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PROSPECTUS SUPPLEMENT 424(B)(3) AND 424(C)
TO PROSPECTUS DATED OCTOBER 9, 1996 REGISTRATION NO. 333-13133
[LOGO]
37,651,948 SHARES
COMMON STOCK
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U.S. Office Products Company (the "Company" or "U.S. Office Products") has
prepared this Prospectus Supplement (the "Prospectus") to update and restate in
its entirety the Company's Prospectus dated October 9, 1996, as supplemented by
Prospectus Supplements dated November 6, 1996, December 12, 1996, January 8,
1997, and February 3, 1997, covering 37,651,948 shares of common stock, par
value $.001 per share (the "Common Stock"), which may be offered and issued by
U.S. Office Products from time to time in connection with the acquisition by the
Company of other businesses, assets or securities. It is expected that the terms
of the acquisitions involving the issuance of securities covered by this
Prospectus will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be acquired by the Company.
No underwriting discounts or commissions will be paid, although finder's fees
may be paid in cash or in shares of Common Stock from time to time with respect
to specific mergers or acquisitions. Any person receiving such fees may be
deemed to be an underwriter within the meaning of the Securities Act of 1933, as
amended (the "Securities Act").
As of March 26, 1997, the Company had 60,693,638 shares of Common Stock
outstanding. The Common Stock is traded on the Nasdaq National Market under the
symbol "OFIS." On April 8, 1997, the last reported sale price for the Common
Stock on the Nasdaq National Market was $22.375 per share.
All expenses of this offering will be paid by the Company.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS APRIL 11, 1997.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents of the Company filed with the Securities and
Exchange Commission (the "Commission") (File No. 0-25372) are incorporated
herein by reference:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended April
30, 1996 filed with the Commission on July 16, 1996;
(b) The Company's Quarterly Reports on Form 10-Q for the interim periods
ended July 27, 1996 (filed with the Commission on September 10, 1996), October
26, 1996 (filed with the Commission on December 11, 1996) and January 25, 1997
(filed with the Commission on March 11, 1997);
(c) The Company's Current Reports on Form 8-K dated January 29, 1997,
January 9, 1997, October 25, 1996 (as amended), September 23, 1996, August 20,
1996, July 26, 1996 (as amended), July 23, 1996, July 16, 1996 and May 2, 1996
(as amended); and
(d) The description of the Company's Common Stock under the caption
"Description of Registrant's Securities to be Registered" in the Company's
Amendment No. 1 to Registration Statement on Form 8-A, dated February 13, 1995,
and the Company's Quarterly Report on Form 10-Q for the interim period ended
July 27, 1996 disclosing, among other things, an amendment to the Company's
Amended and Restated Certificate of Incorporation.
In addition, all reports and other documents filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to the date of
effectiveness of the Registration Statement of which this Prospectus is a part
and prior to the termination of the offering made hereby, shall be deemed to be
incorporated by reference into this Prospectus. Any statement contained herein
or incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
THE COMPANY BY CONTACTING MARK D. DIRECTOR, 1025 THOMAS JEFFERSON STREET, N.W.,
SUITE 600 EAST, WASHINGTON, D.C. 20007. IN ORDER TO ENSURE TIMELY DELIVERY OF
THE DOCUMENTS, ANY REQUEST SHOULD ALLOW AT LEAST FIVE (5) BUSINESS DAYS FOR
DELIVERY.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Incorporation of Certain Information by Reference.......................................................... 2
Available Information...................................................................................... 3
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 7
Price Range of Common Stock................................................................................ 12
Dividend Policy............................................................................................ 12
Selected Financial Data.................................................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 16
Business................................................................................................... 24
Management................................................................................................. 35
Executive Compensation..................................................................................... 38
Certain Transactions....................................................................................... 42
Principal Stockholders..................................................................................... 43
Description of Capital Stock............................................................................... 45
Plan of Distribution....................................................................................... 46
Restrictions on Resale..................................................................................... 47
Legal Matters.............................................................................................. 47
Experts.................................................................................................... 47
Index to Financial Statements.............................................................................. F-1
</TABLE>
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-4 under the Securities Act, with respect to the securities
offered hereby. This Prospectus, which constitutes part of the Registration
Statement, omits certain of the information contained in the Registration
Statement and the exhibits and schedules thereto on file with the Commission
pursuant to the Securities Act and the rules and the regulations of the
Commission thereunder. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, and each such
statement is qualified in all respects by such reference. The Company is subject
to the informational requirements of the Exchange Act, and, in accordance
therewith, files reports, proxy statements, and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Seven World
Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison Avenue,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates, or from the Commission's Internet
web site at http://www.sec.gov. In addition, such materials also may be
inspected and copied at the offices of the Nasdaq National Market, 1735 K
Street, N.W., Washington, D.C. 20006.
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PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED IN THIS PROSPECTUS, THE WORDS "ANTICIPATE," "BELIEVE,"
"ESTIMATE," AND "EXPECT" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY
OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY
FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED IN "RISK FACTORS." THIS PROSPECTUS ALSO CONTAINS PRO FORMA FINANCIAL
INFORMATION THAT GIVES EFFECT TO CERTAIN EVENTS. SUCH INFORMATION IS NOT
NECESSARILY INDICATIVE OF THE RESULTS THAT THE COMPANY WOULD HAVE ATTAINED HAD
THE EVENTS OCCURRED AT THE BEGINNING OF THE PERIODS PRESENTED, AS ASSUMED, OR OF
THE FUTURE RESULTS OF THE COMPANY. SEE "PRO FORMA COMBINED FINANCIAL
STATEMENTS."
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND
RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED BY
REFERENCE HEREIN. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN THE COMMON STOCK. UNLESS THE CONTEXT OTHERWISE
REQUIRES, THE TERMS "U.S. OFFICE PRODUCTS" OR THE "COMPANY" REFER TO U.S. OFFICE
PRODUCTS COMPANY, A DELAWARE CORPORATION, AND ITS SUBSIDIARIES AND PREDECESSORS.
ALL REFERENCES TO YEARS, UNLESS OTHERWISE NOTED, REFER TO THE COMPANY'S FISCAL
YEAR, WHICH ENDED ON APRIL 30 OF EACH YEAR UNTIL YEARS BEGINNING WITH THE 1997
FISCAL YEAR, WHICH END ON THE LAST SATURDAY OF APRIL.
THE COMPANY
U.S. Office Products is one of the world's largest and fastest growing
suppliers of a broad range of office products and business services to
corporate, commercial, industrial and educational customers. Since its founding
in October 1994, the Company has emerged as a leading consolidator of several
highly fragmented industries that serve the office needs of business and
educational customers. The Company had pro forma revenues of $2.8 billion for
the fiscal year ended April 30, 1996 assuming the completion as of May 1, 1995
of the acquisitions made by the Company after May 1, 1995. U.S. Office Products
currently provides products and services from over 350 facilities in North
America, and from over 350 facilities in New Zealand, Australia and the United
Kingdom. The Company currently has over 15,000 employees.
The Company's strategy is to serve as the sole source for the full range of
business products, services, and equipment used by middle market businesses
around the world. The Company believes that middle market businesses, which it
defines as those with between 20 and 500 employees, constitute the fastest
growing sector of the economy and have served as a greater source of new job
growth in recent years than have larger organizations. The Company sells to its
business and educational customers a full range of more than 34,000 products and
services, including office supplies, office furniture, office coffee services,
computer and telecommunications network services, forms management and school
supplies and school furniture. The Company believes that in many middle market
businesses most of these products and services are purchased by a single
decisionmaker. The Company's goal is to emerge as the provider of choice for all
of a customer's office needs by offering superior customer service, convenience
and a full range of products and services to such decisionmakers.
The Company has an aggressive acquisition program through which it has
acquired and seeks to acquire companies with established sales presences and
brand names in given geographic, product or service markets. From its founding
through March 26, 1997, the Company completed 149 acquisitions (the "Completed
Acquisitions"). The Company believes that the fragmented nature of many of the
markets it serves has both allowed it to identify suitable acquisition
candidates and enabled it, through acquisitions, to establish a leadership
position in these markets. For example, the Company believes that, based upon
current sales volume, it is now one of the largest contract stationers in the
United States, one of the largest school supply distributors in the United
States, one of the largest providers of office coffee services in the United
States and one of the largest providers of contract furniture in the United
States. The Company is
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currently organized into eight divisions to serve its various product, service,
and geographic markets, and to identify and pursue complementary acquisitions
within these markets. See "Business."
During the 1997 fiscal year through March 26, 1997, the Company acquired 82
businesses located in the United States and 19 businesses located in Australia,
New Zealand, Canada and the United Kingdom. During this period, the Company's
acquisitions in the United States included 43 contract stationers, 10 office
coffee services companies, 13 office furniture companies and eight school
supplies and school furniture companies. In addition, the Company acquired 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. In September 1996, the Company entered into an
exclusive arrangement to distribute Starbucks-Registered Trademark- coffee in
the North American office coffee services market for a period of five years
subject to, among other things, the satisfaction of certain minimum purchase
requirements.
The Company's 19 international acquisitions included the November 1996
acquisition of a 49% interest in Dudley Stationery Limited ("Dudley"), the
United Kingdom's largest independent office products dealer, and the July 1996
acquisition of New Zealand-based Whitcoulls Group Limited ("Whitcoulls"), the
Company's largest single acquisition since its inception. Dudley serves as the
stationer to Her Majesty the Queen and The Prince of Wales. The investment in
Dudley was the Company's first acquisition in the European office products
market. Whitcoulls sells a broad array of office, educational and printing
products and services to the commercial, retail, government and school supply
markets throughout New Zealand and Australia.
As a result of its aggressive acquisition program, the Company has been in
discussions with potential acquirees at most times since its founding. It
currently has, and from time to time expects to enter into, letters of intent
with respect to additional acquisitions, both in the United States and
internationally. There can be no assurance, however, that definitive agreements
for additional acquisitions will be executed or that additional acquisitions
will be completed. In response to industry and market changes, including
industry consolidation resulting from possible combinations or alliances among
major competitors in the office products industry and continued volatility in
the market prices of shares of common stock of the Company and its industry
competitors, the Company also may consider, from time to time, additional
strategies to enhance stockholder value in light of such changes. These may
include, among others, strategic alliances and joint ventures, spin-offs,
purchase, sale or merger transactions with other large companies, a
recapitalization of the Company, and other similar transactions. See "Risk
Factors--Rapid Expansion; Dependence on Acquisitions for Future Growth;" and
"Substantial Competition and Industry Consolidation."
The Company operates with a decentralized sales and customer contact
strategy in an effort to provide superior customer service and retain the
historical customers of acquired businesses. The Company believes that many
customers purchase office products and business services based on established
long-term commercial relationships. The Company seeks to preserve these
relationships by retaining the management, sales organizations, and brand name
identity of acquired companies. By broadening the range of products and services
that it sells, the Company also believes that it can create additional sales
opportunities for its local sales organizations.
While retaining the identities of acquired businesses, the Company also
seeks to achieve the operating efficiencies of a large organization by (i)
generating cost savings through volume purchasing of office products and
increasing the percentage of office supplies purchased directly from
manufacturers; (ii) implementing improved technology and operating systems; and
(iii) combining certain general and administrative functions at the corporate
level and eliminating redundant facilities. In its acquisition program, the
Company utilizes a "hub and spoke" strategy, which involves the acquisition of
(a) a larger established, high quality local company, or hub, and (b) additional
smaller companies, or spokes, in
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secondary markets surrounding the hubs. Where possible, the operations of the
acquired spokes are integrated into the operations of existing hubs, thereby
eliminating a portion of the operating expenses of the acquired spokes. The
Company also is implementing regional consolidation and integration plans, such
as the establishment of regional warehouses (referred to by the Company as
district fulfillment centers), which enable certain operational activities to be
shared among hubs and spokes located within a specific geographic area. The
Company has appointed managers for each of its 12 regions in the United States
and has given them oversight responsibility for the operations of their
respective regions. This regional approach is designed to permit the elimination
of duplicative facilities and costs and promote the integration of the
operations within each region.
The Company is a Delaware corporation. Its executive offices are located at
1025 Thomas Jefferson Street, N.W., Suite 600 East, Washington, D.C. 20007, and
its telephone number is 202-339-6700.
RECENT DEVELOPMENTS
In February and March 1997, the Company completed an underwritten public
offering of 10,637,000 shares of Common Stock at a gross price of $33.00 per
share (the "Recent Offering"). Of the 10,637,000 shares, 8,682,331 shares were
offered by the Company and 1,954,669 shares were offered by certain stockholders
of the Company. The net proceeds to the Company, after deducting underwriting
discounts and commissions and offering expenses, were approximately $274.5
million and have been used to repay a portion of the outstanding balance on the
Company's $500 million bank credit facility (the "Credit Facility"). At March
26, 1997, the Company had $92.5 million outstanding under the Credit Facility at
an annual interest rate of approximately 7.0%.
On February 4, 1997, the Company announced the appointment of Thomas Morgan
as President of the Company's North American Office Products Group. On February
28, 1997, the Company's Board of Directors (the "Board") elected Mr. Morgan to
be a director of the Company, filling an existing vacancy on the Board. Mr.
Morgan had been the Executive Vice President of the S.P. Richards Company, the
second largest office products wholesaler in the United States and a division of
publicly traded Genuine Parts Company.
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RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the following risk factors, as well as the other information in this
Prospectus or incorporated herein by reference, in evaluating an investment in
the Common Stock.
RAPID EXPANSION; DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH
One of the Company's strategies is to increase its revenues and the markets
it serves through the acquisition of additional businesses offering a broad
array of office and educational products, services and equipment. From its
inception through March 26, 1997, the Company completed 149 acquisitions. The
Company is actively negotiating to acquire additional office and educational
products and services businesses, both in the United States and internationally,
consistent with its strategy of pursuing an aggressive acquisition program.
There can be no assurance, however, that the Company's management and financial
controls, personnel, computer systems and other corporate support systems will
be adequate to manage the continuing increase in the size and scope of the
Company's operations and acquisition activity.
The Company depends on acquisitions and organic growth to increase its
earnings. There can be no assurance that the Company will complete acquisitions
in a manner that coincides with the end of its fiscal quarters. The failure to
complete acquisitions on a timely basis could have a material adverse effect on
the Company's quarterly results. Likewise, delays in implementing planned
integration strategies and activities also could adversely affect the Company's
quarterly earnings.
In addition, there can be no assurance that acquisitions will occur at the
same pace or be available to the Company on favorable terms, if at all. For
example, if the market price of the Common Stock were to decline significantly
over a sustained period, the owners of potential acquisition targets might not
be willing to receive shares of Common Stock in exchange for their businesses,
thereby adversely affecting the pace of the Company's acquisition program. Such
an effect on the pace of the Company's acquisition program could further reduce
the price of a share of Common Stock, to the further detriment of the Company's
acquisition strategy. In addition, the consolidation of the domestic contract
stationer industry has reduced the number of larger companies available for
sale, which could lead to higher prices being paid for the acquisition of the
remaining domestic, independent companies.
RISKS RELATED TO EXPANSION INTO NEW PRODUCT AND SERVICE AREAS
The Company's ability to manage an aggressive consolidation program in
markets other than the domestic contract stationer market has not yet been fully
tested. In addition, there can be no assurance that companies that have been
acquired or that may be acquired in the future will achieve sales and
profitability levels that justify the investment therein. Acquisitions may
involve a number of special risks that could have a material adverse effect on
the Company's operations and financial performance, including adverse short-term
effects on the Company's reported operating results; diversion of management's
attention; difficulties with the retention, hiring and training of key
personnel; risks associated with unanticipated problems or legal liabilities;
and amortization of acquired intangible assets.
