...................... 100 Tertiary & Professional Book Retailing
Croxley Stationery Limited........................ 100 Stationery Manufacturing & Wholesaling
Armidale Industries Limited....................... 65 Stationery Manufacturing
OTC Office Supplies Limited....................... 100 Commercial Stationery Retailing
Whitcoulls Office Products Limited................ 100 Commercial Stationery Retailing
Hollands Limited.................................. 100 Commercial Stationery Retailing
School Supplies Limited........................... 100 Scholastic Stationery Retailing
GPO Holdings Limited.............................. 100 Printing & Publishing
WGL Retail Holdings Limited....................... 100 Holding Company
WGL Stationery Holdings Limited................... 100 Holding Company
Whitcoulls Group Services Limited................. 100 Management Services
</TABLE>
Significant Associate Companies equity accounted at 30 June 1996 are:
<TABLE>
<S> <C> <C>
University Bookshop (Auckland)
Limited............................... 50 Tertiary Book Retailing
University Bookshop (Canterbury)
Limited............................... 50 Tertiary Book Retailing
University Bookshop (Otago) Limited..... 50 Tertiary Book Retailing
</TABLE>
Whitcoulls Group Limited has entered into the following related party
transactions with its subsidiaries.
<TABLE>
<CAPTION>
COMPANY
------------------------
<S> <C> <C>
1996 1995
$NZ000 $NZ000
----------- -----------
Interest Charged to Subsidiaries........................................... 9,423 8,605
Management Fees from Subsidiaries.......................................... 0 89
</TABLE>
Shares in certain subsidiary companies, with a book value of $20 million
were sold in the year to another subsidiary company for $20.2 million. Within
the parent company, provision has been made for amounts owing by subsidiaries
not considered collectible amounted to $1,117,000 (1995:NIL), these have
previously been accounted for on consolidation of the group. The outstanding
balances at year end are disclosed in the Balance Sheet, and the financing
cashflows are disclosed in the Statement of Cash Flows.
51
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
18 FINANCIAL INSTRUMENTS
CURRENCY AND INTEREST RATE RISK
CURRENCY
Whitcoulls Group Limited has a 100% investment in a subsidiary company
located in Australia-- Angus & Robertson Bookworld Pty Limited. The purchase
price of this investment was fully funded in Australian currency loans.
The Group has exposure to foreign exchange risk as a result of transactions
denominated in foreign currencies in the normal course of trading. Where these
exposures are considered significant, the Group's policy is to cover the
transaction. No significant exposures existed at year end.
INTEREST RATE
The Group has long term borrowings which are used to fund on-going
activities. These borrowings have short dated interest rate maturity dates of
generally 90 days. It is Group policy to manage its interest rate exposure in
accordance with prudent commercial practice. The Group has entered into interest
rate swaps to convert a portion of its interest rate exposure from floating to
fixed. The notional principal amounts of interest rate contracts outstanding at
balance date were as follows:
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
$000 $000 $000 $000
--------- --------- --------- ---------
Interest Rate Swaps........................................................ 83,015 91,000 60,000 70,000
</TABLE>
INTEREST RATE REPRICING
The Group has entered into interest rate swap agreements where a portion of
the Group's floating rate debt has been effectively converted to fixed. These
agreements mature approximately evenly over the period to October 1999. Interest
rates range from 9.05% to 9.35%.
CREDIT RISK
In the normal course of business, the Group incurs credit risk from trade
debtors and transactions with financial institutions. The Group has a credit
policy to manage this exposure to credit risk. Credit risk in respect of debtors
is limited due to the large numbers of customers included in the Group's
customer base. The Group does not require collateral from debtors.
FAIR VALUES
As at balance date, the fair value of the interest swap agreements were
$140,000 in Whitcoulls favour. This value was calculated based on the variance
between the fixed interest rates contracted under the swap agreements and the
forward swap rates at balance date. The Directors are of the opinion that the
fair value of the Group's remaining financial assets and liabilities approximate
their carrying value.
52
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
19 EVENTS SUBSEQUENT TO BALANCE DATE
The following significant events occurred subsequent to balance date:
a) A taxable bonus issue of 13,500,000 new ordinary shares was made to
Rank Commercial Limited(RCL) on 22 July 1996 at an issue price of $4 per
share. The bonus issue was classified as a dividend for taxation purposes
and Whitcoulls Group Limited (WGL) attached the appropriate imputation
credits to the dividend.
b) A buyback of 25,750,000 ordinary shares by WGL from RCL took place
on 23 July 1996 at a price of $4 per share. The share buyback was financed
by further third party external borrowings.
c) RCL has sold all the shares in WGL to Blue Star Group Limited (BSG)
which is 100% owned by US Office Products Company (USOP). The sale agreement
("Stock Purchase Agreement") between RCL, BSG and USOP was dated 22 July
1996 and was effective on 26 July 1996 (the closing date).
As at the time of completing these financial statements, negotiations
are continuing between the parties to the Stock Purchase Agreement in
relation to warranted net tangible assets for the purposes of the
acquisition. It is not possible at this time to estimate the ultimate
outcome of these negotiations and the potential impact (if any) they may
have on these financial statements at 30 June 1996. Accordingly, no
adjustments, in relation to the ongoing negotiations have been made in these
financial statements.
d) Following acquisition all the third party external debt of WGL was
repaid by BSG and USOP, who continue to fund ongoing operations.
20 CONTINGENT LIABILITIES/ASSETS
The group has a contingent liability in respect of a taxation investigation
of $ 17.4 million which existed at the time of purchase of certain businesses.
No losses are anticipated as the group has an indemnity from the vendor of those
businesses.
The group has certain tax returns for prior years currently being reviewed
by the Inland Revenue Department. In accordance with the Stock Purchase
Agreement between Rank Commercial Ltd and Blue Star Group Ltd, Rank Commercial
Ltd has indemnified Blue Star Group Limited for differences if any, that may
arise in respect of these matters currently being investigated.
Angus & Robertson Bookworld Pty Ltd has been admitted as an unsecured
creditor of Bilbury Limited (formerly Brash Holdings Limited) (Subject to Deed
of Company Arrangement) for A$7.5 million. No monies will be received in respect
of this proof of debt until the other unsecured creditors have received A$38
cents per dollar of admitted proof.
There were no other material contingent liabilities/assets.
21 CAPITAL COMMITMENTS
There were no material capital commitments at year end. (1995: NIL)
53
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
22 CONVERSION FROM NEW ZEALAND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP) EFFECTING
SHAREHOLDERS' EQUITY AND REPORTED EARNINGS.
As indicated in Note 1, the financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) followed in New
Zealand. Had these financial statements been prepared on the basis of generally
accepted accounting principles in the United States (US GAAP), the material
differences which affect earnings and shareholders' equity would be as follows:
1. New Zealand GAAP allows for the revaluation of fixed assets with a
corresponding adjustment to capital reserves. Whitcoulls Group Limited have
revalued land, buildings and a certain item of plant. This type of revaluation
is not in accordance with U.S. GAAP and accordingly, US GAAP basis fixed assets
should be presented at their historical cost amounts. In this regard
depreciation and gains or losses on disposal of fixed assets would be computed
on the basis of the historical cost amounts and not upon the revalued amounts.
2. New Zealand GAAP allows for the recognition of dividend distributions on
an accrual basis. Under US GAAP, dividends are only recognised if they are
declared prior to the balance sheet date.
3. New Zealand GAAP allows the immediate recognition of gains arising from
sale and leaseback transactions which meet certain criteria. U.S. GAAP requires
that these gains within specified limits be recognised over the term of the
related lease.
4. New Zealand GAAP requires that the earnings of foreign subsidiaries be
recognised at the year end exchange rate. US GAAP requires that the earnings be
recognised at a weighted average rate. This results in a reallocation of
earnings between the income statement and the currency translation reserve.
5. US GAAP requires a deferred tax liability to be recognised for
differences between the assigned tax and book basis of assets in a purchase
business combination.
6. Under US GAAP minority interests would not be presented as a component of
Total Equity.
A reconciliation of the key components of the financial statements between
New Zealand GAAP and US GAAP are as follows:
<TABLE>
<CAPTION>
NON
SHAREHOLDER FIXED CURRENT DEFERRED
EQUITY ASSETS INVESTMENT GOODWILL LIABILITIES TAX
------------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
YEAR ENDED 30 JUNE 1996
Reported under NZ GAAP.............. 158,043 100,282 2,610 50,009 55,685 (4,914)
1. Adjustments related to changes in
accounting for Fixed Assets....... (20,234) (19,983) (251)
3. Adjustments related to changes in
the accounting for sale and
leaseback transactions............ (762)
4. Adjustment related to using
weighted average exchange rate
rather than year end exchange rate
for earnings of foreign
subsidiary........................
5. Adjustments for differences
between assigned values and tax
basis on acquisition.............. (80) 323 403
6. Adjustments for reclassification
of Minority Interest.............. (702) 702
------------- ----------- ----- ----------- ----------- -----------
Restated under US GAAP.............. 136,265 80,299 2,359 50,332 56,387 (4,511)
------------- ----------- ----- ----------- ----------- -----------
------------- ----------- ----- ----------- ----------- -----------
<CAPTION>
DEFERRED NET PROFIT
INCOME AFTER TAX
------------- -----------
<S> <C> <C>
$NZ000 $NZ000
YEAR ENDED 30 JUNE 1996
Reported under NZ GAAP.............. 0 26,728
1. Adjustments related to changes in
accounting for Fixed Assets....... 1,181
3. Adjustments related to changes in
the accounting for sale and
leaseback transactions............ 762 82
4. Adjustment related to using
weighted average exchange rate
rather than year end exchange rate
for earnings of foreign
subsidiary........................ (87)
5. Adjustments for differences
between assigned values and tax
basis on acquisition.............. (20)
6. Adjustments for reclassification
of Minority Interest..............
--- -----------
Restated under US GAAP.............. 762 27,884
--- -----------
--- -----------
</TABLE>
54
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
22 CONVERSION FROM NEW ZEALAND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP) EFFECTING
SHAREHOLDERS' EQUITY AND REPORTED EARNINGS. (CONTINUED)
<TABLE>
<CAPTION>
NON
SHAREHOLDER FIXED CURRENT DEFERRED DEFERRED
EQUITY ASSETS INVESTMENT GOODWILL LIABILITIES TAX INCOME
------------- ----------- ------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
YEAR ENDED 30 JUNE 1995
Reported under NZ GAAP.... 148,100 111,005 2,519 52,158 81,672 (627) 0
1. Adjustments related to
changes in accounting
for Fixed Assets........ (21,837) (21,586) (251)
2. Adjustments related to
changes in accounting
for Dividends........... 7,260
3. Adjustments related to
changes in the
accounting for sale and
leaseback
transactions............ (844) 844
4. Adjustment related to
using weighted average
exchange rate rather
than year end exchange
rate for earnings of
foreign subsidiary......
5. Adjustments for differ-
ences between assigned
values and tax basis on
acquisition............. (60) 343 403
6. Adjustments for
reclassification of
Minority Interest....... (600) 600
------------- ----------- ----- ----------- ----------- --- ---
Restated under US GAAP.... 132,019 89,419 2,268 52,501 82,272 (224) 844
------------- ----------- ----- ----------- ----------- --- ---
------------- ----------- ----- ----------- ----------- --- ---
<CAPTION>
PROVISION
FOR NET PROFIT
DIVIDEND AFTER TAX
----------- -----------
<S> <C> <C>
$NZ000 $NZ000
YEAR ENDED 30 JUNE 1995
Reported under NZ GAAP.... 7,260 20,188
1. Adjustments related to
changes in accounting
for Fixed Assets........ 789
2. Adjustments related to
changes in accounting
for Dividends........... (7,260)
3. Adjustments related to
changes in the
accounting for sale and
leaseback
transactions............ 82
4. Adjustment related to
using weighted average
exchange rate rather
than year end exchange
rate for earnings of
foreign subsidiary...... 332
5. Adjustments for differ-
ences between assigned
values and tax basis on
acquisition............. (20)
6. Adjustments for
reclassification of
Minority Interest.......
----------- -----------
Restated under US GAAP.... 0 21,371
----------- -----------
----------- -----------
</TABLE>
55
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
ADDITIONAL DISCLOSURES REQUIRED UNDER US GAAP
YEARS ENDED 30 JUNE 1996 AND 1995
1. NATURE OF BUSINESS
Whitcoulls Group Ltd operates nine main subsidiary companies.
Summarised below are the activities for each of the main subsidiaries:
Whitcoulls Ltd operates 68 stores throughout New Zealand, retailing books,
paperbacks, magazines, commercial and household stationery, greeting cards,
videos, and other complementary products.
London Bookshops Ltd operates 36 stores (nine of which are franchised)
throughout New Zealand, retailing books, paperbacks, magazines, commercial and
household stationery, greeting cards, videos, and other complementary products.
Angus & Robertson Bookworld Pty Ltd operates Australia's largest chain of
bookshops, comprising 85 company owned and 81 franchised stores. Books are the
core of the product range, with some stores also carrying magazines and a
limited range of household stationery.
OTC Office Supplies Ltd is the largest commercial stationery retailer in New
Zealand, operating four sales and distribution centres in Auckland, Hamilton,
Wellington and Christchurch.
Whitcoulls Office Products Ltd is New Zealand's second largest commercial
stationer, operating 18 retail and warehouse branches and includes a specialist
retailer of computer consumables and related products.
Hollands Ltd is a retailer of stationery and office furniture to the
Auckland market.
School Supplies Ltd operates 11 branches throughout New Zealand, supplying
schools with a wide range of stationery, art supplies and text books.
Croxley Stationery Ltd is a manufacturer and wholesaler of stationery,
including filing products, diaries, scholastic products, pads, envelopes,
writing instruments and recycled laser cartridges. It manufactures approximately
70% of its products range at its four factories.
GP Print Ltd (formerly the Government Printing Office). It holds long term
contracts to produce all New Zealand's telephone directories and to print and
distribute Parliamentary legislation. It is also one of New Zealand's largest
commercial printers.
2. PROFIT AND LOSS ACCOUNT
Operating expenses in the Profit and Loss Account comprise;
<TABLE>
<CAPTION>
1996 1995
NZ$000 NZ$000
--------- ---------
<S> <C> <C>
Cost of Product sold........................................................................... 386,127 392,557
Selling, General, Administrative and Other Expenses............................................ 126,025 116,832
--------- ---------
Total Operating Expenses....................................................................... 512,152 509,389
--------- ---------
--------- ---------
</TABLE>
56
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
ADDITIONAL DISCLOSURES REQUIRED UNDER US GAAP
YEARS ENDED 30 JUNE 1996 AND 1995
3. STATEMENT OF CASH FLOWS
NZ GAAP includes bank overdraft as under the cash caption in the Statement
of Cash Flows under US GAAP a bank overdraft is included as financing
activities.
Effect on the Cash Flow Statement is to increase cash received from
financing activities by NZ$11,176,000 in the 1995 year and reduce cash paid by
financing activities by NZ$11,176,000 in the 1996 year.
The restated cash flow in summary form is as follows:
<TABLE>
<CAPTION>
1996 1995
NZ$000 NZ$000
--------- ---------
<S> <C> <C>
Net Cash flows from Operating Activities..................................................... 65,990 21,296
Cash Flows from Investing Activities......................................................... (4,599) (13,012)
Cash Flows from Financing Activities......................................................... (51,337) (8,755)
Net Cash (Disbursements) during period....................................................... 10,054 (471)
Cash at beginning of period.................................................................. -- 197
Impact of Foreign Exchange................................................................... (573) 274
--------- ---------
Cash at end of Period........................................................................ 9,481 Nil
--------- ---------
</TABLE>
4. FINANCE LEASE LIABILITIES
Finance lease commitments disclosed in Note 12 comprises:
<TABLE>
<CAPTION>
1996 1995
NZ$000 NZ$000
----------- -----------
<S> <C> <C>
Repayable:
Current........................................................................................ 3,532 1,388
1 & 2 years.................................................................................... 85 1,060
2 & 3 years.................................................................................... 17 936
----- -----
3,634 3,384
----- -----
Less
Future Interest Expense........................................................................ 494 460
----- -----
3,140 2,924
----- -----
</TABLE>
5. EARNINGS PER SHARE
<TABLE>
<CAPTION>
1996 1995
NZ$000 NZ$000
----------- -----------
<S> <C> <C>
Earnings per share (cents)................................................. 23.0 17.7
</TABLE>
57
<PAGE>
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
ADDITIONAL DISCLOSURES REQUIRED UNDER US GAAP
YEARS ENDED 30 JUNE 1996 AND 1995
6. LOANS
Included in loans is Australian denominated debt NZ$48.5 million for the
year ended 30 June 1996 and NZ$32.9 million for the year ended 30 June 1995.