INTERNATIONAL EXPANSION
As of March 26, 1997, the Company's international operations were in New
Zealand, Australia, Canada and, through its 49% interest in Dudley, the United
Kingdom. In addition to their contract stationery, office furniture, and school
supply and school furniture operations, the Company's international operations
include a significant number of retail book and stationery stores. The Company
operates only a small number of retail stationery outlets in the United States.
If the Company had acquired its international operations as well as the other
Completed Acquisitions at the beginning of fiscal 1996, the Company's
international operations would have accounted for approximately 30.9% of the
Company's fiscal 1996 pro forma revenues and 31.5% of pro forma revenues for the
nine months ended January 25,
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1997. International operations constituted approximately 6.1% of historical
fiscal 1996 revenues and 27% of historical revenues for the nine months ended
January 25, 1997. The Company expects to continue to focus significant attention
and resources on international expansion in the future and expects foreign sales
to represent a significant proportion of the Company's total sales. Expansion
into international markets involves additional risks relating to currency
exchange rates; new and different legal, regulatory and competitive
requirements; difficulties in staffing and managing foreign operations;
different business lines; and other factors.
INTEGRATION OF ACQUISITIONS AND LIMITED COMBINED OPERATING HISTORY
U.S. Office Products was founded in October 1994 and conducted no operations
prior to the acquisition of its founding companies in February 1995. From its
inception through March 26, 1997, U.S. Office Products acquired 149 companies,
and it intends to continue to make acquisitions. In most cases, the managers of
the acquired companies have continued to operate their companies after being
acquired by U.S. Office Products. There can be no assurance that the Company
will be able to successfully integrate these companies within its operations
without substantial costs, delays or other problems. In addition, there can be
no assurance that the Company's executive management group will be able to
oversee the combined entity and effectively implement the Company's operating or
growth strategies in each of the markets that the Company serves. There also can
be no assurance that the pace of the Company's acquisitions will not adversely
affect the Company's efforts to integrate acquisitions and manage those
acquisitions profitably. Finally, although the Company conducts due diligence
and generally requires representations, warranties, and indemnifications from
the former owners of acquired companies, there can be no assurance that such
owners will have accurately represented the financial and operating conditions
of their companies; if not, this could have a material adverse effect on the
Company's results of operations and financial condition.
DEPENDENCE ON IMPLEMENTATION AND OPERATION OF SYSTEMS
The Company believes that the successful operation of the businesses that it
has acquired and intends to acquire depends in part on the implementation of
computerized inventory management and order processing systems and warehouse
management and distribution systems. While in December 1996 the Company acquired
The Systems House, Inc. ("TSH"), its primary software and management information
systems provider, the Company may experience delays, complications or expenses
in implementing, integrating and operating these systems, any of which could
have a material adverse effect on the Company's results of operations and
financial condition. In addition, interruptions or disruptions in systems
operations could adversely affect the financial results of particular locations.
Finally, while the Company believes that its operating and technology systems
will be adequate for its future needs as a result of the acquisition of TSH,
such systems will require modification, improvement or replacement as the
Company expands or as new technologies make these systems obsolete. Such
modifications, improvements or replacements may require substantial expenditures
to design and implement and may require interruptions in operations during
periods of implementation, any of which could have a material adverse effect on
the Company's results of operations and financial condition.
SUBSTANTIAL COMPETITION AND INDUSTRY CONSOLIDATION
The Company operates in a highly competitive environment. In the markets in
which the Company operates, the Company generally competes with a large number
of smaller, independent companies, many of which are well-established in their
markets. In addition, in the contract stationer market, the Company currently
competes with five large office products companies, each of which has
significant financial resources. Several of the Company's large competitors
operate in many of the Company's geographic and product markets, and other
competitors may choose to enter the Company's geographic and product markets in
the future. In addition, as a result of this competition, the Company may lose
customers or have
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difficulty acquiring new customers. As a result of competitive pressures on the
pricing of products, the Company's revenues and/or margins may decline.
The Company faces significant competition to acquire additional businesses
as the office products industry undergoes continuing consolidation. Significant
competition exists, or is expected to develop, in the other markets that the
Company serves or is planning to enter as consolidation occurs (or accelerates)
in those markets. A number of the Company's major competitors are actively
pursuing acquisitions outside of the United States. These companies, or other
large companies, may compete with the Company for acquisitions in markets other
than the market for office products. Such competition could lead to higher
prices being paid for acquired companies.
In response to industry and market changes, including industry consolidation
resulting from possible combinations or alliances among major competitors in the
office products industry and continued volatility in the market prices of shares
of common stock of the Company and its industry competitors, the Company also
may consider, from time to time, additional strategies to enhance stockholder
value in light of such changes. These may include, among others, strategic
alliances and joint ventures, spin-offs, purchase, sale, or merger transactions
with other large companies, a recapitalization of the Company, and other similar
transactions. There can be no assurance whether any such transaction could be
completed or the terms or timing of any such transaction. See
"Business--Competitions."
CONSIDERATION FOR OPERATING COMPANIES EXCEEDS ASSET VALUE
The purchase prices of the Company's acquisitions have not been established
by independent appraisals, but generally have been determined through
arms-length negotiations between the Company and representatives of such
companies. The consideration for each such company has been based primarily on
the value of such company as a going concern and not on the value of the
acquired assets. Valuations of these companies determined solely by appraisals
of the acquired assets would have been less than the consideration paid for the
companies. No assurance can be given that the future performance of such
companies will be commensurate with the consideration paid. Moreover, the
Company has incurred and expects to continue to incur significant amortization
charges resulting from consideration paid in excess of the fair value of the net
assets of the companies acquired in business combinations accounted for under
the purchase method of accounting.
EFFECT OF QUARTERLY FLUCTUATIONS IN OPERATING RESULTS ON PRICE OF COMMON STOCK
The Company's business is subject to seasonal influences. The Company's
historical sales and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
seasonality of the core office products business, however, is expected to be
impacted by the seasonality of its other operations, which have been expanding
through acquisitions. For example, the revenues and profitability of the
Company's school supplies and school furniture business have been higher during
the Company's first and second quarters and significantly lower in its third and
fourth quarters, and the revenues and profitability of the Company's operations
in New Zealand and Australia have generally been higher in the Company's third
quarter. As the Company's mix of businesses evolves through future acquisitions,
these seasonal fluctuations may continue to change.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold and general economic conditions. Moreover, the operating
margins of companies acquired by the Company may differ substantially from those
of the Company which could contribute to the further fluctuation in the
Company's quarterly operating results. Therefore, results for any quarter are
not necessarily indicative of the results that the Company may achieve for any
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subsequent fiscal quarter or for a full fiscal year. Fluctuations caused by
variations in quarterly operating results may have a material adverse effect on
the market price of the Company's Common Stock.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock is subject to significant fluctuations
caused by variations in stock market conditions, changes in financial estimates
by securities analysts or failures by the Company or its competitors to meet
such estimates, quarterly operating results, announcements by the Company or its
competitors, general conditions in the office products and services industry and
other factors. Since the beginning of fiscal 1997 through April 1, 1997, the
Common Stock has traded in the range of $21.625 to $45.50 per share. The stock
market in recent years has experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of publicly traded companies. These broad fluctuations may have a material
adverse effect on the market price of the Common Stock.
NEED FOR ADDITIONAL FINANCING TO CONTINUE ACQUISITION STRATEGY
The Company has financed most acquisitions, and intends to finance future
acquisitions in the United States, by using cash and shares of Common Stock. If
the Company does not have sufficient cash resources to pay the cash
consideration for acquisitions, or if potential acquisition candidates are
unwilling to accept the Common Stock as part of the consideration for the sale
of their businesses because the Common Stock does not maintain sufficient value
or for other reasons, the Company may be unable to continue the current pace of
its aggressive acquisition program, which could have a material adverse impact
on the Company and the market price of its Common Stock. This Prospectus and a
prior shelf registration statement filed with the Commission relate to the
offering of 38,381,471 shares of Common Stock to be used as consideration for
acquisitions by the Company, of which approximately 31,018,720 shares remain
available. In addition, the Company has sold debt and equity securities to raise
cash proceeds for acquisitions. The Company expects that future acquisitions
outside the United States may be for cash consideration.
Assuming that the current pace of the Company's acquisitions continues, the
Company may need additional debt or equity financing in order to continue its
acquisition program. There can be no assurance that the Company will be able to
obtain such financing if and when it is needed or that any such financing will
be available on terms the Company deems acceptable. In August 1996, the Company
entered into an agreement under which a syndicate of financial institutions led
by Bankers Trust Company, as Agent, is providing the Company with the $500
million Credit Facility. The amount available to be borrowed under the Credit
Facility for acquisitions will vary from time to time depending on the level of,
on a pro forma basis reflecting consummated acquisitions, the Company's
consolidated earnings before interest, taxes, depreciation and amortization and
the Company's total indebtedness and related interest expense. As of March 26,
1997, the Company had $92.5 million outstanding under the Credit Facility at an
annual interest rate of approximately 7.0%.
RELIANCE ON KEY PERSONNEL
The Company's operations depend on the continued efforts of Jonathan J.
Ledecky, its Chairman of the Board and Chief Executive Officer; Timothy J.
Flynn, its President and Chief Operating Officer; its other executive officers;
and the senior management of its subsidiaries. Furthermore, the Company will
likely depend on the senior management of companies that may be acquired in the
future. If any of these people become unable to continue in their present roles,
or if the Company is unable to attract and retain other skilled employees, the
Company's business would be adversely affected. The Company currently has key
man life insurance covering Mr. Ledecky in the amount of $20 million, but does
not have and does not intend to obtain key man life insurance covering any of
its other executive officers or other members of senior management.
10
<PAGE>
CONTROL BY MANAGEMENT AND STOCKHOLDERS
As of March 26, 1997, officers and directors of the Company and its
subsidiaries beneficially own approximately 24.5% of the outstanding shares of
Common Stock. These stockholders acting together may be able to elect a
sufficient number of directors to control the Board of Directors and to approve
or disapprove any matter submitted to a vote of stockholders.
RISKS RELATED TO UNIONIZED EMPLOYEES
A small number of the Company's employees are members of labor unions. If
unionized employees were to engage in a strike or other work stoppage, or if
other employees were to become unionized, the Company could experience a
disruption of operations or higher labor costs, which could have a material
adverse effect on operations.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
As of March 26, 1997, there were 60,693,638 shares of Common Stock of the
Company outstanding, of which approximately 29.2 million shares were issued by
the Company pursuant to registration statements in connection with acquisitions
of businesses, and approximately 6.9 million shares were issued in private
transactions and have been registered for resale pursuant to a shelf
registration statement (the "Selling Stockholder Shelf"). Of the approximately
29.2 million shares and the shares remaining on the Selling Stockholder Shelf,
as of April 7, 1997 approximately 2.5 million shares are subject to contractual
restrictions on the transfer thereof (other than restrictions relating to shares
issued in transactions accounted for under the pooling-of-interests method of
accounting and under lockup agreements, described below). The contractual
restrictions expire at various times, generally up to two years from the date of
issuance of the shares. This Prospectus relates to the offering of shares of
Common Stock to be used as consideration in future acquisitions.
The Company has an aggressive acquisition program under which it
periodically makes, and expects to continue to make, acquisitions that are
accounted for under the pooling-of-interests method of accounting. Under the
pooling-of-interests method of accounting, the affiliates of the acquired
companies, which are generally all of the stockholders of the companies acquired
by U.S. Office Products, must be free to sell or otherwise transfer shares of
the Common Stock received in the acquisition, subject to their compliance with
federal securities laws, as soon as the Company releases results of operations
that reflect the combined post-acquisition operations of the Company and the
acquired company for a minimum of 30 days. For example, the Company issued
approximately 4.2 million shares in connection with acquisitions completed in
the first three calendar months of 1997 that were accounted for under the
pooling-of-interests method of accounting. These shares will become freely
transferable at the time the Company publicly announces results of operations
reflecting 30 days of combined post-acquisition operations of the Company and
the acquired companies, subject to certain volume and other restrictions of Rule
145(d) of the Securities Act applicable to affiliates of the acquired companies.
In addition, the Company expects to complete additional acquisitions in the
future that will be accounted for under the pooling-of-interests method. If a
significant number of shares of Common Stock are issued in acquisitions that are
consummated in close proximity to each other, such shares will become freely
tradeable at the same time. If a large number of shares are sold by stockholders
in the market as soon as their shares become freely transferable, the price of
the Common Stock could be adversely affected.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is empowered to issue preferred stock
without stockholder action. The existence of this "blank-check" preferred stock
could render more difficult or discourage an attempt to obtain control of the
Company by means of a tender offer, merger, proxy contest or otherwise.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"OFIS." On April 8, 1997, the last sale price of the Common Stock was $22.375
per share. The following table sets forth, for the fiscal periods indicated, the
range of high and low sale prices for the Company's Common Stock on the Nasdaq
National Market. On April 8, 1997, there were approximately 625 stockholders of
record of the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED APRIL 30, 1995
Fourth Quarter............................................................................. $15.50 $10.00 (1)
FISCAL YEAR ENDED APRIL 30, 1996
First Quarter.............................................................................. $15.88 $10.50
Second Quarter............................................................................. $18.13 $13.50
Third Quarter.............................................................................. $26.38 $16.25
Fourth Quarter............................................................................. $40.00 $22.00
FISCAL YEAR ENDED APRIL 26, 1997
First Quarter.............................................................................. $45.50 $24.50
Second Quarter............................................................................. $38.00 $24.75
Third Quarter.............................................................................. $37.25 $26.25
Fourth Quarter through April 1, 1997....................................................... $34.75 $21.625
</TABLE>
- ------------------------
(1) Represents the initial public offering price.
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on its shares of
Common Stock in the foreseeable future because it intends to retain its
earnings, if any, to finance the expansion of its business and for general
corporate purposes. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Company's Board of Directors deems relevant. Further, the
Credit Facility prohibits the payment of dividends without the lenders' consent.
12
<PAGE>
SELECTED FINANCIAL DATA
The Selected Financial Data for the fiscal years ended April 30, 1994, 1995,
and 1996 (except pro forma amounts) have been derived from the Company's
consolidated financial statements that have been audited by Price Waterhouse LLP
and are included elsewhere in this Prospectus. The Selected Financial Data for
the fiscal years ended April 30, 1992 and 1993 have been derived from unaudited
combined financial statements. The financial statements for the 1992 and 1993
fiscal years are not included elsewhere in this Prospectus or incorporated
herein by reference. The Selected Financial Data for the nine months ended
January 31, 1996 and January 25, 1997 (except pro forma amounts) have been
derived from unaudited consolidated financial statements that appear elsewhere
in this Prospectus. The unaudited combined financial statements have been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, contain all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations for the periods presented.
The pro forma data gives effect, as applicable, to (i) the acquisitions
completed by the Company between May 1, 1995 and March 26, 1997 as if all of
such acquisitions had been made on May 1, 1995, (ii) the sales by the Company of
4,025,000 shares of Common Stock in the second offering in August 1995 as if
such sales had been made on May 1, 1995, (iii) the sales by the Company in
February and March 1996 of 5,543,045 shares of Common Stock and 5 1/2%
Convertible Subordinated Notes due 2001 in the principal amount of $143.75
million as if such sales had been made on May 1, 1995, (iv) the sales by the
Company in May and June 1996 convertible notes (the "May Notes") in the
principal amount of $230 million as if such sales had been made on May 1, 1995,
(v) the sale by the Company in September 1996 (the "September Stock Sale") of
1,250,000 shares of Common Stock as if such sale had been made on May 1, 1995,
and (vi) the sales by the Company in February and March 1997 of 8,682,331 shares
of Common Stock as if such sales had been made on May 1, 1995. In addition, the
pro forma information is based on available information and certain assumptions
and adjustments. The Selected Financial Data provided herein should be read in
conjunction with the historical financial statements, including the notes
hereto, of U.S. Office Products and the other companies whose financial
statements appear elsewhere in, or are incorporated by reference into, this
Prospectus, the pro forma financial statements, including the notes thereto, and
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Prospectus.
13
<PAGE>
SELECTED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND FOOTNOTES)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
---------------------------------------------------------------------------
PRO PRO FORMA
FORMA 1996 AS
1992 1993 1994 1995 1996 1996(2) ADJUSTED(3)
-------- -------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues...................... $416,188 $522,950 $597,511 $798,709 $1,386,212 $2,763,493 $2,763,493
Cost of revenues.............. 293,867 373,222 427,308 586,989 1,016,640 1,967,304 1,967,304
-------- -------- -------- -------- ---------- ---------- -----------
Gross profit.................. 122,321 149,728 170,203 211,720 369,572 796,189 796,189
Selling, general and
administrative expenses..... 112,755 139,822 151,979 181,845 314,314 670,073 670,073
Nonrecurring acquisition
costs....................... 8,078
Nonrecurring restructuring
costs....................... 8,092 8,092
Discontinuation of printing
division at subsidiary...... 682 682 682
-------- -------- -------- -------- ---------- ---------- -----------
Operating income.............. 9,566 9,906 18,224 29,875 46,498 117,342 117,342
Interest expense.............. 3,804 4,888 4,943 7,108 15,322 40,058 21,254
Interest income............... (420) (280) (405) (682) (4,034)
Foreign currency gain.........
Other (income)................ (2,248) (1,494) (1,154) (1,122) (1,140) (2,834) (2,834)
Equity in net income of
affiliated company.......... (1,155) (1,155)
-------- -------- -------- -------- ---------- ---------- -----------
Income before income taxes and
extraordinary item.......... 8,430 6,792 14,840 24,571 36,350 81,273 100,077
Provision for income taxes.... 1,375 2,044 2,095 3,184 7,123 34,451 41,973
-------- -------- -------- -------- ---------- ---------- -----------
Income before extraordinary
item........................ 7,055 4,748 12,745 21,387 29,227 46,822 58,104
---------- -----------
---------- -----------
Extraordinary item (4)........
-------- -------- -------- --------
Net income.................... $ 7,055 $ 4,748 $ 12,745 $ 21,387 $ 29,227(5)
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share(7)....... $ 0.79(5) $ 0.89 $ 0.95
---------- ---------- -----------
---------- ---------- -----------
Weighted average shares
outstanding(8).............. 36,781 52,460 61,142
<CAPTION>
APRIL 30,
-----------------------------------
1992 1993 1994
---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Working capital....................................................... $ 31,388 $ 32,426 $ 39,825
Total assets.......................................................... 130,486 162,308 178,874
Long-term debt less current portion................................... 22,317 19,895 26,764
Stockholders' equity.................................................. 41,702 44,897 50,055
<CAPTION>
NINE MONTHS ENDED
JANUARY 31, 1996 AND JANUARY 25, 1997
----------------------------------------------------------
PRO PRO PRO FORMA
FORMA FORMA FISCAL 1997
FISCAL FISCAL FISCAL FISCAL AS
1996 1997 1996(2) 1997(2) ADJUSTED(3)
-------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues...................... $975,128 $1,807,652 $2,090,716 $2,166,710 $2,166,710
Cost of revenues.............. 719,908 1,295,249 1,506,883 1,552,735 1,552,735
-------- ---------- ---------- ---------- ------------
Gross profit.................. 255,220 512,403 583,833 613,975 613,975
Selling, general and
administrative expenses..... 213,123 418,516 498,345 507,377 507,377
Nonrecurring acquisition
costs....................... 6,094 10,957
Nonrecurring restructuring
costs....................... 8,092
Discontinuation of printing
division at subsidiary...... 682 682
-------- ---------- ---------- ---------- ------------
Operating income.............. 35,321 82,930 76,714 106,598 106,598
Interest expense.............. 9,503 32,083 35,067 35,067 20,964
Interest income............... (1,405) (6,437)
Foreign currency gain......... (3,420) (3,420) (3,420)
Other (income)................ (1,402) (193) (3,575) (1,277) (1,277)
Equity in net income of
affiliated company.......... (265) (866) (1,274) (1,274)
-------- ---------- ---------- ---------- ------------
Income before income taxes and
extraordinary item.......... 28,625 61,162 46,088 77,502 91,605
Provision for income taxes.... 5,226 24,159 19,445 33,086 38,727
-------- ---------- ---------- ---------- ------------
Income before extraordinary
item........................ $ 23,399 37,003 26,643 44,416 52,878
---------- ---------- ------------
---------- ---------- ------------
Extraordinary item (4)........ 612
-------- ----------
Net income.................... $ 23,399(5) $ 36,391
-------- ----------
-------- ----------
Net income per share(7)....... $ 0.68(5) $ 0.73 (6) $ 0.51 $ 0.84 $ 0.86
-------- ---------- ---------- ---------- ------------
-------- ---------- ---------- ---------- ------------
Weighted average shares
outstanding(8).............. 34,395 49,759 52,286 53,149 61,831
JANUARY 25, 1997
------------------------------------
PRO FORMA
AS
PRO FORMA ADJUSTED
1995 1996 ACTUAL (9) (10)
-------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
Working capital............... $ 62,183 $ 265,513 $ 78,876 $ 72,733 $ 348,255
Total assets.................. 285,147 870,719 1,628,307 1,604,173 1,604,173
Long-term debt less current po 32,696 199,504 389,453 389,453 389,453
Stockholders' equity.......... 96,904 356,326 572,086 585,542 861,064
</TABLE>
14
<PAGE>
- ------------------------
(1) As a result of the substantial continuing interests in the Company of the
former stockholders of the four companies acquired by the Company for a
combination of Common Stock and cash concurrent with the closing of its
initial public offering (the "IPO") (the "Combined Companies"), the
historical financial information of the Combined Companies and the
historical financial information of the businesses that were acquired after
the closing of the IPO in business combinations accounted for under the
pooling-of-interests method (the "Pooled Companies") have been combined on a
historical cost basis in accordance with generally accepted accounting
principles ("GAAP") to present this financial data as if the Combined
Companies and the Pooled Companies had always been members of the same
operating group. The financial information of the businesses acquired in the
business combinations accounted for under the purchase method (the
"Purchased Companies") is included from the dates of their respective
acquisitions. The pro forma data reflect acquisitions completed by the
Company through March 26, 1997.
(2) Gives effect to: (i) the acquisitions completed by the Company since May 1,
1995 as if such acquisitions had been made on May 1, 1995; (ii) the sales by
the Company in August 1995 of 4,025,000 shares of Common Stock as if such
sales had been made on May 1, 1995; (iii) the sales by the Company in
February and March 1996 of 5,543,045 shares of Common Stock and 5 1/2%
Convertible Subordinated Notes due 2001 in the principal amount of $143.75
million as if such sales had been made on May 1, 1995; (iv) the sales by the
Company in May and June 1996 of 5 1/2% Convertible Subordinated Notes due
2003 in the principal amount of $230.0 million as if such sales had been
made on May 1, 1995; and (v) the sale by the Company in September 1996 of
1,250,000 shares of Common Stock as if such sale had been made on May 1,
1995.
(3) Gives effect to: (i) the acquisitions completed by the Company since May 1,
1995 as if such acquisitions had been made on May 1, 1995; (ii) the sales by
the Company in August 1995 of 4,025,000 shares of Common Stock as if such
sales had been made on May 1, 1995; (iii) the sales by the Company in
February and March 1996 of 5,543,045 shares of Common Stock and 5 1/2%
Convertible Subordinated Notes due 2001 in the principal amount of $143.75
million as if such sales had been made on May 1, 1995; (iv) the sales by the
Company in May and June 1996 of 5 1/2% Convertible Subordinated Notes due
2003 in the principal amount of $230.0 million as if such sales had been
made on May 1, 1995; (v) the sale by the Company in September 1996 of
1,250,000 shares of Common Stock as if such sale had been made on May 1,
1995; and (vi) the sales by the Company in February and March 1997 of
8,682,331 shares of Common Stock as if such sales had been made on May 1,
1995.
(4) Extraordinary item represents the loss associated with the early termination
of the Company's $50 million credit facility with First Bank National
Association, net of the related income tax benefit.
(5) Net income and net income per share include nonrecurring acquisition costs
incurred in conjunction with the business combinations with the Pooled
Companies and the costs associated with the discontinuation of the printing
division at a subsidiary. GAAP requires the Company to expense all costs
related to acquisitions accounted for under the pooling-of-interests method.
(6) Includes a loss of $.01 per share related to the extraordinary item.
(7) Pro forma net income per share is pro forma income before extraordinary item
per share.
(8) For calculation of the pro forma weighted average shares outstanding for the
year ended April 30, 1996 and for each of the nine months ended January 25,
1997 and January 31, 1996, see Note 2(j) of Notes to Pro Forma Combined
Financial Statements included herein.
(9) Gives effect to acquisitions completed after January 25, 1997 as if they had
been made on January 25, 1997.
(10) Gives effect to (i) acquisitions completed after January 25, 1997 as if
they had been made on January 25, 1997; and (ii) the sales by the Company in
February and March 1997 of 8,682,331 shares of Common Stock as if such sales
had been made on January 25, 1997.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. When used herein, the words "anticipate," "believe,"
"estimate," and "expect" and similar expressions as they relate to the Company
or its management are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors."
INTRODUCTION
The Company's revenues through January 25, 1997 have been derived primarily
from the sale of a wide variety of office supplies, office furniture and other
office and educational products, services and equipment to corporate,
commercial, educational and industrial customers. The cost of revenues through
January 25, 1997 represents the purchase price of office supplies, office
furniture and other office products. Cost of revenues includes occupancy and
delivery expenses and is reduced by rebates and discounts on inventory
purchases.
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the three fiscal years ended April 30, 1996 and for the nine months ended
January 31, 1996 and January 25, 1997.
<TABLE>
<CAPTION>
Nine Months Ended
January 31, 1996 and
January 25, 1997
Fiscal Year Ended April 30, --------------------
------------------------------- Fiscal Fiscal
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................. 71.5 73.5 73.3 73.8 71.7
--------- --------- --------- --------- ---------
Gross profit........................... 28.5 26.5 26.7 26.2 28.3
Selling, general and administrative
expenses................................... 25.5 22.8 22.7 21.9 23.1
Nonrecurring acquisition costs............... 0.5 0.6 0.6
Discontinuation of printing division at
subsidiary................................. 0.1 0.1
--------- --------- --------- --------- ---------
Operating income....................... 3.0 3.7 3.4 3.6 4.6
Other (income) expense:
Interest expense........................... 0.8 0.9 1.1 1.0 1.8
Interest income............................ (0.1) (0.1) (0.2) (0.2) (0.4)
Foreign currency gain...................... (0.2)
Other...................................... (0.2) (0.2) (0.1) (0.1)
--------- --------- --------- --------- ---------
Income before income taxes and extraordinary
item....................................... 2.5 3.1 2.6 2.9 3.4
Provision for income taxes................... 0.4 0.4 0.5 0.5 1.3
--------- --------- --------- --------- ---------
Income before extraordinary item............. 2.1 2.7 2.1 2.4 2.1
Extraordinary item--loss on early termination
of credit facility, net of income tax
benefit.................................... 0.1
--------- --------- --------- --------- ---------
Net income................................... 2.1% 2.7% 2.1% 2.4% 2.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
NINE MONTHS ENDED JANUARY 25, 1997 COMPARED TO NINE MONTHS ENDED JANUARY 31,
1996
Consolidated revenues increased 85.4%, from $975.1 million for the nine
months ended January 31, 1996, to $1,807.7 million for the nine months ended
January 25, 1997. This increase was primarily due to the inclusion, in the
revenues for the nine months ended January 25, 1997, of revenues from the 86
companies that were acquired in business combinations accounted for under the
purchase method since the begining of fiscal 1996 ("Fiscal 1996 and 1997
Purchased Companies"). Revenues from 18 of such
16
<PAGE>
Fiscal 1996 and 1997 Purchased Companies were included in revenues for a portion
of the nine months ended January 31, 1996.
During fiscal 1997, the Company aquired two school supply companies (the
"School Companies") in business combinations accounted for under the
pooling-of-interests method. These School Companies are subject to significant
seasonal influences; their revenues and profitability typically are highest
during the summer and early fall, because of back-to-school buying. Before being
acquired by U.S. Office Products, the School Companies reported their results on
a calender year basis. Their highest revenues and profits occur during the July
through September period, which was their third quarter on a calendar year
reporting basis. Under Generally Accepted Accounting Principles ("GAAP"), after
U.S. Office Products acquired the School Companies, U.S. Office Products
restated its financial results to include the financial results of the School
Companies. Pursuant to GAAP, the School Companies' results for the July through
September 1995 period (the third quarter of their fiscal year) were included in
U.S. Office Products' results for the November 1995 through January 1996 period
(the third quarter of U.S. Office Products' fiscal year). Beginning with U.S.
Office Products' current fiscal year, the School Companies' fiscal year has been
conformed to U.S. Office Products' fiscal year, in accordance with GAAP. Thus,
U.S. Office Products' fiscal 1997 third quarter includes the School Companies'
results for November 1996 through January 1997. The School Companies' results
from their back-to-school season were included in U.S. Office Products' fiscal
1997 second quarter results. Because the School Companies' highest revenue and
profitablity period is included in U.S. Office Products' fiscal 1996 third
quarter, but not in its fiscal 1997 third quarter, the results of the two
quarters are not comparable.
International revenues increased from $34.0 million, or 3.5% of consolidated
revenues, for the nine months ended January 31, 1996, to $488.8 million, or
27.0% of consolidated revenues, for the nine months ended January 25, 1997. This
increase was primarily due to the inclusion, in the revenues for the nine months
ended January 25, 1997, of revenues from 17 companies that were acquired in
business combinations accounted for under the purchase method after the begining
of the fourth quarter of fiscal 1996.
Gross profit increased 100.8%, from $255.2 million, or 26.2% of revenues,
for the nine months ended January 31, 1996, to $512.4 million, or 28.3% of
revenues, for the nine months ended January 25, 1997. The increase in gross
profit as a percentage of revenues was due primarily to a shift in revenue mix
resulting in a higher proportion of revenues in traditionally higher margin
products and services such as office coffee services and products sold in New
Zealand and Australia. The Company's gross profit as a percentage of revenue
also improved as a result of improved purchasing and rebate programs negotiated
with vendors.
Selling, general and administrative expenses increased 96.4%, from $213.1
million, or 21.9% of revenues, for the nine months ended January 31, 1996, to
$418.5 million, or 23.1% of revenues, for the nine months ended January 25,
1997. The increase in selling, general and administrative expenses was due
primarily to the inclusion of the Fiscal 1996 and 1997 Purchased Companies in
the results for the nine months ended January 25, 1997. The increase in selling,
general and administrative expenses as a percentage of revenues was due
primarily to a shift in revenue mix resulting in a higher proportion of revenues
from products and services with traditionally higher selling, general and
administrative expenses, such as office coffee services and products sold in New
Zealand and Australia.
The Company incurred one-time nonrecurring acquisition costs of
approximately $11.0 million and $6.1 million during the nine months ended
January 25, 1997 and January 31, 1996, respectively, in conjunction with
business combinations accounted for under the pooling-of-interests method. The
nonrecurring acquisition costs for the nine months ended January 25, 1997
represented costs associated with 30 business combinations accounted for under
the pooling-of-interests method compared to six such business combinations
during the nine months ended January 31, 1996. The nonrecurring acquisition
costs for the nine months ended January 31, 1996 included a charge of
approximately $4.7 million related to one business combination which included
the payment of significant transaction related compensation obligations. During
the nine months ended January 31, 1996 the Company also recorded a one-time
charge of $682,000 associated with the discontinuation of the printing division
at one of its subsidiaries.