7. NON-CASH FINANCING ACTIVITIES
New Zealand GAAP requires that bonus shares (stock dividends) are recorded
at par value. US GAAP requires stock dividends involving issuance by the company
of additional shares in ratios of less than 20% to 25% of the previously
outstanding shares accounted for by the issuer to be transferred from retained
earnings to share capital at a combined amount equal to the fair value of the
additional shares issued.
On 11 December 1992 a one-for-ten bonus issue was made. The fair value was
NZ $22,138,000, which under US GAAP would have been transferred from Retained
Earnings to Capital Reserves. Under NZ GAAP the par value of shares NZ$963,000
was transferred. This adjustment has no effect on total reported shareholders'
equity.
8. FOREIGN SUBSIDIARIES
Net liabilities of foreign subsidiaries which are denominated in Australian
dollars amount to NZ$5,709,000 as at 30 June 1996 and NZ$4,884,000 as at 30 June
1995.
9. UNUSED LETTERS OF CREDIT
<TABLE>
<CAPTION>
1996 1995
NZ$000 NZD$000
----------- -------------
<S> <C> <C>
Total as at 30 June...................................................... 612 588
</TABLE>
10. OPERATING LEASE EXPENSE
Operating lease expense comprise:
<TABLE>
<CAPTION>
1996 1995
NZ$000 NZD$000
--------- -----------
<S> <C> <C>
Base......................................................................................... 41,495 35,339
Contingent................................................................................... 567 450
Less sub-lease............................................................................... (3,328) (2,511)
--------- -----------
38,734 33,268
</TABLE>
58
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SFI Corp.:
We have audited the accompanying balance sheet of SFI Corp. as of December
31, 1995, and the related statements of income, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SFI Corp. as of December 31,
1995 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
59
<PAGE>
SFI CORP.
BALANCE SHEETS
(IN 000'S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
(UNAUDITED)
ASSETS (NOTES 4 AND 5)
Current assets:
Cash.............................................................................. $ 4 4
Trade accounts receivable, less allowance for doubtful accounts of $409 in 1995
and $695 in 1996................................................................ 15,543 14,196
Inventories (note 2).............................................................. 3,638 3,784
Prepaid expenses.................................................................. 117 183
Other accounts receivable......................................................... 121 175
------------ -------------
Total current assets............................................................ 19,423 18,342
Property, plant and equipment, net (notes 3 and 6)................................ 3,586 3,570
Other assets, net................................................................. 1,068 912
------------ -------------
Total assets $ 24,077 22,824
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft.................................................................... $ 1,888 2,099
Line of credit facility (notes 5 and 12).......................................... 4,204 7,489
Current installments of long-term debt (note 4)................................... 170 146
Current installments of obligations under capital leases (note 6)................. 174 149
Trade accounts payable............................................................ 4,677 4,186
Accrued compensation and benefits................................................. 1,272 732
Other accrued expenses............................................................ 829 1,449
Income taxes payable.............................................................. 68 --
Due to related parties (note 9)................................................... 620 850
------------ -------------
Total current liabilities..................................................... 13,902 17,100
Revolving credit facility (notes 5 and 12).......................................... 3,500 --
Long-term debt, excluding current installments (note 4)............................. 598 494
Obligations under capital leases, excluding current installments (note 6)........... 238 124
------------ -------------
Total liabilities............................................................. 18,238 17,718
------------ -------------
Stockholders' equity:
Common stock, no par value, 15,680,000 shares authorized 4,000,000 shares issued
and outstanding (note 12)....................................................... -- --
Additional paid-in capital........................................................ 37 37
Retained earnings................................................................. 5,802 5,069
------------ -------------
Total stockholder's capital................................................... 5,839 5,106
------------ -------------
Commitments, contingencies and subsequent events
(notes 5, 6, 9, 10 and 12)
------------ -------------
Total liabilities and stockholders' equity.................................... $ 24,077 22,824
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to financial statements.
60
<PAGE>
SFI CORP.
STATEMENTS OF INCOME
(IN 000'S)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1995 1995 1996
------------ --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Net sales....................................................................... $ 75,714 54,429 65,259
Cost of goods sold.............................................................. 49,296 35,564 42,235
------------ --------- ---------
Gross profit.............................................................. 26,418 18,865 23,024
Selling, general and administrative expenses.................................... 22,520 16,141 19,897
Nonrecurring expenses (note 12)................................................. -- -- 792
------------ --------- ---------
Operating income.......................................................... 3,898 2,724 2,335
Interest expense................................................................ (690) (486) (603)
------------ --------- ---------
Income before state income taxes.......................................... 3,208 2,238 1,732
State income tax expense........................................................ 225 157 121
------------ --------- ---------
Net income................................................................ $ 2,983 2,081 1,611
------------ --------- ---------
------------ --------- ---------
Pro forma income data:
Income before income taxes.................................................... 3,208 2,238 1,732
Pro forma provision for income taxes (unaudited).............................. 1,283 895 693
------------ --------- ---------
Pro forma net income (unaudited).......................................... $ 1,925 1,343 1,039
------------ --------- ---------
------------ --------- ---------
</TABLE>
See accompanying notes to financial statements.
61
<PAGE>
SFI CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN 000'S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- --------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.......................... 4,000,000 $ -- 37 $ 5,010 $ 5,047
Net income............................................ -- -- -- 2,983 2,983
Distributions to stockholders (note 8)................ -- -- -- (2,191) (2,191)
---------- --------- --- --------- ------------
Balance at December 31, 1995.......................... 4,000,000 -- 37 5,802 5,839
Net income (unaudited)................................ -- -- -- 1,611 1,611
Distributions to stockholders (unaudited)............. -- -- -- (2,344) (2,344)
---------- --------- --- --------- ------------
Balance at September 30, 1996 (unaudited)............. 4,000,000 $ -- 37 $ 5,069 $ 5,106
---------- --------- --- --------- ------------
---------- --------- --- --------- ------------
</TABLE>
See accompanying notes to financial statements.
62
<PAGE>
SFI CORP.
STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1995 1995 1996
------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income..................................................................... $ 2,983 2,081 1,611
------ --------- ---------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization.............................................. 775 495 643
Changes in assets and liabilities increasing (decreasing) cash:
Trade accounts receivable.............................................. (5,057) (3,288) 1,347
Inventories............................................................ (1,461) (1,065) (146)
Prepaid expenses....................................................... (83) (181) (66)
Other accounts receivable.............................................. (59) (164) (54)
Other assets........................................................... (78) (254) 80
Trade accounts payable................................................. 1,875 1,040 (491)
Accrued expenses....................................................... 889 320 80
Income taxes payable................................................... 53 -- (68)
Due to related parties................................................. 184 (130) 230
------ --------- ---------
Total adjustments.................................................... (2,962) (3,227) 1,555
------ --------- ---------
Net cash provided by (used in) operating activities.................. 21 (1,146) 3,166
------ --------- ---------
Cash flows from investing activities:
Acquisitions of property, plant and equipment.................................. (1,356) (1,039) (551)
Acquisitions of customer lists and other assets................................ (161) (161) --
Repayment of advances to related parties....................................... 132 60 --
------ --------- ---------
Net cash used in investing activities................................ (1,385) (1,140) (551)
------ --------- ---------
Cash flows from financing activities:
Increase in bank overdraft..................................................... $ 573 187 211
Borrowings under long-term revolving credit facility........................... 3,500 3,500 --
Net borrowings (repayments) on line of credit facility......................... (327) 201 (215)
Payment of debt issuance costs................................................. (29) (29) --
Proceeds from issuance of long-term debt....................................... 300 300 168
Principal payments on long-term debt........................................... (309) (267) (296)
Repayments of obligations under capital leases................................. (151) (80) (139)
Distributions to stockholders.................................................. (2,191) (1,525) (2,344)
------ --------- ---------
Net cash provided by (used in) financing activities.................. 1,366 2,287 (2,615)
------ --------- ---------
Net increase in cash............................................................. $ 2 1 --
Cash at beginning of period...................................................... 2 2 4
------ --------- ---------
Cash at end of period............................................................ $ 4 3 4
------ --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................................... $ 696 468 587
------ --------- ---------
------ --------- ---------
State income taxes......................................................... $ 185 164 216
------ --------- ---------
------ --------- ---------
Supplemental disclosures of noncash investing and financing activities:
Acquisitions of property and equipment through capital leases.............. $ 356 347 --
------ --------- ---------
------ --------- ---------
</TABLE>
See accompanying notes to financial statements.