17
<PAGE>
Interest expense, net of interest income, increased 216.7% from $8.1 million
for the nine months ended January 31, 1996 to $25.6 million for the nine months
ended January 25, 1997. This increase was due primarily to the increase in the
Company's borrowings through the issuance of an aggregate of $373.75 million of
Notes during the fourth quarter of fiscal 1996 and the first quarter of fiscal
1997 and an increase in the outstanding balance on the Company's Credit
Facility. The proceeds from the issuance of the Notes and the additional
borrowings from the Credit Facility were used to fund the cash portion of the
consideration in business combinations and to refinance indebtedness assumed in
such business combinations. For the nine months ended January 25, 1997, other
(income) expense also included a foreign currency gain of $3.4 million, which
represented the effect of the change in the exchange rate between the New
Zealand and U.S. dollars on short-term loans between the Company and Blue Star.
Provision for income taxes increased from $5.2 million, for the nine months
ended January 31, 1996, to $24.2 million, for the nine months ended January 25,
1997, reflecting effective income tax rates of 18.3% and 39.5%, respectively.
The low effective income tax rate for the nine months ended January 31, 1996,
compared to the federal statutory rate of 35.0% plus state, local and foreign
taxes, is primarily due to the fact that several companies included in the
results for such nine month period, which were acquired in business combinations
accounted for under the pooling-of-interests method, were not subject to federal
income taxes on a corporate level as they had elected to be treated as
subchapter S corporations prior to being acquired by the Company. The higher
effective income tax rate for the nine months ended January 25, 1997, is due
primarily to increased nondeductible expenses, including amortization of
goodwill related to acquisitions accounted for under the purchase method and
nonrecurring acquisition costs related to acquisitions accounted for under the
pooling-of-interests method. This was partially offset by the impact of the
completion of business combinations accounted for under the pooling-of-interests
method, during the first three quarters of fiscal 1997, of companies that had
elected to be treated as subchapter S corporations prior to being acquired by
the Company.
During the nine months ended January 25, 1997, the Company incurred an
extraordinary item of $612,000, which represents the aggregate expenses, net of
the expected tax benefit, associated with the early termination of the Company's
$50 million credit facility with First Bank National Association due to the
Company entering into a new $500 million Credit Facility in August 1996 with a
syndicate of banks led by Bankers Trust Company. The expenses consisted of the
write-off of certain capitalized debt issue costs, which were being amortized
over the life of the credit facility, and the direct costs of terminating the
facility.
RESULTS FOR THE PRIOR FISCAL YEARS
YEAR ENDED APRIL 30, 1996 COMPARED TO THE YEAR ENDED APRIL 30, 1995
Revenues increased by 73.6%, from $798.7 million in fiscal 1995 to $1,386.2
million in fiscal 1996. This increase was due primarily to the 26 acquisitions
completed during fiscal 1996 that were accounted for under the purchase method
of accounting and the five acquisitions completed during fiscal 1995 that were
accounted for under the purchase method of accounting and were included for the
entire 1996 fiscal year (collectively, the "31 Purchased Companies").
Gross profit increased by 74.6%, from $211.7 million in fiscal 1995 to
$369.6 million in fiscal 1996. Gross profit as a percentage of revenues
increased from 26.5% in fiscal 1995 to 26.7% in fiscal 1996. This increase in
gross profit was due primarily to the inclusion of the 31 Purchased Companies.
Selling, general and administrative expenses increased by 72.8%, from $181.8
million in fiscal 1995 to $314.3 million in fiscal 1996. Selling, general, and
administrative expenses as a percentage of revenues decreased from 22.8% in
fiscal 1995 to 22.7% in fiscal 1996. The increase in selling, general and
administrative expenses was due primarily to the inclusion of the 31 Purchased
Companies.
During fiscal 1996, the Company incurred $8.8 million in one-time charges,
which represented 0.6% of revenues. These charges consisted of $8.1 million in
nonrecurring acquisition costs incurred in conjunction with the 14 business
combinations completed during fiscal 1996 that were accounted for under
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the pooling-of-interests method of accounting (the "Pooled Companies") and
$682,000 associated with the discontinuation of the printing division at a
subsidiary, which consisted primarily of the write-down of printing division
assets to their estimated market value. GAAP requires the Company to expense all
acquisition expenses related to the combinations accounted for under the
pooling-of-interests method of accounting.
Interest expense increased by 115.6%, from $7.1 million in fiscal 1995 to
$15.3 million in fiscal 1996. The increase was due primarily to the increase in
the Company's borrowings. The increase in interest expense was partially offset
by an increase in interest income of $3.4 million for fiscal 1996 compared to
fiscal 1995. The increase in interest income was primarily the result of the
investment by the Company of a portion of the proceeds from the sale of
5,543,045 shares of Common Stock at $23.25 per share, including the
underwriters' over-allotment option of 610,000 shares, and the issuance of
$143.75 million principal amount of the February Notes, including the
underwriters' over-allotment option of $18.75 million, at a time when it did not
need to borrow under its line of credit.
Provision for income taxes increased by 123.7%, from $3.2 million in fiscal
1995 to $7.1 million in fiscal 1996, reflecting effective income tax rates of
13.0% and 19.6% in fiscal 1995 and 1996, respectively. The increase in income
taxes was primarily due to increased pretax income resulting from the inclusion
of the Purchased Companies. The increase in the effective income tax rate is due
primarily to the fact that the pretax income of the Pooled Companies that had
elected to be treated as subchapter S corporations prior to their acquisition by
the Company constituted a higher proportion of the total pretax income during
fiscal 1995 and to the addition of non-deductible expenses, primarily
non-deductible goodwill relating to the Purchased Companies.
YEAR ENDED APRIL 30, 1995 COMPARED TO THE YEAR ENDED APRIL 30, 1994
Revenues increased by 33.7%, from $597.5 million in fiscal 1994 to $798.7
million in fiscal 1995. This increase was due primarily to the inclusion of the
five Purchased Companies acquired during fiscal 1995 (the "1995 Purchased
Companies").
Gross profit increased by 24.4% from $170.2 million in fiscal 1994 to $211.7
million in fiscal 1995. Gross profit as a percentage of revenues decreased from
28.5% in fiscal 1994 to 26.5% in fiscal 1995. The decrease as a percentage of
revenues was primarily due to the inclusion of the 1995 Purchased Companies,
which had a higher proportion of sales of traditionally lower margin product
lines, such as business machines and office furniture.
Selling, general and administrative expenses increased by 19.7%, from $152.0
million in fiscal 1994 to $181.8 million in fiscal 1995. Selling, general and
administrative expenses as a percentage of revenues decreased from 25.5% in
fiscal 1994 to 22.8% in fiscal 1995. This decrease, as a percentage of revenues,
was primarily due to the inclusion of the 1995 Purchased Companies, which had
lower selling, general and administrative expenses as a percentage of revenues.
Interest expense increased by 43.8%, from $4.9 million in fiscal 1994 to
$7.1 million in fiscal 1995. The increase in interest expense was primarily due
to incremental interest expense incurred by the 1995 Purchased Companies and to
higher interest rates. The interest expense was partially offset by an increase
in interest income of $277,000.
Other income decreased by 2.8% from $1.2 million in fiscal 1994, to $1.1
million in fiscal 1995.
The provision for income taxes increased by 52.0%, from $2.1 million in
fiscal 1994 to $3.2 million in fiscal 1995, reflecting effective income tax
rates of 14.1% and 13.0% in fiscal 1994 and 1995, respectively. This increase in
income taxes was due primarily to increased pretax income. The low effective
income tax rates for fiscal 1994 and fiscal 1995, compared to the federal
statutory rate of 34.0% plus state and local taxes, were the result of the
election by certain companies included in the results to be treated as
subchapter S corporations prior to their acquisitions by the Company in
transactions accounted for under the pooling-of-interests method of accounting.
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LIQUIDITY AND CAPITAL RESOURCES
At January 25, 1997, the Company had cash of $56.5 million and working
capital of $78.9 million. The Company's capitalization, defined as the sum of
long-term debt and stockholders' equity, at January 25, 1997 was $961.5 million.
In February and March 1997, the Company completed the Recent Offering, at a
gross price of $33.00 per share, of 8,682,331 shares of Common Stock, including
the purchase by the underwriters of 637,000 shares of Common Stock from their
over-allotment option. The net proceeds to the Company, after deducting
underwriting discounts and commissions and offering expenses, were approximately
$274.5 million and have been used to repay a portion of the outstanding balance
on the Credit Facility. At March 26, 1997, the Company had $92.5 million
outstanding under the Credit Facility at an annual interest rate of
approximately 7.0%.
In October 1996, the Company refinanced $180 million in high interest rate
debt outstanding in New Zealand and Australia with the $180 million that was
available under the Credit Facility solely for purposes of such refinancing. The
average annual interest rate on such debt prior to such refinancing was
approximately 11.0%.
In September 1996, the Company sold 1,250,000 shares of Common Stock to
Quantum Partners LDC in a private placement. The Company received proceeds of
approximately $38.1 million as a result of the sale. The proceeds were used to
repay a portion of the then outstanding balance under the Credit Facility.
In August 1996, the Company entered into an agreement under which a
syndicate of financial institutions, led by Bankers Trust Company, as Agent (the
"Bank"), is providing the Company with the $500 million Credit Facility bearing
interest, at the Company's option, at the Bank's base rate plus an applicable
margin of up to 1.25%, or a eurodollar rate plus an applicable margin of up to
2.5%. The availability under the Credit Facility is subject to certain sublimits
including $100 million for working capital loans and $400 million for
acquisition loans, with $180 million of the acquisition loan sublimit available
solely to refinance certain outstanding indebtedness of the Company in Australia
and New Zealand. The Credit Facility is secured by a majority of the assets of
the Company and its subsidiaries and contains customary covenants, including
financial covenants with respect to the Company's consolidated leverage and
interest coverage ratios, capital expenditures, payment of dividends and
purchases and sales of assets, and customary default provisions, including
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy. The Company is currently in negotiations with
the Bank to amend the Credit Facility to eliminate the $180 million acquisition
sublimit.
In May and June 1996, the Company completed the sale, in an offshore
offering and in a concurrent private placement in the United States, of the May
Notes in the principal amount of $230 million, including the manager's
over-allotment option of $30 million principal amount of May Notes (the "May
Notes Offering"). The net proceeds from the May Notes Offering, after deducting
the manager's discounts and commissions and offering expenses, were
approximately $223.1 million and were used for working capital and acquisition
purposes, including the repayment of higher interest rate debt assumed in
business combinations.
During the nine months ended January 25, 1997, net cash used in operating
activities was $24.8 million which resulted primarily from the increase in
accounts receivable due to seasonality and revenue growth and a decrease in
accounts payable due to the Company's aggressive policy of taking recently
negotiated cash discounts. Net cash used in investing activities was $404.2
million, including $332.5 million used for acquisitions, $23.9 million used for
additions to property and equipment and $41.3 million used to make an equity
investment in Dudley. Net borrowings increased $276.0 million during the nine
months ended January 25, 1997 primarily to fund acquisitions, including the
repayment of higher interest rate debt assumed in business combinations.
During the nine months ended January 31, 1996, net cash used in operating
activities was $4.2 million. Net cash used in investing activities was $75.3
million, including $58.2 million used for acquisitions and $16.8 million used
for additions to property and equipment. Net borrowings increased $36.6 million
during
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the nine months ended January 31, 1996. The Company also received $53.5 million
in cash as a result of the sale of Common Stock during the period.
During fiscal 1996, net cash provided by operating activities was $7.9
million. Net cash used in investing activities during fiscal 1996 was $122.7
million, consisting primarily of net cash paid in acquisitions of $95.6 million,
net cash paid for additions to property and equipment of $20.8 million and an
investment in affiliate of $5.6 million. Net cash provided by financing
activities during fiscal 1996 was $273.2 million, consisting primarily of $176.3
million from the two public offerings of Common Stock and the public offering of
debt of $138.4 million, net of offering expenses, partially offset by a
reduction in net borrowings of $23.9 million and dividends paid by certain
Pooled Companies prior to their acquisitions by the Company of $16.5 million.
During fiscal 1995, net cash provided by operating activities was $14.9
million. Net cash used in investing activities during fiscal 1995 was $25.8
million, consisting primarily of net cash paid in acquisitions of $18.1 million
and net cash paid for additions to property and equipment of $7.9 million. Net
cash provided by financing activities during fiscal 1995 was $18.5 million,
representing proceeds from the initial public offering of $33.5 million, net of
offering expenses, and an increase in net borrowings of $2.0 million partially
offset by payments of $11.3 million to the stockholders of four companies
acquired in the initial public offering and dividends paid by certain Pooled
Companies prior to their acquisitions by the Company of $8.7 million.
During fiscal 1994, net cash provided by operating activities was $12.1
million. Net cash used in investing activities during fiscal 1994 was $8.0
million, consisting primarily of net cash paid for additions to property and
equipment of $7.2 million. Net cash used in financing activities during fiscal
1994 was $3.7 million, consisting primarily of dividends paid by certain Pooled
Companies prior to their acquisitions by the Company of $7.2 million offset by
net borrowings of $3.3 million.
Subsequent to January 25, 1997 and through March 26, 1997, the Company has
completed 13 business combinations for an aggregate purchase price of $25.6
million, consisting of approximately $6.2 million of cash and 624,828 shares of
the Company's Common Stock with an aggregate market value on the dates of
acquisition of approximately $19.4 million.
The Company plans to continue to consolidate and modernize its distribution
facilities and systems with the creation of district fulfillment centers and the
consolidation of existing facilities into such centers. The Company expects to
incur capital expenditures of approximately $20 million to $30 million over the
next fiscal year for this and other purposes.
The Company anticipates that its current cash on hand, cash flow from
operations, and additional financing available under the Credit Facility will be
sufficient to meet the Company's liquidity requirements for its operations
through the end of the 1997 calendar year. However, the Company is currently,
and intends to continue, pursuing additional acquisitions, which are expected to
be funded through a combination of cash and shares of Common Stock. There can be
no assurances that additional sources of financing will not be required during
the next twelve months or thereafter.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
seasonality of the core office products business, however, is expected to be
impacted by the seasonality of its other operations, which have expanded through
acquisitions. For example, the revenues and profitability of the Company's
school supplies and school furniture business have been higher during the
Company's first and second quarters and significantly lower in its third and
fourth quarters, and the revenues and profitability of the Company's operations
in New Zealand and Australia have generally been higher in the Company's third
quarter. As the Company's mix of businesses evolves through future acquisitions,
these seasonal fluctuations may continue to change. In addition, quarterly
results also may be materially affected by the timing of acquisitions, the
timing and magnitude of costs related to such acquisitions, variations in
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the prices paid by the Company for the products it sells, the mix of products
sold and general economic conditions. Therefore, results for any quarter are not
necessarily indicative of the results that the Company may achieve for any
subsequent fiscal quarter or for a full fiscal year.
The following table sets forth certain unaudited consolidated quarterly
financial data for the fiscal year ended April 30, 1996 and the nine months
ended January 25, 1997. The information has been derived from unaudited
consolidated financial statements that in the opinion of management reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of such quarterly information.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS FISCAL 1997 QUARTERS
---------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FIRST SECOND THIRD(1) FOURTH FIRST SECOND THIRD
---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 266,959 $ 328,080 $ 380,089 $ 411,084 $ 474,267 $ 652,895 $ 680,490
Gross profit.......................... 70,003 85,456 99,761 114,352 131,566 186,178 194,659
Operating income(2)(3)................ 3,766 12,196 19,359 11,177 22,271 32,180 28,479
Net income(2)(3)...................... 2,919 8,317 12,163 5,828 12,604 13,610 10,177
</TABLE>
- ------------------------
(1) The quarterly financial data for the fiscal year ended April 30, 1996
includes the financial results of two companies subject to significant
seasonal influences which had fiscal years ended December 31, 1995 and were
acquired in business combinations accounted for under the
pooling-of-interests method of accounting. GAAP requires that the results of
these acquired companies for their third quarter ended September 30, 1995 be
included in the Company's results for the third quarter ended January 31,
1996. Because the acquired companies are significantly more profitable
during the three months ended September 30 than the three months ended
January 31, the Company's revenues and operating income for the quarter
ended January 31, 1996, as reported in accordance with GAAP appear high. The
Company's revenues and operating income for such quarter would have been
$47.2 million lower and $14.2 million lower, respectively, if the Company's
results for the quarter ended January 31, 1996 had included the acquired
companies' results for the three months ended January 31, 1996.
(2) Includes costs of $682,000 incurred during the third quarter of 1996 in
connection with the discontinuation of a printing division at a subsidiary.
(3) Includes one-time nonrecurring acquisition costs of $1,787,000, $3,945,000
and $5,225,000 for each of the first three quarters of fiscal 1997,
respectively, and $4,671,000, $599,000, $824,000 and $1,984,000 for each of
the four quarters of fiscal 1996, respectively. These one-time nonrecurring
acquisition costs are the result of business combinations consummated during
the fiscal year and accounted for under the pooling-of-interests method of
accounting. Under GAAP, acquisition costs incurred in conjunction with
pooling-of-interests combinations must be recorded as expense.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations.
FACTORS AFFECTING THE COMPANY'S PROSPECTS
The prospects of the Company may be affected by a number of factors,
including the matters discussed below:
The Company has an aggressive acquisition strategy that has involved, and is
expected to continue to involve, the acquisition of a significant number of
additional companies in related lines of businesses. From its inception through
March 26, 1997, the Company completed 149 acquisitions. In addition, the Company
currently has, and from time to time expects to enter into, letters of intent
with respect to the acquisition of additional office and educational products
and equipment businesses, both in the United States and internationally,
consistent with its strategy of pursuing an aggressive acquisition program.
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The Company depends on acquisitions and organic growth to increase its
earnings. There can be no assurance that the Company will complete acquisitions
in a manner that coincides with the end of its fiscal quarters. The failure to
complete acquisitions on a timely basis could have a material adverse effect on
the Company's quarterly results. Likewise, delays in implementing planned
integration strategies and activities also could adversely affect the Company's
quarterly earnings. In addition, there can be no assurance that acquisitions
will occur at the same pace or be available to the Company on favorable terms,
if at all. For example, if the market price of the Common Stock were to decline
significantly over a sustained period, the owners of potential acquisition
targets may not be willing to receive shares of Common Stock in exchange for
their businesses, thereby adversely affecting the pace of the Company's
acquisition program. Such an effect on the pace of the Company's acquisition
program could further reduce the price of a share of Common Stock, to the
further detriment of the Company's acquisition strategy. In addition, the
consolidation of the contract stationer industry has reduced the number of
larger companies available for sale, which could lead to higher prices being
paid to acquire such companies. The failure to acquire additional businesses and
to acquire such businesses on favorable terms in accordance with the Company's
growth strategy could have a material adverse impact on future sales and
profitability.
The Company's acquisition strategy has resulted in a significant increase in
sales, employees, facilities and distribution systems. While the Company's
decentralized management strategy, together with operating efficiencies
resulting from the elimination of duplicative functions and economies of scale,
may present opportunities to reduce costs, such strategies may initially
necessitate costs and expenditures to expand operational and financial systems
and corporate management and administration. These various costs and possible
cost-savings strategies may make historical operating results not indicative of
future performance. In addition, there can be no assurance that the pace of the
Company's acquisitions will not adversely affect the Company's efforts to
implement its cost-savings strategies and to manage its acquisitions profitably.
The Company operates in a highly competitive environment. Some of the
Company's current and potential competitors are larger than the Company and have
greater financial resources. No assurances can be given that competition will
not have a material adverse effect on the Company's business.
The Company expects to continue to focus significant attention and resources
on future international expansion. In addition to the factors described above
that may impact the Company's domestic operations, the Company's operations in
foreign markets are subject to a number of inherent risks, including currency
exchange rates, new and different legal and regulatory requirements,
difficulties in staffing and managing foreign operations, risks specific to
different business lines that the Company may enter and other factors.
In addition, in response to industry and market changes, including industry
consolidation resulting from possible combinations or alliances among major
competitors in the office products industry and continued volatility in the
market prices of shares of common stock of the Company and its industry
competitors, the Company also may consider, from time to time, additional
strategies to enhance stockholder value in light of such changes. These may
include, among others, strategic alliances and joint ventures, spin-offs,
purchase, sale, or merger transactions with other large companies, a
recapitalization of the Company, and other similar transactions. There can be no
assurance whether any such transaction could be completed or the terms or timing
of any such transaction. See "Business--Competition."
For a more complete discussion of the above factors, see "Risk Factors."
23
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BUSINESS
The following "Business" section contains forward-looking statements which
involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions as they relate to
the Company or its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors."
COMPANY OVERVIEW
U.S. Office Products is one of the world's largest and fastest growing
suppliers of a broad range of office products and business services to
corporate, commercial, industrial and educational customers. Since its founding
in October 1994, the Company has emerged as a leading consolidator of several
highly fragmented industries that serve the office needs of business and
educational customers. The Company had pro forma revenues of $2.8 billion for
the fiscal year ended April 30, 1996 assuming the completion as of May 1, 1995
of the acquisitions made by the Company after May 1, 1995. U.S. Office Products
currently provides products and services from over 350 facilities in North
America, and from over 350 facilities in New Zealand, Australia, and the United
Kingdom. The Company currently has over 15,000 employees.
The Company's strategy is to serve as the sole source for the full range of
business products, services, and equipment used by middle market businesses
around the world. The Company believes that middle market businesses, which it
defines as those with between 20 and 500 employees, constitute the fastest
growing sector of the economy and have served as a greater source of new job
growth in recent years than have larger organizations. The Company sells to its
business and educational customers a full range of more than 34,000 products and
services, including office supplies, office furniture, office coffee services,
computer and telecommunications network services, forms management and school
supplies and school furniture. The Company believes that, in many middle market
businesses, most of these products and services are purchased by a single
decisionmaker. The Company's goal is to emerge as the provider of choice for all
of a customer's office needs by offering superior customer service, convenience
and a full range of products and services to such decisionmakers.
The Company has an aggressive acquisition program through which it has
acquired and seeks to acquire companies with established sales presences and
brand names in given geographic, product or service markets. From its founding
through March 26, 1997, the Company completed 149 acquisitions. The Company
believes that the fragmented nature of many of the markets it serves has both
allowed it to identify suitable acquisition candidates and enabled it, through
acquisitions, to establish a leadership position in these markets. For example,
the Company believes that, based upon current sales volume, it is now one of the
largest contract stationers in the United States, one of the largest school
supply distributors in the United States, one of the largest providers of office
coffee services in the United States and one of the largest providers of
contract furniture in the United States. The Company is currently organized into
eight divisions to serve its various product, service, and geographic markets,
and to identify and pursue complementary acquisitions within these markets.
As a result of its aggressive acquisition program, the Company has been in
discussions with potential acquirees at most times since its founding. It
currently has, and from time to time expects to enter into, letters of intent
with respect to additional companies, both in the United States and
internationally. There can be no assurance, however, that definitive agreements
for additional acquisitions will be executed or that additional acquisitions
will be completed. In response to industry and market changes, including
industry consolidation resulting from possible combinations or alliances among
major competitors in the office products industry and continued volatility in
the market prices of shares of common stock of the Company and its industry
competitors, the Company also may consider, from time to time, additional
strategies to enhance stockholder value in light of such changes. These may
include, among others,
24
<PAGE>
strategic alliances and joint ventures, spin-offs, purchase, sale or merger
transactions with other large companies, a recapitalization of the Company, and
other similar transactions. See "Risk Factors--Rapid Expansion; Dependence on
Acquisitions for Future Growth" and "Risk Factors--Substantial Competition and
Industry Consolidation."
The Company operates with a decentralized sales and customer contact
strategy in an effort to provide superior customer service and retain the
historical customers of acquired businesses. The Company believes that many
customers purchase office products and business services based on established
long-term commercial relationships. The Company seeks to preserve these
relationships by retaining the management, sales organizations, and brand name
identity of acquired companies. By broadening the range of products and services
that it sells, the Company also believes that it can create additional sales
opportunities for its local sales organizations.
At the same time, the Company seeks to achieve the operating efficiencies of
a large organization by (i) generating cost savings through volume purchasing of
office products and increasing the percentage of office supplies purchased
directly from manufacturers; (ii) combining certain general and administrative
functions at the corporate level and eliminating redundant facilities; and (iii)
implementing improved technology and operating systems. In its acquisition
program, the Company utilizes a "hub and spoke" strategy, which involves the
acquisition of (a) a larger established, high quality local company, or hub, and
(b) additional smaller companies, or spokes, in secondary markets surrounding
the hubs. Where possible, the operations of the acquired spokes are integrated
into the operations of existing hubs, thereby eliminating a portion of the
operating expenses of the acquired spokes. The Company also is implementing
regional consolidation and integration plans, such as the establishment of
regional warehouses (referred to by the Company as district fulfillment
centers), which enable certain operational activities to be shared among hubs
and spokes located within a specific geographic area. The Company has appointed
managers for each of its 12 regions in the United States and has given them
oversight responsibility for the operations of their respective regions. This
regional approach is designed to permit the elimination of duplicative
facilities and costs and promote the integration of the operations within each
region.
MARKET OVERVIEW
The Company has served the following related markets in North America and
abroad:
NORTH AMERICAN OFFICE PRODUCTS
CONTRACT STATIONERY
According to independent research reports, the traditional office supplies
market in the United States generates approximately $60 billion in annual sales.
The companies servicing this market include: (i) discount superstore retailers;
(ii) mail order marketers; (iii) traditional retail stores; and (iv) contract
stationers. Independent estimates indicate that the aggregate size of the retail
and mail order markets is approximately $30 billion in annual sales and that the
size of the contract stationer market is also approximately $30 billion in
annual sales. The Company believes that the total $60 billion market can be
classified by customer type into three segments: the large corporate segment,
the middle market corporate segment and the small office segment.
The large corporate segment is comprised of companies with 500 or more
employees. These customers often negotiate contract pricing on many of the
office products they routinely purchase, and the Company believes that this
segment of the market is more price sensitive than the middle market corporate
segment. The large corporate segment has historically been served by contract
stationers, and the Company believes that this segment is currently the focus of
several of its largest competitors.
The middle market corporate segment, which is the focus of the Company's
sales efforts, is composed of companies between 20 and 500 employees. The
Company believes that companies in this segment do
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<PAGE>
not have large numbers of employees to devote to the function of purchasing
office products, and that, while these products are important to the functioning
of businesses, office products are not necessarily a large portion of the costs
of companies in this segment. As a result, the Company believes that this
segment is more driven by the level of service provided than by price. This
segment historically has been served primarily by contract stationers, and, to a
much lesser extent, by mail order marketers and traditional retail dealers.
Discount superstore chains and mail order marketers have attempted to gain
market share in this segment by providing delivery services and allowing credit
card purchases. However, the Company believes that discount superstores and mail
order marketers have achieved only limited penetration because they do not
provide the level of service required by customers in this segment.
The small office segment consists of home offices and small businesses with
20 or fewer employees. These customers historically have purchased office
supplies from retail dealers at or near manufacturers' list prices. Discount
superstores and mail order marketers have captured an increasing share of sales
to this segment primarily by offering lower prices and providing a better
product selection than retail dealers.
The $30 billion U.S. corporate office supplies segment has historically been
serviced by numerous contract stationers, most of which operate in only one
metropolitan area and have annual sales of less than $15 million. However, as
the office products industry undergoes rapid consolidation, the Company believes
that many smaller office supply companies will be unable to compete because, in
part, of their inability to purchase products at favorable prices. As a result,
these companies will be acquired by larger companies or closed. The Company
believes that it has five competitors with revenues in excess of $500 million
supplying office products to the corporate segments, that none of these
competitors has a market share in excess of 10% and that their combined market
share is less than 35%. See "--Competition."
OFFICE COFFEE SERVICES
The Company believes that the office coffee services ("OCS") industry in the
United States generates approximately $3 billion in annual sales. The Company
believes that this industry is also highly fragmented, with most companies in
the industry having sales of under $15 million.
OFFICE FURNITURE
The Company believes that there are thousands of companies selling office
furniture to the corporate, commercial and industrial markets. The Company
believes that the office furniture market in North America had sales of
approximately $12 billion in 1995.
FORMS MANAGEMENT
The U.S. market for business forms, as measured by the International
Business Forms Industries trade association, was approximately $8 billion in
1995. Five national direct manufacturers account for a large share of business
form sales. The remainder of the industry is highly fragmented among smaller
companies serving local or regional markets.
CORPORATE TRAVEL
The U.S. corporate travel market, as measured by the Airline Reporting
Corporation, generates annual sales of approximately $50 billion. Fifty percent
of the market is dominated by the top 100 corporate travel agencies in the
United States, with the remainder of the sales spread among smaller agencies.
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SCHOOL SUPPLIES AND SCHOOL FURNITURE
According to the National Center of Education Statistics, there are
approximately 137,000 private and public schools that serve approximately 54.4
million kindergarten through 12th grade students in the United States. The
Company believes that these schools are serviced by a fragmented industry of
over 1,000 independent dealers, who generated sales totaling over $3 billion in
1995.
INTERNATIONAL OFFICE PRODUCTS
The Company believes that the international office products industry, like
the office supplies industry in the United States, is highly fragmented and
therefore represents a consolidation opportunity for the Company. According to
independent research estimates, annual sales in the contract stationer market in
developed countries excluding the United States exceed $100 billion.
COMPUTER NETWORK SERVICES
According to independent research reports, computer and telecommunications
network services constitute a combined market of over $50 billion. The Company
believes that this market is growing rapidly and that an opportunity exists for
the Company to provide these services to its middle market customers.
BUSINESS STRATEGY
The Company's objective is to become the premier provider of office products
and business services to middle market companies around the world. The Company
is pursuing several strategies to accomplish this objective, including:
MAKING STRATEGIC ACQUISITIONS TO CONSOLIDATE THE DOMESTIC OFFICE PRODUCTS
MARKET. The Company believes that various North American office products markets
remain highly fragmented and that it has the opportunity to continue to
consolidate these markets through selective acquisitions of leading companies.
The Company believes that its policy of retaining the brand name and empowering
the management of acquired companies helps to make it the acquirer of choice for
many companies. Moreover, this strategy enables the Company to draw on the
contacts and expertise of local management by empowering them to identify
acquisition candidates and to participate in the process of integrating newly
acquired companies into U.S. Office Products.
EXPANDING THE COMPANY'S PRODUCT AND SERVICE OFFERINGS. The Company intends
to continue to broaden the complement of products and services it offers in
order to increase its sales to existing customers. The Company believes that
many of its subsidiaries can maximize their sales, warehousing and distribution
capabilities by offering a broader array of products and services to their
customers. The Company's strategy in making acquisitions in complementary
office-related markets is to maximize the cross-selling opportunities and
operating efficiencies available to these subsidiaries. For example, certain of
the Company's subsidiaries offer to the same customers office supplies, contract
furniture, and office coffee services, although the Company believes that this
is occurring at a relatively small number of subsidiaries and that significant
additional cross-selling opportunities exist among its existing subsidiaries.
Over time, the Company's strategy is to complement these offerings with
additional office-related products and services, such as computer network
services, corporate travel services and forms management.