63
<PAGE>
SFI CORP.
NOTES TO FINANCIAL STATEMENTS
(IN 000'S, EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
SFI Corp. (the Company), incorporated in New York, is a value added reseller
of printing products, ad specialties and office products. The Company markets
its products principally in the Midatlantic region of the United States through
a network of 21 sales offices in 13 states. The Company also operates six
distribution centers.
While a substantial portion of the Company's products are purchased directly
from others, some products are manufactured internally by Stanform Printers, the
Company's manufacturing division.
(b) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Property, plant and
equipment under capital leases are stated at the present value of minimum lease
payments or the fair value of the leased asset, whichever is lower. Depreciation
and amortization is provided using the straight-line method over the estimated
useful lives of the property as follows:
<TABLE>
<S> <C>
Building....................................................... 30 years
Leasehold improvements......................................... 10 years
Purchased computer software.................................... 5 years
Machinery and equipment........................................ 5-10 years
Automobiles.................................................... 5 years
</TABLE>
(c) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
(d) OTHER ASSETS
Other assets consist principally of goodwill, deferred financing costs and
deposits. Goodwill, which represents the excess of the purchase price over the
fair value of net assets acquired, is being amortized over a period of 25 years
using the straight-line method. The recoverability of goodwill is evaluated
based upon the estimated projected cash flows to which it relates. Deferred
financing costs are being amortized on a straight-line basis over the life of
the related loan which approximates the effective interest method. Accumulated
amortization on intangible assets amounted to $219 at December 31, 1995.
(e) INCOME TAXES
The Company, with the consent of its stockholders, has elected to be taxed
as an S corporation under section 1372 of the Internal Revenue Code, which
provides that, in lieu of corporate income tax, the stockholders are taxed on
their proportionate share of the Company's taxable income. A similar election
has not been made for certain state and local income taxes.
(f) REVENUE RECOGNITION
Revenue is generally recognized as orders are shipped to customers. When
customers, under the terms of specific orders, request that the Company invoice
goods on a bill and hold basis, the Company recognizes revenue based on the date
goods are available for shipment.
64
<PAGE>
SFI CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S, EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventory held by the Company under bill and hold arrangements at December
31, 1995 amounted to approximately $3,900. This inventory has been fully insured
by the Company.
(g) 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 40%, as if the Company
had been a taxable entity in all tax jurisdictions.
(h) INTERIM FINANCIAL INFORMATION
Interim financial information for the nine month periods ended September 30,
1995 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 necessary indicative of results for a full
year.
(i) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(2) INVENTORIES
Inventories at December 31, 1995 consist of the following:
<TABLE>
<S> <C>
Purchased for resale................................................ $ 3,351
Finished goods...................................................... 46
Work in process..................................................... 54
Raw materials....................................................... 187
---------
Total inventories............................................. $ 3,638
---------
---------
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1995 consists of the
following:
<TABLE>
<S> <C>
Land............................................................... $ 200
Building........................................................... 900
Leasehold improvements............................................. 287
Purchased computer software........................................ 1,449
Machinery and equipment............................................ 4,519
Automobiles........................................................ 95
---------
Total........................................................ 7,450
Accumulated depreciation and amortization.......................... (3,864)
---------
Total property, plant and equipment, net..................... $ 3,586
---------
---------
</TABLE>
65
<PAGE>
SFI CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S, EXCEPT SHARE DATA)
(4) LONG-TERM DEBT
Long-term debt at December 31, 1995 consists of the following:
<TABLE>
<S> <C>
9.45% note payable in monthly installments of $6, plus interest,
through March 1999; secured by certain real and personal
property........................................................... $ 238
7.35% note payable in monthly installments of $5, plus interest, with
final payment of $192 due January 31, 2001; secured by certain real
and personal property.............................................. 497
Other................................................................ 33
---------
Total long-term debt........................................... 768
Less current installments............................................ 170
---------
Long-term debt, excluding current installments................. $ 598
---------
---------
</TABLE>
The aggregate maturities of long-term debt for fiscal years after December
31, 1995 are as follows: 1996, $170; 1997, $137; 1998, $137; 1999, $75; 2000,
$57; and thereafter, $192.
(5) LINE OF CREDIT FACILITIES
In May 1995, the Company entered into an agreement with a commercial bank
which provided for a $5,500 line of credit and a $3,500 revolving credit
facility (the facilities). Under the terms of the line of credit, the Company
could borrow up to $5,500 through May 31, 1996. The Company had borrowed $4,204
against the line of credit at December 31, 1995. As discussed in note 12, the
line of credit was renewed and the agreement amended in August 1996.
The revolving credit facility, which was fully extended at December 31, 1995
and previously expired on January 1, 2001, was amended in August 1996 to expire
on October 2, 1997 (note 12).
The agreement governing the facilities provides for various borrowing rate
options including borrowing rates based on the bank's prime rate and a spread
over the London Interbank Offered Rate (LIBOR) ranging from 1.75% to 2.40%. The
Company must pay a monthly commitment fee ranging from .32% to .375% on the
average unused portion of the line of credit. The weighted average interest rate
on borrowings under the line of credit and the revolving credit facility during
1995 was 8.1%.
Borrowings under the line of credit and revolving credit facility are
secured by substantially all of the Company's assets. Further, the agreement,
among other things, restricts mergers and consolidations, transactions with
affiliates, the amount of capital expenditures, debt incurred and cash dividends
paid. The Company is also required to maintain certain specified financial
ratios including a minimum current ratio, a maximum debt coverage ratio and a
maximum debt to tangible net worth ratio. As of December 31, 1995, the company
had violated certain covenants under the agreement. In conjunction with the
amendments discussed in note 12, the lender agreed to amend these covenants to
resolve the instances of noncompliance with the agreement. At September 30,
1996, the Company was also in violation of certain covenants under the
agreement. However, it is anticipated that the line of credit and the revolving
credit facility will be paid in full upon the completion of the business
combination discussed in note 12. As such, the entire outstanding balance has
been included in current liabilities in the accompanying September 30, 1996
unaudited balance sheet.
66
<PAGE>
SFI CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S, EXCEPT SHARE DATA)
(6) LEASES
The Company is obligated under various capital leases for certain computer
equipment, computer software, office equipment and automobiles that expire at
various dates during the next four years. At December 31, 1995, the gross amount
of property and equipment and related accumulated amortization recorded under
capital leases were as follows:
<TABLE>
<S> <C>
Computer software.................................................... $ 35
Machinery and equipment.............................................. 554
---------
589
Less accumulated amortization........................................ 203
---------
$ 386
---------
---------
</TABLE>
Amortization expense related to assets held under capital leases was $130
for the year ended December 31, 1995.
The Company also has several noncancelable operating leases, primarily for
office and warehouse space, that expire over the next nine years. These leases
generally contain renewal options for periods ranging from two to ten years and
require the Company to pay all executory costs such as maintenance and
insurance. Rental expense, including executory costs, for operating leases
during the year ended December 31, 1995 was $794.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1995 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1996..................................................................... $ 197 743
1997..................................................................... 149 505
1998..................................................................... 89 416
1999..................................................................... 16 335
2000..................................................................... -- 286
Thereafter............................................................... -- 805
----- -----------
Total minimum lease payments............................................. 451 $ 3,090
-----------
-----------
Less amounts representing interest....................................... 39
-----
Net present value of minimum capital lease payments...................... 412
Less current installments of obligations under capital leases............ 174
-----
Obligations under capital leases, excluding current installments......... $ 238
-----
-----
</TABLE>
(7) 401(k) PLAN
The Company has a 401(k) defined contribution plan covering substantially
all of the employees of the Company. Under the provisions of the plan,
participants may defer from 1% to 15% of their pre-tax
67
<PAGE>
SFI CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S, EXCEPT SHARE DATA)
(7) 401(k) PLAN (CONTINUED)
compensation. The Company matches 33% of an employee's contributions up to 6% of
their compensation. The Company contributed $153 in matching contributions to
the plan during 1995.
(8) DISTRIBUTIONS TO STOCKHOLDERS
The distributions to stockholders amounted to $2,191 for the year ended
December 31, 1995, of which approximately $1,550 were made for payment of taxes
on income which flows through to the stockholders for income tax purposes in
accordance with the Company's organization as an "S corporation" under the
Internal Revenue Code.
(9) RELATED PARTY TRANSACTIONS
The Company purchases business forms in the normal course of business from
Hano Document Printers, Inc. (Hano), an affiliate of the Company through common
ownership. These purchases totaled approximately $5,242 for the year ended
December 31, 1995. At December 31, 1995, the net amounts due to Hano totaled
$609.
At December 31, 1995, the Company was also obligated in the amount of $11 to
Minority Business Forms, Inc., an affiliate of the Company through common
ownership.
The Company leases certain office and warehouse facilities from an entity
controlled by a majority stockholder and executive officer of the Company. This
lease has been classified as an operating lease. Total rent expense associated
with the lease for the year ended December 31, 1995 was $81.
(10) PURCHASE OF CUSTOMER LISTS
During 1995, the Company acquired to customer lists, as well as certain
other assets, from various entities in the forms printing and distribution
industry. These acquisitions have been accounted for as purchases and,
accordingly, the revenues derived from the assets acquired have been included in
the accompanying statements of income since the dates of the acquisitions.
The aggregate purchase price for the assets associated with the four
acquisitions made in 1995 was approximately $487. Assets purchased include
customer lists, supplies, inventory, fixed assets and certain prepaid items. In
addition, the Company paid $108 for noncompete agreements which are being
amortized using the straight-line method over five years. In conjunction with
the acquisitions, the Company entered into various employment and consulting
agreements with the former stockholders of the acquired entities, under which
additional amounts will be paid based on future sales.
(11) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
(a) CASH, TRADE ACCOUNTS RECEIVABLE, OTHER ACCOUNTS RECEIVABLE, INCOME TAXES
PAYABLE, TRADE ACCOUNTS PAYABLE, ACCRUED EXPENSES, AND DUE TO RELATED
PARTIES
The carrying amount approximates fair value because of the short maturity of
these instruments.
(b) LINE OF CREDIT FACILITY AND REVOLVING CREDIT FACILITY
The carrying amounts of the Company's borrowings under its line of credit
and its revolving credit facility approximate their fair value because the
interest rates on these instruments have been recently
68
<PAGE>
SFI CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S, EXCEPT SHARE DATA)
(11) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
renegotiated and vary both with changes in market interest rates and changes in
the Company's operating performance (note 5).
(c) LONG-TERM DEBT
The carrying amount of the Company's long-term debt (including current
portions thereof) is $768 at December 31, 1995, while the estimated fair value
is $432. The fair value of the Company's long-term debt has been estimated by
discounting the future cash flows of each instrument at the rate of interest
paid on a recently negotiated borrowing with similar characteristics.
(b) LIMITATIONS
FASB Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties. Fair value estimates are made at a specific point in time, based on
relevant market information. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
(12) SUBSEQUENT EVENTS
(a) RENEWAL OF LINE OF CREDIT FACILITY
In August 1996, the Company obtained a commitment from its lender, subject
to final documentation and certain terms and conditions, to renew its working
capital line of credit and refinance its revolving credit facility. Under the
terms of the amendment, the Company is permitted to borrow up to $12,000, $4,000
of which is payable upon demand of the lender. Of the remaining $8,000, $4,500
expires on May 31, 1997 and $3,500 expires on October 2, 1997. Borrowings will
bear interest based upon a spread over LIBOR ranging from 1.25% to 2.85%
depending upon the Company's operating performance. Substantially all other
terms and conditions remain consistent with the existing agreement.
(b) STOCK OPTION PLANS
In connection with an anticipated initial public offering of common stock,
the Company adopted the Long-Term Incentive Plan by which officers, employees
and consultants of the Company will be eligible to receive options to purchase
common stock. In May 1996, the Company granted options to employees to purchase
an aggregate of 474,360 shares of common stock, exercisable at $7.75 per share.
Options granted to employees may be issued as tax-benefited incentive stock
options or a non-qualified stock options.
In addition, the Company adopted the Director Stock Option Plan by which
nonemployee directors of the Company are eligible to receive options as provided
by a predetermined formula. Options granted under the Director Stock Option Plan
are limited to nonqualified stock options.
(c) STOCK SPLIT
During 1996, the Company authorized a 78,400 for 1 stock split. All share
data in these financial statements has been retroactively restated to reflect
this stock split.
69
<PAGE>
SFI CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S, EXCEPT SHARE DATA)
(12) SUBSEQUENT EVENTS (CONTINUED)
(d) NONRECURRING EXPENSES
The nonrecurring expenses for the nine months ended September 30, 1996
include a legal settlement and related fees associated with a dispute involving
a competitor, costs incurred with an attempted acquisition and costs incurred in
conjunction with a terminated initial public offering of common stock.
(e) BUSINESS COMBINATION
On October 2, 1996, the majority stockholder of the Company signed a letter
of intent to exchange substantially all of the outstanding common stock of the
Company for approximately 2,000,000 shares of common stock of a national office
products supplier (the Transaction). It is anticipated that the Transaction, if
consummated, will be accounted for as a pooling-of-interests in accordance with
the provisions of Accounting Principles Board No. 16, BUSINESS COMBINATIONS. In
addition, at the close of the Transaction, options exercisable into shares of
the company's common stock discussed in note 12(b) will be converted into
options exercisable into common stock of the issuer, with vesting and
termination rights to be equivalent to those that were in existence under the
Company's stock option plan. It is anticipated that the Transaction will close
in December 1996, however, consummation is subject to the due diligence and
certain other terms and conditions.
70
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hano Document Printers, Inc.:
We have audited the accompanying balance sheet of Hano Document Printers,
Inc. as of December 31, 1995, and the related statements of income,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Norfolk, Virginia
August 28, 1996
71
<PAGE>
HANO DOCUMENT PRINTERS, INC.
BALANCE SHEETS
(IN 000'S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
(UNAUDITED)
ASSETS (NOTES 4 AND 5)
Current assets:
Cash.............................................................................. $ 1 11
Trade accounts receivable, less allowance for doubtful accounts of $111 in 1995
and $105 in 1996................................................................ 4,776 3,569
Inventories (note 2).............................................................. 3,623 3,491
Prepaid expenses.................................................................. 57 113
Due from affiliate (note 9)....................................................... 609 831
------------ -------------
Total current assets.......................................................... 9,066 8,015
Property, plant and equipment, net (notes 3 and 6)................................ 2,470 3,395
Prepaid pension costs (note 7).................................................... 289 199
Other assets, net................................................................. 62 44
------------ -------------
Total assets.................................................................. $ 11,887 11,653
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft.................................................................... $ 602 516
Line of credit facility (note 5).................................................. 4,038 3,255
Current installments of long-term debt (note 4)................................... 614 615
Current installments of obligations under capital leases (note 6)................. 166 104
Trade accounts payable............................................................ 1,671 1,820
Accrued compensation and benefits................................................. 116 267
Other accrued expenses............................................................ 466 128
Income taxes payable.............................................................. -- 82
------------ -------------
Total current liabilities..................................................... 7,673 6,787
Long-term debt, excluding current installments (note 4)............................. 2,011 1,736
Obligations under capital leases, excluding current installments (note 6)........... 670 608
------------ -------------
Total liabilities............................................................. 10,354 9,131
------------ -------------
Stockholders' equity:
Common stock, $0.10 par value, 5,000,000 shares authorized, 1,000,000 shares
issued and outstanding (note 11)................................................ -- --
Additional paid-in capital........................................................ 100 100
Retained earnings................................................................. 1,433 2,422
------------ -------------
Total stockholders' equity.................................................... 1,533 2,522
Commitments, contingencies and subsequent events (notes 6, 9 and 11)................