ACHIEVING OPERATING EFFICIENCIES. The Company's strategy is to continue to
reduce costs as a percentage of sales by taking advantage of purchasing,
operating, and administrative efficiencies which it believes can be achieved
with the Company's increased size and scale. For example, office product
manufacturers historically have offered more favorable prices and rebates to
high volume purchasers. As it has grown, the Company has negotiated certain
additional discounts and rebates with its suppliers and vendors and believes
that it will be able to increase the discounts and rebates in the future. The
Company believes that
27
<PAGE>
it will be able to achieve operating efficiencies by eliminating redundant
facilities and reducing overhead and by combining certain general and
administrative functions, such as purchasing and implementation of computer
systems, purchasing or leasing of delivery vehicles, and the process of securing
accounting, insurance, financial management, marketing, human resources and
legal support. The Company also is implementing regional consolidation and
integration plans, such as the establishment of regional warehouses (referred to
by the Company as district fulfillment centers), which enable certain
operational activities to be shared among hubs and spokes located within a
specific geographic area. In addition, the Company publishes its annual
proprietary catalog of its office products including approximately 5,000 stock
keeping units ("SKUs"). The Company believes this catalog assists its
subsidiaries in reducing their reliance on wholesalers and in enabling them to
purchase more items directly from manufacturers at lower cost. Consistent with
the Company's decentralized operating approach, the Company-wide catalog is
customized for each subsidiary so that the cover bears the name of the
subsidiary and the initial pages can provide information specifically about that
subsidiary.
IMPLEMENTING SYSTEM AND TECHNOLOGY IMPROVEMENTS. Certain subsidiaries have
developed operating and technology systems designed to improve and enhance their
operations, including computerized inventory management and order processing
systems, computerized quotation and job costing systems, and computerized
logistics and distribution systems. The Company plans to incorporate
industry-standard technology platforms, including frame relay networks, bar
coding, and radio frequency technologies at its existing and planned regional
warehouses, referred to by the Company as district fulfillment centers ("DFCs").
The Company believes that these platforms will allow it to process orders and
track inventory and order fulfillment on a real-time basis, forecast demand by
specific inventory item, or SKU, and generate customized usage and billing
reports for their customers. The Company believes that implementation of these
systems at additional facilities will significantly increase the speed and
accuracy of order processing and fulfillment at the subsidiaries, while reducing
inventory turns and providing measurement and analysis tools that facilitate
efficient operation. In addition, in December 1996, the Company acquired TSH, a
leading vendor of management information systems to the office products
industry. A substantial portion of the Company's North American contract
stationery subsidiaries currently use TSH software for their computerized
inventory management systems, order processing systems and warehouse management
and distribution systems. The Company believes that TSH's leading historical
position in supplying MIS to the industry will enable it to speed the adoption
of systems throughout the Company.
SEEKING TO CONSOLIDATE THE INTERNATIONAL OFFICE PRODUCTS MARKET BY MAKING
ACQUISITIONS IN ATTRACTIVE MARKETS. The Company believes that the international
office products market represents an attractive consolidation opportunity. In
the past year, the Company acquired Blue Star, a leading office products company
in New Zealand, through which it has acquired numerous office products companies
in New Zealand and Australia, including Whitcoulls. In 1996, the Company
acquired numerous office products companies in Australia and a 49% ownership
stake in Dudley, the largest independent office products dealer in the United
Kingdom. The Company currently operates from 285 facilities in New Zealand, 100
facilities in Australia, eight facilities in the United Kingdom, and three
facilities in Canada. The Company's initial focus has been to acquire companies
in English speaking countries, although the Company expects in the future to
acquire companies in other countries.
PRINCIPAL PRODUCTS AND SERVICES
The Company has operated through eight divisions which provide products and
services and through which it seeks to identify and pursue complementary
acquisitions.
NORTH AMERICAN OFFICE PRODUCTS GROUP
Sales of office products to business customers in North America accounted
for the largest portion of the Company's revenues for fiscal year 1996 and for
the first nine months of fiscal year 1997. The Company's strategy is to continue
to increase its presence in this market by acquiring profitable companies
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<PAGE>
which have established a leading market position in a given geographic area. To
continue to implement successfully its strategy of acquiring and integrating
leading independent companies in geographic regions throughout the United
States, the Company has established an organizational structure in which
regional "quarterbacks" (similar to regional vice presidents) are responsible
for coordinating the Company's activities in 12 Company-defined geographic
regions of the country. The Company sells office products in the North American
market through three divisions: contract stationery, office coffee services and
office furniture. In addition, the Company has recently completed acquisitions
that have led to the creation of two new divisions that have been added to the
North American Office Products Group: the Forms Management Division and the
Corporate Travel Services Division. As of April 1, 1997, the Company had two
office coffee operations in Canada. The Company is actively seeking to acquire
additional businesses in Canada that offer a range of the products and services
now offered by the Company in the United States.
CONTRACT STATIONERY DIVISION
The Company sells office and related supplies and equipment in the domestic
office contract stationer market. The Company's offerings include desktop
accessories, writing instruments, paper products, computer consumables and
business machines. As of March 26, 1997, the Company served this market from 39
hubs and 48 spokes. The Company believes it has over 200,000 corporate customers
for office supplies in the North American market. The Company believes its
decentralized management philosophy results in better customer service by
allowing local management the flexibility to implement policies and make
decisions based on the needs and desires of local customers. The Company
encourages its local managers to work collaboratively within geographic regions
and to share successful operating strategies.
The Company generally provides next-day delivery of ordered items and, on
request, same-day delivery. This "just in time" service enables certain
customers to reduce overhead cost by reducing inventory and the associated
personnel and space requirements. The Company believes that many of its
customers purchase office products based on an established long-term business
relationship with one primary supplier. The Company obtains office products from
many sources, including manufacturers and wholesalers, and maintains warehouses
from which ordered items are delivered to customers. With respect to office
supplies, approximately one-third of ordered items are not kept in inventory but
are obtained by the Company from wholesalers with which the Company has
relationships. The Company does not believe that its ability to deliver goods to
its customers is dependent on any particular wholesaler.
Orders are received by the Company's sales personnel primarily by telephone
or facsimile. In addition, the Company uses an electronic data interchange
("EDI") system between the Company and certain of its customers. Using this
system, customers are able to place orders directly into the Company's computer
systems, manage their own inventory and generate customized usage reports and
invoices. Orders to be filled are routed electronically to either the Company's
warehouse or, if the ordered item is not stocked by the Company at its local
warehouse, to a wholesaler.
After receiving a customer order, the Company fills the order (excluding
items to be supplied by wholesalers) by "picking" the goods from the Company's
warehouse. At certain facilities, the Company's computer systems automatically
generate "picking" orders arranged according to the location of ordered items
within the Company's warehouse, improving the efficiency of warehouse personnel
in filling orders. The Company also has installed conveyer systems at these
facilities to move orders through the Company's warehouses more efficiently.
When orders have been picked, they are combined with the wholesaler portion of
the order, if required. Finally, delivery-ready orders are staged and loaded
onto trucks on a first-in, last-out basis, based on delivery routes. At these
facilities, staging and loading of trucks and delivery routes are computer
generated to improve delivery and distribution efficiency. The Company intends
to implement additional computerized warehouse systems as it consolidates
additional warehouses and implements a system of regional distribution
fulfillment centers. The Company delivers ordered items using Company-owned
trucks, leased trucks and unaffiliated delivery companies.
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<PAGE>
OFFICE COFFEE SERVICES DIVISION
Office coffee services ("OCS") businesses typically provide and install
coffee brewing equipment in a customer's office at no charge but require
customers to purchase, on an ongoing basis, a minimum volume of coffee and
related items from the OCS business. OCS businesses generally also offer a wide
assortment of both coffee and related products, including creamers, sugar,
stirrers, teas, sodas, juices and bottled waters, as well as snack items and all
other items that are likely to be found in an employee "breakroom" or lunch
room, including plastic flatware, napkins, paper cups, straws and similar items.
In the last two years, the Company has acquired 13 OCS companies serving the
following North American markets: Washington, D.C., Atlanta, Miami, Baltimore,
Milwaukee, Madison (WI), Wilkes Barre/Scranton, Philadelphia, New Orleans, Los
Angeles, Portland, Seattle, El Paso, Dallas and Vancouver and Ottawa, Canada.
In September 1996, the Company signed an agreement through which it secured
an exclusive arrangement to distribute Starbucks-Registered Trademark- coffee in
the North American OCS market for five years subject to, among other things,
satisfaction of certain minimum purchase requirements. The Company has developed
promotional materials and materials for its catalog, and certain of its
employees have received training from Starbucks in connection with this
strategic alliance. The Company believes that this strategic alliance will
strengthen its position in the OCS market and will enhance its ability to
cross-sell office coffee services to its existing clients.
OFFICE FURNITURE DIVISION
The Company sells catalog, contract and remanufactured furniture to the
office furniture market, both through its office supplies businesses and through
14 subsidiaries that principally serve the furniture market. The Company
believes that it has over 35,000 corporate customers for office furniture.
The Company sells furniture to three different types of customers. The
smaller customer typically purchases furniture such as lower-priced chairs and
file cabinets from the Company's office supplies catalogs. The middle market
customer typically purchases furniture of higher quality and functionality, and
the large customer buys high-quality furniture of a more sophisticated design
and tends to make project-oriented purchases. The Company also sells refurbished
and remanufactured furniture specially designed for contract and middle market
customers. To a lesser extent, the Company rents furniture to various customers
on a short-term basis.
FORMS MANAGEMENT DIVISION
The Company distributes and manages business forms, commercial printing,
promotional products, and office supplies through a network serving more than
12,000 customers with the products of more than 3,500 vendors. This division's
vendor network enables it to offer customers a broad range of specialized
products.
CORPORATE TRAVEL SERVICES DIVISION
The Company provides clients with corporate travel services through 35
offices in Colorado, the metropolitan Washington, D.C. area and Minneapolis.
SCHOOL SUPPLIES AND SCHOOL FURNITURE DIVISION
The Company sells school and office supplies and school furniture to the
kindergarten through 12th grade ("K-12") educational market primarily through
its School Specialty, Inc. subsidiary, which recently has acquired six companies
serving this market, as well as through its Re-Print Corporation subsidiary.
30
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The Company's school supplies and school furniture business focuses on the
approximately 137,000 private and public schools that serve approximately 54.4
million K-12 students in the United States. Categories of sales in the
educational market include classroom, art, office and instructional materials
(excluding textbooks), and desks, chairs, tables and other furniture for
classroom, cafeteria, library, locker and laboratory use.
The Company employs a three-tiered approach to the industry. It utilizes a
direct sales force group to market products to individual school systems
throughout the United States. A National Bid Desk group responds to Requests for
Proposals ("RFPs") and larger regional or statewide contracts. The Company's
Re-Print Corporation subsidiary uses a direct mail program to reach over 1.6
million teachers with what the Company believes is the largest and most
comprehensive catalog in the U.S. school supply market-place.
The Company believes that the school supplies and school furniture market
has been growing as school enrollments have increased. The Company believes that
it is one of the leading distributors of supplies and furniture to this market,
and is therefore well-positioned to further consolidate the market.
COMPUTER NETWORK SERVICES DIVISION
The Company's computer network services business includes three subsidiaries
that focus on four key areas of the computer and network services market. These
areas include: (i) regional consulting, which includes the definition of
customer needs, strategic planning, project management services, and the
development and implementation of best practices; (ii) network and system
integration, which includes the procurement and installation of building cable,
network and computer systems hardware, and network and computer systems
software; (iii) telephone interconnect services, which includes the procurement
and installment of building cabling, telephone PBX and key-system equipment,
voice mail systems, and voice response units; and (iv) software integration
services, which includes the installation and customization of mainstream
manufacturers of business software to help the Company's customers achieve best
practices. The Company provides these services to its customers both
domestically and internationally.
INTERNATIONAL OFFICE PRODUCTS DIVISION
The Company expects to continue to focus significant attention and resources
on international expansion. The Company's initial acquisition efforts outside of
the United States have focused on companies in English-speaking countries. The
Company currently sells office and educational products and equipment and
certain other products and services in New Zealand and Australia through Blue
Star and its subsidiaries, including Whitcoulls, and in the United Kingdom
through its 49% interest in Dudley.
The Company's operations in New Zealand and Australia currently include, in
addition to the office products business, the sale and leasing of
telecommunications and office automation equipment and products, as well as the
provision of related maintenance and system design and implementation services,
retail stationery and book stores, manufacturing of commercial, scholastic and
household stationery products and printing operations. Blue Star has completed
39 acquisitions during the last three years to become one of the largest office
products companies in New Zealand. The Company believes that its acquisitions of
Blue Star and Whitcoulls have made it one of the largest office products
suppliers in the Pacific Rim.
The Company believes that Dudley is the largest independent office products
dealer in the United Kingdom. Under the Company's joint venture agreement with
Dudley, the Company has made and will make further investments of working
capital in Dudley to enable Dudley to seek to consolidate the United Kingdom
office products market.
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The Company's strategy is to continue to make international acquisitions to
increase its presence in the international office products market. The Company
expects to focus its international acquisition program in Western Europe and
Scandinavia.
SALES AND MARKETING
The Company believes that its ability to maintain and grow its customer and
revenue base will depend, in part, on its ability to maintain a high level of
customer satisfaction, as well as competitive prices. The Company believes that
its customers typically purchase office products based on an established
long-term business relationship with one primary supplier. The Company
establishes and maintains its relationships with customers by assigning a sales
representative to most customers. The Company currently employs approximately
3,000 North American sales representatives and 2,000 sales representatives in
New Zealand and Australia.
Sales representatives, who are compensated almost exclusively on a
commission and/or incentive basis, have frequent contact with their customers
and share responsibility for increasing account penetration and providing
customer service. Sales representatives also are responsible for marketing
efforts directed to prospective customers and for responding to all bid and/or
contract requests for their existing and prospective customers. The Company
emphasizes a team approach, and generally integrates management, sales, customer
service, purchasing and other personnel into the relationship with each
customer. The Company believes that its decentralized management strategy offers
it a competitive advantage because, by not adhering to a standardized national
model, it has greater flexibility to respond to the needs of each local customer
while achieving the buying power and operating efficiencies of a large company.
The Company focuses its marketing efforts on the middle market business
segment of the office products industry. The Company believes that a significant
opportunity exists in the middle market business segment and that the larger
office products companies with which the Company competes have focused more on
the large corporate segment. The Company sells primarily through direct contact
with customers and potential customers and does not conduct significant mass
market advertising.
The Company continues to leverage its expertise in operations that are not
typical of traditional contract stationers, such as office coffee service
operations, by training its sales personnel in these different areas and
emphasizing a full service approach to its sales. The Company believes that, by
integrating its office products operations with these other related operations,
it can leverage its sales, warehousing and distribution capabilities, while
offering its corporate, commercial, industrial and educational customers a
single source vendor for more of their office requirements.
COMPETITION
The Company operates in a highly competitive environment. The Company's
competitors in many of the markets that it serves are smaller, independent
companies, many of which are well-established in their markets. In addition, in
the contract stationer market, the Company competes with five large office
products companies, each of which is believed to have annual revenues in excess
of $500 million: Boise Cascade Office Products Corporation; Corporate Express,
Inc.; Office Depot, Inc.; BT Office Products International, Inc.; and Staples,
Inc. Two of these five competitors are divisions of discount superstore chains
and two others are owned in substantial portion by large manufacturers of office
products.
In the contract stationer market, as well as the other markets that it
serves or proposes to serve, the Company believes that customers not only are
concerned with the overall reduction of their office products costs but also
place an emphasis on dependability, superior levels of service and flexible
delivery capabilities. The Company believes that it competes favorably with the
five large companies in the contract stationer market on the basis of service
and price. However, some of these companies have greater financial resources
than the Company.