------------ -------------
Total liabilities and stockholders' equity.................................... $ 11,887 11,653
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to financial statements.
72
<PAGE>
HANO DOCUMENT PRINTERS, INC.
STATEMENTS OF INCOME
(in 000's)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1995 1995 1996
------------ --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Net sales....................................................................... $ 31,299 23,314 24,487
Cost of goods sold.............................................................. 26,236 19,518 19,924
------------ --------- ---------
Gross profit.............................................................. 5,063 3,796 4,563
Selling, general and administrative expenses.................................... 3,395 2,648 2,471
Nonrecurring expenses (note 11)................................................. -- -- 314
------------ --------- ---------
Operating income.......................................................... 1,668 1,148 1,778
------------ --------- ---------
Other income (expenses):
Interest expense.............................................................. (738) (568) (459)
Gain on sale of property and equipment........................................ 47 48 467
------------ --------- ---------
(691) (520) 8
------------ --------- ---------
Income before state income taxes.......................................... 977 628 1,786
State income tax expense........................................................ 24 18 108
------------ --------- ---------
Net income................................................................ $ 953 610 1,678
------------ --------- ---------
------------ --------- ---------
Pro forma income data:
Income before income taxes.................................................... 977 628 1,786
Pro forma provision for income taxes (unaudited).............................. 391 251 714
------------ --------- ---------
Pro forma net income (unaudited).......................................... $ 586 377 1,072
------------ --------- ---------
------------ --------- ---------
</TABLE>
See accompanying notes to financial statements.
73
<PAGE>
HANO DOCUMENT PRINTERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN 000'S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.......................... 1,000,000 $ -- $ 100 $ 951 $ 1,051
Net income............................................ -- -- -- 953 953
Distributions to stockholders (note 8)................ -- -- -- (471) (471)
---------- ----- ----- ----------- ------
Balance at December 31, 1995.......................... 1,000,000 -- 100 1,433 1,533
Net income (unaudited)................................ -- -- -- 1,678 1,678
Distributions to stockholders (unaudited)............. -- -- -- (689) (689)
---------- ----- ----- ----------- ------
Balance at September 30, 1996 (unaudited)............. 1,000,000 $ -- $ 100 $ 2,422 $ 2,522
---------- ----- ----- ----------- ------
---------- ----- ----- ----------- ------
</TABLE>
See accompanying notes to financial statements.
74
<PAGE>
HANO DOCUMENT PRINTERS, INC.
STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1995 1995 1996
------------ --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income..................................................................... $ 953 610 1,678
------------ --------- ---------
Adjustments to reconcile net income to net cash provided (used in) operating
activities:
Depreciation and amortization................................................ 314 237 319
Gain on sale of property, plant and equipment................................ (47) -- (467)
Changes in assets and liabilities increasing (decreasing) cash:
Trade accounts receivable.................................................. (551) 35 1,207
Inventories................................................................ (470) (377) 132
Prepaid expenses........................................................... 67 39 (56)
Due from affiliate......................................................... (184) (66) (222)
Prepaid pension costs...................................................... 37 -- 90
Trade accounts payable..................................................... (623) (1,057) 150
Accrued expenses........................................................... 52 (81) (187)
Income taxes payable....................................................... (5) (5) 82
------------ --------- ---------
Total adjustments........................................................ (1,410) (1,275) (1,048)
------------ --------- ---------
Net cash provided by (used in) operating activities...................... (457) (665) 2,726
------------ --------- ---------
Cash flows from investing activities:
Acquisitions of property, plant and equipment.................................. (981) (472) (1,253)
Proceeds from sale of property, plant and equipment............................ 63 -- 493
------------ --------- ---------
Net cash used in investing activities.................................... (918) (472) (760)
------------ --------- ---------
Cash flows from financing activities:
Increase (decrease) in bank overdraft.......................................... 79 413 (86)
Net borrowings (repayments) on line of credit facility......................... 1,309 661 (783)
Payment of debt issuance costs................................................. (69) (69) --
Proceeds from issuance of long-term debt....................................... 2,905 2,800 168
Principal payments on long-term debt........................................... (2,234) (2,084) (443)
Repayments of obligations under capital leases................................. (157) (116) (123)
Distributions to stockholders.................................................. (471) (471) (689)
------------ --------- ---------
Net cash provided by (used in) financing activities...................... 1,362 1,134 (1,956)
------------ --------- ---------
Net increase (decrease) in cash.................................................. (13) (3) 10
Cash at beginning of period...................................................... 14 14 1
------------ --------- ---------
Cash at end of period............................................................ $ 1 $ 11 $ 11
------------ --------- ---------
------------ --------- ---------
Supplement disclosures of cash flow information:
Cash paid during the period for:
Interest..................................................................... $ 639 $ 478 $ 459
------------ --------- ---------
------------ --------- ---------
State income taxes........................................................... $ 9 $ 23 $ 32
------------ --------- ---------
------------ --------- ---------
</TABLE>
See accompanying notes to financial statements.
75
<PAGE>
HANO DOCUMENT PRINTERS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN 000'S EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS
Hano Document Printers, Inc. (the Company) is incorporated in the state of
Virginia, and operates as a full service manufacturer and distributor of
continuous and noncontinuous business forms. The Company maintains manufacturing
facilities in Springfield, Massachusetts; Conyers, Georgia and Mt. Olive,
Illinois. The Company markets its products principally in the New England,
Midwestern and Southern regions of the United States. The Company's major
customers, each contributing more than 5% of sales in 1995, include Aetna Life
and Casualty, J. Harland Data Graphics, Data Manufacturing, Inc. and Executive
Greetings.
(B) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Property, plant and
equipment under capital leases are stated at the lower of the present value of
minimum lease payments at the beginning of the lease term or fair value of the
asset at the inception of the lease. Depreciation and amortization is computed
using the straight-line method over estimated useful lives of the respective
assets. The Company uses the following periods for depreciating and amortizing
property, plant and equipment:
<TABLE>
<S> <C>
Buildings....................................................... 30 years
Leasehold improvements.......................................... 10 years
Machinery and equipment......................................... 5-10 years
</TABLE>
(C) INVENTORIES
Inventories consist of raw materials, work in process and finished goods.
Inventories are stated at the lower of cost or market. The Company determines
its inventory cost using the average cost method.
(D) OTHER ASSETS
Other assets consist largely of deferred financing costs which are amortized
on a straight-line basis over the life of the related loan which approximates
the use of the effective interest method. Accumulated amortization on intangible
assets amounted to $7 at December 31, 1995.
(E) INCOME TAXES
The Company, with the consent of its stockholders, has elected to be taxed
as an S corporation under section 1372 of the Internal Revenue Code, which
provides that, in lieu of corporate income tax, the stockholders are taxed on
their proportionate share of the Company's taxable income. A similar election
has not been made for certain state and local income taxes.
(F) REVENUE RECOGNITION
Revenue is generally recognized as orders are shipped to customers. When
customers, under the terms of specific orders, request that the Company invoice
goods on a bill and hold basis, the Company recognizes revenue based on the date
goods are produced and available for shipment. Inventory held by the Company for
which title had passed to customers at December 31, 1995 amounted to
approximately $300. This inventory has been fully insured by the Company.
76
<PAGE>
HANO DOCUMENT PRINTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) COST OF SALES
Vendor rebates and similar payments are recognized on an accrual basis in
the period earned and are recorded as a reduction to cost of sales. Delivery and
warehousing costs are included as an increase to cost of sales.
(H) 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 40%, as if the Company
had been a taxable entity in all tax jurisdictions.
(I) INTERIM FINANCIAL INFORMATION
Interim financial information for the nine month periods ended September 30,
1995 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.