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The Company faces significant competition to acquire additional businesses
as the office products industry undergoes continuing consolidation. Significant
competition exists, or is expected to develop, in the other markets that the
Company serves or is planning to enter as consolidation occurs (or accelerates)
in those markets. A number of the Company's major competitors are actively
pursuing acquisitions outside of the United States. These companies, or other
large companies, may compete with the Company for acquisitions in markets other
than the market for office products. Such competition could lead to higher
prices being paid for acquired companies. The Company believes that its
decentralized management strategy and other operating strategies make it an
attractive acquirer of other companies. However, no assurance can be given that
the Company's acquisition program will be successful in the future.
In addition, the Company anticipates that its major industry competitors may
pursue strategic alliances, joint ventures, or other significant business
combinations. Such significant transactions may include (or come in response to)
the announced merger of Staples, Inc., and Office Depot, Inc., which the Federal
Trade Commission (the "FTC") recently opposed on antitrust grounds. The Company
cannot predict whether the FTC would oppose other future significant
transactions involving major companies in the office products industry. The
Company does not expect, however, that the FTC's position will have an adverse
impact on the Company's acquisition program. See "Business--Company Overview."
EMPLOYEES
As of March 26, 1997, the Company had over 15,000 full-time employees, a
small number of which are members of labor unions. The Company considers its
relations with its employees to be satisfactory.
PROPERTIES
As of January 25, 1997, the Company operated 763 facilities in various
states and in Canada, New Zealand and Australia, including one facility located
in Washington, D.C. for its corporate headquarters. Of these facilities, 727 are
leased and 36 are owned. The facilities are used for retail, warehouse and
office purposes, or a combination of these functions. The aggregate square
footage for all of the facilities is approximately 9,100,000 square feet
consisting of 1,800,000 square feet for retail use, 5,500,000 square feet for
warehouse use, and 1,800,000 square feet for office use. At this time, the
Company believes its facilities are suitable for its purposes, having adequate
productive capacity for the Company's present and anticipated needs. In
addition, Dudley, in which the Company holds a 49% interest, owns and leases
property in the United Kingdom.
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The following table sets forth the locations of all the Company's facilities
as of January 25, 1997:
<TABLE>
<CAPTION>
NUMBER OF
LOCATION FACILITIES
- ------------------------------------------------------------------------------------------------------ -------------
<S> <C>
DOMESTIC
Alabama............................................................................................. 13
Arkansas............................................................................................ 2
California.......................................................................................... 42
Colorado............................................................................................ 12
Connecticut......................................................................................... 2
District of Columbia................................................................................ 3
Delaware............................................................................................ 1
Florida............................................................................................. 23
Georgia............................................................................................. 8
Illinois............................................................................................ 23
Indiana............................................................................................. 9
Iowa................................................................................................ 3
Kansas.............................................................................................. 2
Kentucky............................................................................................ 7
Louisiana........................................................................................... 12
Maryland............................................................................................ 10
Massachusetts....................................................................................... 7
Michigan............................................................................................ 18
Minnesota........................................................................................... 9
Mississippi......................................................................................... 11
Missouri............................................................................................ 8
Nebraska............................................................................................ 2
New Jersey.......................................................................................... 6
New Mexico.......................................................................................... 3
New York............................................................................................ 11
North Carolina...................................................................................... 17
Ohio................................................................................................ 21
Oklahoma............................................................................................ 1
Oregon.............................................................................................. 6
Pennsylvania........................................................................................ 13
South Carolina...................................................................................... 6
Tennessee........................................................................................... 10
Texas............................................................................................... 5
Virginia............................................................................................ 13
Washington.......................................................................................... 3
Wisconsin........................................................................................... 33
DOMESTIC TOTAL........................................................................................ 375
---
---
INTERNATIONAL
New Zealand......................................................................................... 285
Australia........................................................................................... 100
Canada.............................................................................................. 3
---
INTERNATIONAL TOTAL................................................................................... 388
---
---
</TABLE>
LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of these actions
will have a material adverse effect on the financial condition, results of
operations or cash flows of the Company.
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MANAGEMENT
The following table sets forth certain information concerning each of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS
Jonathan J. Ledecky................. 39 Chief Executive Officer and Chairman of the Board
Timothy J. Flynn.................... 43 President and Chief Operating Officer; Director
Thomas Morgan....................... 43 President--North American Office Products Group; Director
Donald H. Platt..................... 50 Senior Vice President, Chief Financial Officer and Treasurer
Mark D. Director.................... 38 Executive Vice President, General Counsel and Secretary
Martin S. Pinson.................... 51 Executive Vice President
DIRECTORS
John K. Burgess..................... 40 Director; President--Burgess, Anderson & Tate, Inc. ("BAT")
Jack L. Becker, Jr. ................ 45 Director; President--Dameron-Pierson Company, Limited
("Dameron-Pierson")
David C. Copenhaver................. 34 Director; Vice President--Operations, North American Office Products
Group; formerly Senior Vice President--The Smith-Wilson Co.
("Smith-Wilson")
Timothy J. Flynn.................... 43 (See above.)
David C. Gezon...................... 43 Director; President--C.W. Mills Acquisition Corp. ("C.W. Mills");
Director
Milton H. Kuyers.................... 58 Director
Jonathan J. Ledecky................. 39 (See above.)
Allon H. Lefever.................... 48 Director
Edward J. Mathias................... 55 Director
Thomas Morgan....................... 43 (See above.)
Clifton B. Phillips................. 36 Director
John A. Quelch...................... 43 Director
</TABLE>
JONATHAN J. LEDECKY founded the Company in October 1994 and has served since
then as its Chairman of the Board and Chief Executive Officer. Prior to founding
the Company, Mr. Ledecky served from 1989 to 1991 as the President of The Legacy
Fund, Inc. and from 1991 until September 1994 as President and Chief Executive
Officer of Legacy Dealer Capital Fund, Inc., a wholly owned subsidiary of
Steelcase Inc., the nation's largest manufacturer of office furniture products.
While at Legacy Dealer Capital Fund, Mr. Ledecky was responsible for providing
corporate advisory services for Steelcase's network of office products
distributors. In addition, Mr. Ledecky has served as a director of, or corporate
advisor and/or consultant to, several office products companies. Prior to his
tenure at The Legacy Fund, Inc., Mr. Ledecky was a partner at Adler and Company
and a Senior Vice President at Allied Capital Corporation, a publicly traded
investment management company. Mr. Ledecky serves as a director of publicly
traded MLC Holdings, Inc. Mr. Ledecky is a graduate of Harvard College and
Harvard Business School.
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TIMOTHY J. FLYNN is a Director and the President and Chief Operating Officer
of the Company. Mr. Flynn held a variety of positions at Andrews Office Supply
and Equipment Company ("Andrews"), including President, Executive Vice President
and Chief Operating Officer between 1987 and 1996. Mr. Flynn joined Andrews in
1986 after being employed for 10 years in the commercial sales division of M.S.
Ginn and Company, an office products supplier in Washington, D.C. Mr. Flynn is a
former member of the board of directors of the National Purchasing Association
("NPA"), an association of office products companies, and the former Vice
Chairman of the Commercial Dealer Division of the Business Products
International Association (formerly known as the National Office Products
Association ("NOPA")). Mr. Flynn received his undergraduate degree and a Masters
in Administration from the University of Maryland.
THOMAS MORGAN joined the Company in February 1997 as the President of the
North American Office Products Group and was elected to the Board on February
28, 1997. Mr. Morgan had been the Executive Vice President of the S.P. Richards
Company, the second largest office products wholesaler in the United States and
a division of publicly traded Genuine Parts Company. Mr. Morgan has spent the
last 11 years in various positions in S.P. Richards, where he was responsible
for operations, sales and marketing efforts. He is a graduate of the University
of Tennessee, with a degree in Business Administration.
DONALD H. PLATT has served as the Senior Vice President and Chief Financial
Officer of the Company since August 1995 and as Treasurer since August 1996.
From April 1995 until August 1995, Mr. Platt served as the Company's Senior Vice
President--Corporate Development. From 1990 through 1993, Mr. Platt served as
Dealer Business Consultant and, from January 1994 through April 1995, as Vice
President of Dealer Financing for Steelcase Financial Services, Inc., a finance
subsidiary of Steelcase. Mr. Platt was responsible for 22 acquisitions and
divestures of independent Steelcase dealerships in the U.S. and Canada from
January 1994 through April 1995. Mr. Platt has served as a director of 10
different office furniture dealerships, several of which were also prominent
office products dealers. Mr. Platt is a graduate of Stanford University and the
Stanford Graduate School of Business.
MARK D. DIRECTOR joined the Company as its Executive Vice President, General
Counsel and Assistant Secretary in February 1996. In August, 1996, he was
appointed Secretary of the Company. From 1990 through February 1995, Mr.
Director was a principal of the law firm of Fields & Director, P.C., located in
Washington, D.C., which he founded after his association from 1984 to 1990 with
the law firm of Debevoise & Plimpton. From February 1995 to September 1995, he
served as Vice President, General Counsel and Assistant Secretary of Radio Movil
Digital Americas, Inc. ("RMD"), a company that owns and operates specialized
mobile radio networks throughout South America. From September 1995 to February
1996, Mr. Director served as Executive Vice President of RMD. Mr. Director
received his undergraduate degree from Harvard College and his law degree from
Harvard Law School.
DAVID C. COPENHAVER is a Director of the Company. In March 1997, he was
named Vice President-- Operations of the North American Office Products Group of
the Company. Until March 1997, he had been Senior Vice President--Smith-Wilson
since Copenhaver Holdings, Incorporated purchased Smith-Wilson in 1989. Mr.
Copenhaver received both his undergraduate degree and an M.B.A. from the
University of Virginia.
MARTIN S. PINSON has served as Executive Vice President of the Company since
the Company's organization. He previously served as Secretary of the Company
from October 1994 through August 1996 and as Chief Financial Officer from
October 1994 to August 1995. From 1991 to 1994, Mr. Pinson was the President and
Chief Executive Officer of Pinson and Associates, a Washington, D.C. firm
providing consulting and corporate finance services to private and publicly held
corporations. Prior to forming Pinson and Associates, Mr. Pinson was Senior Vice
President at Greater Washington Investors, Inc., a publicly traded venture
capital investment company located in Washington, D.C. Mr. Pinson has served on
the board of directors of more than 15 private and publicly held companies. He
received his undergraduate degree from Union College and his law degree from
Georgetown University.
36
<PAGE>
JOHN K. BURGESS is a Director of the Company and the President of BAT. Mr.
Burgess has served since April 1993 as the Chief Operating Officer of BAT. From
April 1990 through March 1993, Mr. Burgess served as Vice President--Sales and
Marketing for BAT. Prior to April 1990, Mr. Burgess held a variety of positions
at BAT. Mr. Burgess received a bachelor's degree in business management from
Florida Southern College.
JACK L. BECKER, JR. is a Director of the Company and the President of
Dameron-Pierson. Mr. Becker has served as the President of Dameron-Pierson since
May 1992. From 1989 through April 1992, Mr. Becker served as Executive Vice
President of Dameron-Pierson, with responsibility for sales and office furniture
operations. Mr. Becker is a former member of the board of directors of NPA and a
member of the dealer councils of Office Furniture USA and Krueger International,
each of which is an office products trade organization. Mr. Becker received a
bachelor's degree in management from the University of New Orleans.
DAVID C. GEZON is a Director of the Company and the President of C.W. Mills.
Mr. Gezon has worked for C.W. Mills since 1970 and has served as its President
since 1988. Mr. Gezon received an undergraduate degree from Calvin College and a
Masters in Business Administration ("M.B.A.") from Western Michigan University.
CLIFTON B. PHILLIPS is a Director of the Company. Mr. Phillips served as
President of Mills Morris Inc. ("Mills Morris Arrow") from 1993 to May 1996. For
more than four years prior to becoming President of Mills Morris Arrow, he held
a variety of positions at Mills Morris Arrow including President of Mills Morris
Business Interiors and General Manager of Arrow Business Products. Mr. Phillips
received his undergraduate degree from Columbia University and an M.B.A. from
The University of Pennsylvania.
MILTON H. KUYERS is a Director of the Company. Mr. Kuyers is a part owner
and executive officer of a number of privately held companies, including Zero
Zone Refrigeration Manufacturing Co., a manufacturer of commercial refrigeration
units; Desert Air Corp., a manufacturer of commercial dehumidification
equipment; Northwest Coatings, Inc., a manufacturer of coating products;
Grayline, Inc., a manufacturer of tubing used in the appliance and electrical
industries; Barch Communications, Inc., a distributor of business telephone
systems and cellular telephones; and Faustel, Inc., a manufacturer of custom
coating equipment. Prior to 1993, Mr. Kuyers served as the President of Star
Sprinkler Corp., a manufacturer of sprinkler heads for fire protection systems.
He serves on the board of directors of Medical Advances, Inc., a manufacturer of
parts for medical diagnostic applications. Prior to its acquisition by the
Company, Mr. Kuyers also served as a director of H.H. West. He holds an
undergraduate degree in Business Administration and a M.B.A. from the University
of Michigan.
ALLON H. LEFEVER is a Director of the Company. Mr. Lefever has served as
Vice President of the Affiliated Companies for High Industries, Inc. since April
1988. From 1988 until its acquisition by the Company, Mr. Lefever served as the
Chairman of the Board and Chief Executive Officer of The Office Works, Inc. He
currently serves on the boards of directors of several private companies. Mr.
Lefever also is a director of the Lancaster Chamber of Commerce and serves on
the Business Advisory Board of Millersville State University. Mr. Lefever
received his undergraduate degree from Millersville State University and a
Masters in Economics from Pennsylvania State University.
EDWARD J. MATHIAS is a Director of the Company. Mr. Mathias is currently a
Managing Director of The Carlyle Group, a Washington, D.C. based merchant bank.
From 1971 through 1993, Mr. Mathias was with T. Rowe Price Associates, Inc., a
major investment management organization, most recently as a Managing Director.
He also served on the board of directors of T. Rowe Price and was a member of
its management committee. While at T. Rowe Price, Mr. Mathias served as Chairman
of various equity mutual funds, including the New Horizons Fund from 1982
through 1993. Mr. Mathias is the Chairman of the Board of Visitors at American
University's Kogod School of Business Administration and serves on the board of
overseers at The University of Pennsylvania's School of Arts and Sciences. Mr.
Mathias presently
37
<PAGE>
serves on the board of directors of Sirrom Capital Corporation, a publicly
traded small business investment company, Pathogenesis, a publicly traded
bio-technology company, and on the boards of directors of several private
companies. Mr. Mathias holds an undergraduate degree from The University of
Pennsylvania and an M.B.A. from the Harvard Business School.
JOHN A. QUELCH is a Director of the Company. Dr. Quelch is the Sebastian S.
Kresge Professor of Marketing at the Harvard Business School. Dr. Quelch is the
author of 12 books on marketing and is widely published in leading American
business publications. Dr. Quelch serves on the boards of directors of Reebok
International Ltd., a worldwide manufacturer and distributor of athletic
footwear and apparel (until May 1, 1997), and WPP Group plc, a marketing
services company that includes Ogilvy & Mather, J. Walter Thompson and Hill &
Knowlton. Dr. Quelch received an undergraduate degree from Oxford University in
England, an M.B.A. from The University of Pennsylvania, and M.S. and Doctor of
Business Administration degrees from Harvard University.
At each annual meeting of stockholders, directors are elected by the holders
of the Common Stock for a term of one year to succeed those directors whose
terms are expiring. All officers serve at the discretion of the Board of
Directors.
DIRECTORS' REMUNERATION
During the fiscal year ended April 30, 1996, fees for all directors
aggregated $30,000, including amounts paid for committee participation.
Beginning May 1, 1996, non-employee directors of the Company receive an annual
retainer of $25,000 and are reimbursed for all expenses relating to attendance
at meetings. Previously, the annual retainer for non-employee directors was
$10,000. In addition, each non-employee director who agreed to serve as such
prior to the consummation of the Company's initial public offering of its Common
Stock in February 1995 (Messrs. Lefever, Mathias and Quelch) received an option
to acquire 15,000 shares of Common Stock, exercisable in three equal
installments, commencing on the date of the grant and on each anniversary
thereof, at an exercise price per share of $8.00. Under the U.S. Office Products
Company 1996 Non-Employee Directors' Stock Plan (the "Directors' Plan"), non-
employee directors will receive options to acquire 21,000 shares of Common Stock
upon their initial election as a member of the Board of Directors and, in each
subsequent year that they are re-elected, if any, will receive options to
acquire 6,000 shares. In connection with the recent adoption of the Directors'
Plan, all four of the non-employee directors who served as directors during the
1996 fiscal year received upon their re-election options for 21,000 shares and
will receive, for the 1997 fiscal year, options for 6,000 shares (options for a
total of 27,000 shares). Directors who are employees of the Company do not
receive additional compensation for serving as directors. No non-employee member
of the Board of Directors was paid compensation during the 1996 fiscal year for
his service as a director of the Company other than pursuant to the standard
compensation arrangement described above. Messrs. Burgess, Copenhaver and Gezon
receive compensation for their services as employees of the Company pursuant to
employment agreements providing for annual base salary amounts of $93,000,
$150,000 and $113,000 respectively.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides, for the periods indicated, certain summary
information concerning the cash and non-cash compensation earned by or awarded
to (i) the Company's Chief Executive Officer and (ii) each of the Company's
other executive officers during or at the end of the Company's 1996 fiscal year
(collectively, the "named executive officers"). The Company was organized in
October 1994 and did not conduct any operations prior to February 1995.
38
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION --------------------
---------------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3) OPTIONS/SARS (#)(4)
- ----------------------------------------- --------- ---------- ---------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
Jonathan J. Ledecky...................... 1996 $ 250,000 -- -- 500,000
Chief Executive Officer and 1995 145,833 -- -- 100,000
Chairman of the Board
Timothy J. Flynn......................... 1996 250,000 $ 75,000 -- 310,000
President and Chief Operating Officer 1995 45,912 -- -- 25,000
Donald H. Platt.......................... 1996 150,000 125,000 $ 45,300 250,000
Senior Vice President--Chief 1995 -- -- -- --
Financial Officer
Martin S. Pinson(5)...................... 1996 150,000 25,000 -- 100,000
Executive Vice President 1995 57,757 -- -- 25,000
Mark D. Director(5)...................... 1996 38,061 75,000 -- 100,000
Executive Vice President, General 1995 -- -- -- --
Counsel and Secretary
Thomas J. Reaser(6)...................... 1996 150,000 -- -- 25,000
Executive Vice President 1995 23,958 -- -- 25,000
</TABLE>
- ------------------------
(1) The salary for Mr. Director for fiscal 1996 represents less than one full
year's compensation as he commenced employment with the Company during
fiscal 1996. Each salary shown for fiscal 1995 represents less than one full
year's compensation. No compensation was paid to any named executive officer
prior to February 23, 1995. With respect to Messrs. Ledecky and Pinson, the
salary listed for fiscal 1995 includes $99,921 and $30,000, respectively,
for services rendered prior to the commencement of operations by the
Company.
(2) In addition to bonuses related to 1996, the Company granted options in
fiscal 1997 as bonuses for fiscal 1996 to Messrs. Flynn, Platt, Pinson,
Director and Reaser to purchase 75,000, 75,000, 25,000, 75,000 and 25,000
shares of Common Stock, respectively, at an exercise price of $38.00 per
share.
(3) Includes $5,300 of automobile related expenses and $40,000 in moving related
expenses.
(4) Represents options granted during fiscal 1996 with respect to the stated
number of shares of Common Stock.
(5) Mr. Pinson was the Secretary of the Company until August 1996, at which time
Mr. Director was elected to the position of Secretary.
(6) Mr. Reaser resigned as Executive Vice President and Director of the Company
on December 13, 1996. He remains President of GOP, a subsidiary of the
Company.
EMPLOYMENT AGREEMENTS
Each named executive officer has entered into an employment agreement with
the Company. Pursuant to such employment agreement, the named executive officer
receives an annual base salary (which is reviewed and subject to upward
adjustment by the Compensation Committee of the Board of Directors on an annual
basis). In addition, each such officer is eligible to earn additional year-end
bonus compensation in an amount up to 100% of such employee's base salary,
payable out of a bonus pool
39
<PAGE>
determined by the Compensation Committee of the Board of Directors. Bonuses are
determined by measuring such officer's performance and the Company's overall
performance against target performance levels, typically based on the following
criteria: (i) the Company's overall profit; (ii) the Company's internal revenue
growth; and (iii) the Company's revenue growth due to acquisitions. Each
employment agreement is for an initial term of four years and automatically
renews at the end of the second year and each succeeding year for an additional
year, such that the remaining term of such agreements is at all times more than
two years, unless terminated or not renewed by the Company or the employee.
Each of the employment agreements provides that, in the event of a
termination of employment by the Company without cause, such employee shall be
entitled to receive from the Company such employee's then current salary for
whatever period is remaining under the term of the agreement. In the event of a
change in control of the Company (involving a change in the ownership of a
majority of the voting stock of the Company, a change in the majority of the
Board of Directors without approval of the current Board, a merger,
consolidation, recapitalization, reorganization or reverse stock split in which
the stockholders of the Company prior to such transaction do not continue to own
at least 75% of the stock of the Company following such transaction or the
approval by the stockholders of a plan of complete liquidation or disposition of
more than 50% of the Company's assets), the employee may elect to terminate his
employment and shall be entitled to receive his base salary at the rate then in
effect for the remaining term of the agreement or two years, whichever is
greater.
Each employment agreement contains a covenant not to compete with the
Company for a period equal to the longer of: (i) two years immediately following
the termination of employment; or (ii) in the case of a termination without
cause pursuant to which such employee is entitled to continue to receive his
base salary, for so long as the Company continues to pay such salary. Applicable
law may reduce the scope of the covenant not to compete. In the event that the
term of any such covenant is reduced in accordance with applicable law, the
compensation to which such employee is entitled shall be paid to the employee
only for such reduced period of time as the employee is so prohibited from
competing or is not so competing.
40
<PAGE>
OPTION GRANTS IN FISCAL 1996
The following tables set forth certain information concerning the grant and
exercise of options to purchase Common Stock of the Company during the last
completed fiscal year to each of the named executive officers. All of such
options vest in four equal annual installments, commencing on the first
anniversary of the date of grant.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS ANNUAL RATES OF STOCK PRICE
GRANTED TO APPRECIATION FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------------------------
NAME GRANTED(1) FISCAL YEAR PRICE DATE 0% 5% 10%
- -------------------------------- ---------- ------------- ----------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jonathan J. Ledecky............. 100,000 3.6% $ 12.50 6/12/2005 $ -- $ 786,118 $ 1,992,178
150,000 5.4% $ 14.25 10/12/2005 -- 1,344,262 3,406,625
250,000 9.0% $ 23.75 2/06/2006 -- 3,734,062 9,462,846
Timothy J. Flynn................ 75,000 2.7% $ 12.50 6/12/2005 -- 589,589 1,494,134
115,000 4.2% $ 14.25 10/12/2005 -- 1,030,601 2,611,745
120,000 4.3% $ 23.75 2/06/2006 -- 1,792,350 4,542,166
Donald H. Platt................. 100,000 3.6% $ 12.53 5/01/2005 -- 788,084 1,997,159
75,000 2.7% $ 14.25 10/12/2005 -- 672,131 1,703,312
75,000 2.7% $ 23.75 2/06/2006 -- 1,120,219 2,838,854
Martin S. Pinson................ 25,000 0.9% $ 12.50 6/12/2005 -- 196,530 498,045
50,000 1.8% $ 14.25 10/12/2005 -- 448,087 1,135,542
25,000 0.9% $ 23.75 2/06/2006 -- 373,406 946,285
Mark D. Director................ 100,000 3.6% $ 16.31 12/05/2005 -- 1,025,884 2,599,792
Thomas J. Reaser(3)............. 25,000 0.9% $ 12.50 6/12/2005 -- 196,530 498,045
All Optionees................... 2,764,591 100.0% $ 18.83 Various -- 32,738,524 82,965,847
</TABLE>
- ------------------------
(1) The options granted are non-qualified stock options, which are exercisable
at the market price on the date of grant beginning one year from the date of
grant in cumulative yearly amounts of 25% of the shares and expire ten years
from the date of grant. The options become fully exercisable upon a change
in control, as defined in the Incentive Plan.
(2) The dollar amounts under these columns are the results of calculations at
assumed annual rates of stock price appreciation of zero percent (0%), five
percent (5%) and ten percent (10%). These assumed rates of growth were
selected by the Securities and Exchange Commission for illustration purposes
only. They are not intended to forecast possible future appreciation, if
any, of the Company's stock price. No gain to the optionees is possible
without an increase in stock prices, which will benefit all stockholders. A
zero percent (0%) gain in stock price will result in a zero percent (0)%
benefit to optionees.
(3) Mr. Reaser resigned as Executive Vice President and Director of the Company
on December 13, 1996. He remains President of GOP, a subsidiary of the
Company.
41
<PAGE>
OPTION EXERCISES IN FISCAL 1996 AND VALUE OF OPTIONS AT APRIL 30, 1996
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT FISCAL IN-THE-MONEY(3) OPTIONS AT
SHARES ACQUIRED VALUE YEAR END (#) FISCAL YEAR END ($)(4)
ON EXERCISE REALIZED -------------------------- --------------------------
NAME (#)(1) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- --------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan J. Ledecky................ -- -- 25,000 575,000 $ 700,000 $ 10,775,000
Timothy J. Flynn................... -- -- 6,250 328,750 175,000 6,258,750
Donald H. Platt.................... -- -- -- 250,000 -- 4,897,000
Martin S. Pinson................... -- -- 6,250 118,750 175,000 2,506,250
Mark D. Director................... -- -- -- 100,000 -- 1,968,750
Thomas J. Reaser................... -- -- 6,250 43,750 175,000 1,112,500
</TABLE>
- ------------------------
(1) Represents the number of shares received upon exercise or, if no shares were
received, the number of shares with respect to which the options were
exercised.
(2) The value of exercised options represents the difference between the
exercise price of such options and the closing market price of the Company's
Common Stock on the date of exercise.
(3) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options.
(4) The value of unexercised options represents the difference between the
exercise price of such options and $36.00, the closing market price of the
Company's Common Stock at April 30, 1996.
CERTAIN TRANSACTIONS
In connection with the acquisition by the Company of businesses, the Company
may issue shares of Common Stock to persons who become directors, executive
officers or holders of 5% of the Common Stock of the Company. During the 1996
fiscal year, the Company issued shares of Common Stock as consideration for
shares of the businesses sold to the Company by the following persons who became
directors of the Company: Mr. Copenhaver--116,906 shares; Mr. Gezon--119,512
shares; and Mr. Phillips--1,333,857 shares. In addition, in February and June
1996, the Company issued an aggregate of 2,200,145 shares of Common Stock
(equivalent to 5.3% of the outstanding shares as of the September 17, 1996) to
Eric Watson, who is the president of the Company's international division, as
consideration for his interests in Blue Star. The Company acquired 51% of the
shares of stock of Blue Star in February 1996 for $10 million in cash and
1,212,121 shares of Common Stock with a market value of $20 million and acquired
the remaining 49% of the shares of stock of Blue Star in June 1996 in exchange
for 1,052,632 shares of Common Stock.
The Company leases office, warehouse and retail store space from two
partnerships, a principal partner of which is Mr. Kuyers, a director of the
Company. The Company believes that such leases are on terms not less favorable
than would be obtainable in an arm's-length transaction from an unaffiliated
third party. The amounts paid to these partnerships by The H.H. West Company, a
wholly owned subsidiary of the Company, for the 1996 fiscal year was
approximately $406,900, and, pursuant to the terms of the lease agreement, will
increase by five percent (5%) for fiscal 1997.
Mr. Phillips entered into an employment agreement with the Company on August
2, 1995 pursuant to which he is paid $24,000 per year for consulting services
rendered to the Company in connection with acquisitions and the operations of
Mills Morris Arrow, Inc., a wholly owned subsidiary of the Company.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 26, 1997, information with
respect to beneficial ownership of the Company's Common Stock by (i) each
director, (ii) each executive officer, (iii) the executive officers and
directors as a group, and (iv) each person known to the Company who beneficially
owns 5% or more of the outstanding shares of the Common Stock. Unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
NAME NUMBER PERCENT
- ---------------------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Jonathan J. Ledecky(1)............................................................ 1,793,750 3.0%
Clifton B. Phillips(2)(3)......................................................... 1,219,857 2.0%
Timothy J. Flynn(3)(4)............................................................ 536,282 *
David C. Copenhaver(3)(5)......................................................... 220,498 *
Edward J. Mathias(6).............................................................. 196,250 *
Martin S. Pinson(7)............................................................... 138,301 *
David C. Gezon(3)(8).............................................................. 118,583 *
Donald H. Platt(9)................................................................ 88,704 *
Milton H. Kuyers(3)(10)........................................................... 86,521 *
Jack L. Becker, Jr.(3)(11)........................................................ 36,648 *
John K. Burgess(12)............................................................... 31,896 *
Allon H. Lefever(3)(13)........................................................... 31,200 *
Mark D. Director(14).............................................................. 25,162 *
John A. Quelch(15)................................................................ 15,000 *
Thomas Morgan(16)................................................................. 400 *
All executive officers and directors as a group................................... 4,539,052 7.5%
5% STOCKHOLDERS
Pilgrim Baxter & Associates(17)................................................... 4,128,400 6.8%
1255 Drummers Lane, Suite 300
Wayne, PA 19087-1950
FMR Corp.(18)..................................................................... 3,983,470 6.6%
82 Devonshire Street
Boston, MA 02109
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes 175,000 shares which may be acquired upon exercise of options which
currently are exercisable or are exercisable within 60 days. Mr. Ledecky is
the Chief Executive Officer and Chairman of the Board of Directors of the
Company.
(2) Mr. Phillips is a Director of the Company.
(3) These persons were stockholders, executive officers, directors or employees
of entities acquired by, or combined into, the Company.
(4) Includes 90,000 shares which may be acquired upon exercise of options which
currently are exercisable or are exercisable within 60 days. Mr. Flynn is
the President and Chief Operating Officer and a Director of the Company.
(5) Includes 53,163 shares held in a trust in which Mr. Copenhaver has a 50%
beneficial interest and of which Mr. Copenhaver is a co-trustee. Mr.
Copenhaver is a Director of the Company and Vice President of Operations,
North American Office Products Group.
(6) Includes 28,500 shares which may be acquired upon exercise of options which
currently are exercisable or are exercisable within 60 days, 50,000 shares
owned by Mr. Mathias' wife and 181,250 shares that are subject to
contractual restrictions on the resale thereof. Mr. Mathias is a Director of
the Company.
43
<PAGE>
(7) Includes 100,000 shares owned by the Pinson and Associate Profit Sharing
Plan of which Mr. Pinson is the trustee and beneficiary and 37,500 shares
which may be acquired upon exercise of options which currently are
exercisable or are exercisable within 60 days. Martin S. Pinson is an
Executive Vice President of the Company.
(8) Includes 2,500 shares which may be acquired upon the exercise of options
which are currently exercisable and 74,688 shares that are subject to
contractual restrictions on the resale thereof. Mr. Gezon is a Director of
the Company and President of C.W. Mills, a subsidiary of the Company.
(9) Includes 62,500 shares which may be acquired upon the exercise of options
which currently are exercisable or are exercisable within 60 days. Mr. Platt
is Senior Vice President, Chief Financial Officer and Treasurer of the
Company.
(10) Includes 13,500 shares which may be acquired upon the exercise of options
which are currently exercisable and 86,251 shares held by the Kuyers 1996
Joint Revocable