(J) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(2) INVENTORIES
Inventories as of December 31, 1995 consisted of the following:
<TABLE>
<S> <C>
Raw materials....................................................... $ 1,473
Work in process..................................................... 310
Finished goods...................................................... 1,840
---------
Total inventories............................................. $ 3,623
---------
---------
</TABLE>
Work in process and finished goods inventories reflected above include
manufacturing labor and overhead costs amounting to $789 at December 31, 1995.
The Company has entered into a contract with one of its paper suppliers.
Under the terms of the contract, the Company has agreed to purchase all of its
carbonless paper through June 1998 at prevailing market prices. The contract
provides rebates to the Company based on volume purchased.
77
<PAGE>
HANO DOCUMENT PRINTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S EXCEPT SHARE DATA)
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1995 is summarized as follows:
<TABLE>
<S> <C>
Land................................................................ $ 144
Building............................................................ 431
Machinery and equipment............................................. 2,317
Leasehold improvements.............................................. 239
Construction in progress............................................ 257
---------
Total......................................................... 3,388
Accumulated depreciation and amortization........................... (918)
---------
Total property, plant and equipment, net...................... $ 2,470
---------
---------
</TABLE>
(4) LONG-TERM DEBT
Long-term debt at December 31, 1995 consists of the following:
<TABLE>
<S> <C>
Prime plus 3/4% term loan payable in monthly installments of $47,
plus interest, which averaged 9.50% in 1995; final payment due in
May 2000; secured by substantially all assets..................... $ 2,520
Prime plus 3/4% term loan payable in monthly installments of $5
commencing July 1996 through June 2001, plus interest, which
averaged 9.50% in 1995; represents the rollover of the equipment
credit facility (note 5).......................................... 105
---------
Total long-term debt.......................................... 2,625
Less current installments........................................... 614
---------
Long-term debt, excluding current installments................ $ 2,011
---------
---------
</TABLE>
The aggregate maturities of long-term debt for fiscal years after December
31, 1995 are as follows: 1996, $614; 1997, $611; 1998, $560; 1999, $560; and
2000, $280.
(5) CREDIT AGREEMENT
On May 30, 1995, the Company entered into a credit agreement with a
commercial bank which provides for, among other things: (1) a revolving credit
facility pursuant to which the Company is permitted to borrow and repay amounts
based upon certain eligible assets, as defined in the agreement (the Borrowing
Base), up to a maximum available credit amount of $6,000, (2) an equipment
credit facility with a maximum available credit amount of $600, and (3) a $2,800
term loan (note 4). The equipment credit facility and the term loan bear
interest at either the bank's prime rate plus 3/4% or a variable spread over the
London Interbank Offered Rate (LIBOR). Under the terms of the credit agreement,
the Company is prohibited from electing the LIBOR pricing option on outstanding
balances less than $100, and cannot have more than three LIBOR pricing options
in effect at any one time with respect to indebtedness evidenced by the
revolving credit facility or the equipment credit facility. The credit agreement
is secured by substantially all assets of the Company.
78
<PAGE>
HANO DOCUMENT PRINTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S EXCEPT SHARE DATA)
(5) CREDIT AGREEMENT (CONTINUED)
Under the terms of the credit agreement, the outstanding balance against the
revolving credit facility is payable to the bank on demand and bears interest at
either the bank's prime rate plus 3/4% or a variable spread over the LIBOR rate.
At December 31, 1995, the Company had an outstanding balance of $4,038 under the
revolving credit facility. The weighted average interest rate on borrowings
under the revolving credit facility throughout 1995 was approximately 10.30%.
The equipment credit facility, which expired on June 1, 1996, had a
provision allowing for the conversion, at the option of the Company, of all
outstanding amounts to a term loan prior to its expiration. In accordance with
the agreement, the Company converted the $272 in borrowings against the
equipment credit facility on June 1, 1996 to a term loan due in 60 equal monthly
installments, plus interest at the bank's prime rate plus 3/4%. As a result, the
$105 in borrowings against the equipment credit facility at December 31, 1995
are included in the long-term debt schedule provided in note 4 based upon the
maturity schedule of the subsequently issued term note.
The credit agreement, among other things, requires the maintenance of
certain specified financial ratios and restricts the amount of capital
expenditures, additional indebtedness, and certain dividends paid. At December
31, 1995, the Company was not in compliance with the adjusted tangible net worth
ratio debt covenant as specified in the credit agreement. On April 24, 1996, the
bank agreed to waive their rights under the credit agreement as a result of the
noncompliance.
As of September 30, 1996, the Company was not in compliance with certain of
its bank covenants under the agreement. However, it is anticipated that the
amounts due under the agreement will be paid in full in conjunction with the
closing of the business combination discussed in note 12.
Prior to May 30, 1995, the Company maintained a credit arrangement with a
commercial bank consisting of: (1) a revolving credit working capital facility
pursuant to which Hano was permitted to borrow and repay amounts based upon
certain eligible assets, as defined in the agreement, up to a maximum credit
amount of $7,000 bearing interest at the bank's prime rate plus 1 3/4% and (2) a
$2,100 term loan bearing interest at the bank's prime rate plus 1 3/4%. This
credit arrangement was paid in full during 1995, and replaced with the credit
agreement described above. As part of this transaction, the Company expensed a
redemption premium of $90 paid to the bank.
(6) LEASES
The Company is obligated under various capital leases for certain property,
plant and equipment that expire at various dates throughout the next 11 years.
At December 31, 1995, the gross amount of the
79
<PAGE>
HANO DOCUMENT PRINTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S EXCEPT SHARE DATA)
(6) LEASES (CONTINUED)
property, plant and equipment and related accumulated amortization recorded
under capital leases was as follows:
<TABLE>
<S> <C>
Land................................................................ $ 144
Building............................................................ 431
Machinery and equipment............................................. 237
---------
812
Accumulated depreciation and amortization........................... (179)
---------
$ 633
---------
---------
</TABLE>
The above schedule excludes certain machinery and equipment related to the
Conyers, Georgia manufacturing facility lease described below. Based on the
depreciation periods assigned to machinery and equipment by the Company, these
assets are fully depreciated at December 31, 1995. Amortization expense of
assets held under capital leases was $60 for the year ended December 31, 1995.
The Company also has several noncancelable operating leases, primarily for
office and warehouse space, manufacturing facilities, office equipment and
automobiles that expire over the next five years. These leases generally contain
renewal options for periods ranging from two to ten years and require the
Company to pay all executory costs such as maintenance, property taxes and
insurance. Rental expense, including executory costs, for operating leases
during the year ended December 31, 1995 was $560.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
1996..................................................................... $ 211 431
1997..................................................................... 112 404
1998..................................................................... 99 375
1999..................................................................... 95 370
2000..................................................................... 92 369
Thereafter............................................................... 430 1,466
--------- -----------
Total minimum lease payments......................................... 1,039 $ 3,415
-----------
-----------
Less amounts representing interest....................................... 203
---------
Net present value of minimum capital lease payments.................. 836
Less current installments of obligations under capital leases............ 166
---------
Obligations under capital leases, excluding current installments......... $ 670
---------
---------
</TABLE>
Included in the above minimum lease payment schedule is a capital lease
related to the Company's manufacturing facility located in Conyers, Georgia. In
April 1981, the Development Authority of Rockdale
80
<PAGE>
HANO DOCUMENT PRINTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S EXCEPT SHARE DATA)
(6) LEASES (CONTINUED)
County, Georgia (the Authority) sold a $3,000 Industrial Revenue Bond to BayBank
Valley Trust Company (BayBank) for the benefit of Hano, the proceeds of which
were expended for costs incurred in the construction and equipping of the
Conyers, Georgia manufacturing facility.
In accordance with the Bond Purchase Agreement, the Company entered into an
agreement to lease the facility from the Authority. The lease agreement provides
for monthly rentals in amounts sufficient to meet principal and interest
payments due under the Agreement. Upon completion of all required lease
payments, Hano has the option to purchase the facility for a nominal amount. The
bond is collateralized by the lease agreement and land, building and machinery
and equipment located at the facility.
The Development Authority of Rockdale County, Georgia, First Mortgage
Industrial Revenue Bond, Series 1981 is payable in monthly installments with
interest at 60% of the prime rate. Interest has been imputed using 60% of the
current prime rate, 8.50% at December 31, 1995, for purposes of calculating the
minimum lease payments relating to the Conyers manufacturing facility lease. The
provisions of the lease agreement require the maintenance of minimum working
capital and certain other financial ratios.
(7) EMPLOYEE PENSION PLANS
The Company has the following pension plans in effect for its employees:
(A) DEFINED BENEFIT PLAN
The defined benefit plan covers substantially all union employees in the
Springfield, Massachusetts plant. Employees who have completed one year of
service and were hired prior to their 60th birthday are eligible for
participation in the plan. The plan provides for a benefit of 1.1% of the
earnings for each year worked for credited service after November 30, 1985 and
1.15% of the salary for each year before December 1, 1985, based on the salary
as of July 1 each year. The Company makes contributions in amounts sufficient to
fund the plan's current service cost on a current basis and to fund the initial
past service costs over a period of 30 years. Assets of the plan consist
primarily of unallocated insurance contracts.
81
<PAGE>
HANO DOCUMENT PRINTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S EXCEPT SHARE DATA)
(7) EMPLOYEE PENSION PLANS (CONTINUED)
The following table sets forth the defined benefit plan's funded status at
December 31, 1995:
<TABLE>
<S> <C>
Actuarial present value of obligations:
Accumulated benefit obligation including vested benefits of $628... $ (646)
---------
---------
Projected benefit obligation for service rendered to date.......... $ (817)
Plan assets at fair value.......................................... 937
---------
Plan assets in excess of projected benefit obligation............ 120
Unrecognized net loss.............................................. 307
Prior service cost not yet recognized in net periodic pension
costs............................................................ 13
Unrecognized net asset............................................. (151)
---------
Prepaid pension cost........................................... $ 289
---------
---------
Net periodic pension cost for 1995 included the following components:
Service cost earned during the period.............................. $ 48
Interest cost on projected benefit obligation...................... 60
Actual return on plan assets....................................... (43)
Net amortization and deferral...................................... (28)
---------
Net periodic pension cost...................................... $ 37
---------
---------
</TABLE>
Assumptions used in determining the actuarial present value of the projected
benefit obligation at December 31, 1995 were:
<TABLE>
<S> <C>
Weighted average discount rate......................................... 7.5%
Rates of increase in salary levels..................................... 3.5%
Expected long-term rate of return on assets............................ 8.0%
</TABLE>
(B) DEFINED CONTRIBUTION PLANS
During 1994, the Company maintained two defined contribution plans that
covered substantially all employees in the Mt. Olive, Illinois and Conyers,
Georgia plants and established a salary reduction 401(k) plan that covered
substantially all full time nonunion employees at the Springfield, Massachusetts
plant. In 1995, the Company modified the salary reduction 401(k) plan to cover
substantially all full time nonunion employees at the Springfield, Massachusetts
and Mt. Olive, Illinois plants, and substantially all employees at the Conyers,
Georgia plant. The Company terminated the defined contribution plan at the
Conyers, Georgia plant, and suspended contributions to the defined contribution
plan at the Mt. Olive, Illinois plant for all full time nonunion employees.
The Company continues to maintain a defined contribution plan at the Mt.
Olive, Illinois plant which covers substantially all full time union employees,
and contributes 4% of the employees gross pay to a separate trust established
for each employee which is invested according to the employee's designation by
the plan administrator. Total contributions relating to the defined contribution
plans were $90 for the year ended December 31, 1995.
82
<PAGE>
HANO DOCUMENT PRINTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S EXCEPT SHARE DATA)
(8) DISTRIBUTIONS TO STOCKHOLDERS
Distributions to stockholders amounted to $471 for the year ended December
31, 1995, and were made for the payment of taxes on income which flows through
to the stockholders for income tax purposes in accordance with the Company's
organization as an "S corporation" under the Internal Revenue Code.
(9) RELATED PARTY TRANSACTIONS
The Company sells business forms in the normal course of business to SFI
Corp., an affiliate of the Company through common ownership. Sales to SFI Corp.
for the year ended December 31, 1995 approximated $5,242. The balance due from
SFI amounted to $609 at December 31, 1995.
The Company leases its facilities in Springfield and Mt. Olive from a realty
company affiliated through common ownership. These leases include land and
buildings, and have remaining terms of nine years. Rental payments under these
leases are adjusted to reflect changes in the consumer price index. The leases
currently provide for aggregate annual rental payments of $366 which are
included in the future minimum lease payments in note 6. The aggregate rental
expense, including executory costs, on these leases amounted to $439 for the
year ended December 31, 1995, and is included in selling, general and
administrative expenses in the accompanying statement of income.
(10) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes disclosure regarding the estimated fair value of
the Company's financial instruments at December 31, 1995.
(A) CASH, DUE FROM AFFILIATE, TRADE ACCOUNTS RECEIVABLE, TRADE ACCOUNTS PAYABLE
AND ACCRUED EXPENSES
The carrying amount approximates fair value because of the short maturity of
these instruments.
(B) BANK LINE OF CREDIT AND LONG-TERM DEBT
The carrying amounts of the Company's borrowings approximate their fair
value because the interest rates on these instruments were recently
renegotiated.
(C) LIMITATIONS
FASB Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties. Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(11) SUBSEQUENT EVENTS
(A) RELATED PARTY TRANSACTION
On March 31, 1996, the Company terminated the employment of its President.
In accordance with the terms of the severance agreement, severance pay of
approximately $125 was accrued and a portion of the
83
<PAGE>
HANO DOCUMENT PRINTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN 000'S EXCEPT SHARE DATA)
(11) SUBSEQUENT EVENTS (CONTINUED)
employee's ownership interest in the Company, representing 10% of the
outstanding stock, was repurchased by the Company's Chairman and CEO at its book
value effective December 31, 1995. The employee will retain the remaining
portion of his ownership interest, approximately 5% of the Company's outstanding
common stock. If a public stock offering is not completed within two years, the
Company's majority stockholder has the right to repurchase the employee's
remaining stock for $93.
(B) STOCK OPTION PLANS
In connection with an anticipated initial public offering of common stock,
the Company adopted the Long-Term Incentive Plan by which officers, employees
and consultants of the Company will be eligible to receive options to purchase
common stock. In May 1996, the Company granted options to employees to purchase
an aggregate of 80,400 shares of common stock, exerciseable at $7.75 per share.
Options granted to employees may be issued as tax-benefited incentive stock
options or non-qualified stock options.
In addition, the Company adopted the Director Stock Option Plan by which
nonemployee directors of the Company are eligible to receive options as provided
by a predetermined formula. Options granted under the Director Stock Option Plan
are limited to nonqualified stock options.
(C) STOCK SPLIT
During 1996, the Company authorized a 1,000 for 1 stock split. All share
data in these financial statements has been retroactively restated to reflect
this stock split.
(D) NONRECURRING EXPENSES
The nonrecurring expenses for the nine months ended September 30, 1996
include severance accrued upon the termination of the Company's president as
discussed in note 12(a), costs incurred with an attempted acquisition and costs
incurred with a terminated initial public stock offering.
(E) BUSINESS COMBINATION
On October 2, 1996, the majority stockholder of the Company signed a letter
of intent to exchange substantially all of the outstanding common stock of the
Company for approximately 500,000 shares of common stock of a national office
products supplier (the Transaction). It is anticipated that the Transaction, if
consummated, will be accounted for as a pooling-of-interests in accordance with
the provisions of Accounting Principles Board No. 16, BUSINESS COMBINATIONS. In
addition, at the close of the Transaction, options exerciseable into shares of
the Company's common stock discussed in note 11(b) will be converted into
options exerciseable into common stock of the issuer, with vesting and
termination rights to be equivalent to those that were in existence under the
Company's stock option plans. It is anticipated that the Transaction will close
in December 1996, however, consummation is subject to due diligence and certain
other terms and conditions.
(F) LOSS OF SIGNIFICANT CUSTOMER
In October 1996, the Company was informed by J. Harland Data Graphics
(Harland) that in conjunction with a change in management, Harland plans to
terminate its customer relationship with the Company. Sales to Harland were
approximately $4 million for the year ended December 31, 1995 and $4.6 million
for the nine months ended September 30, 1996.
84
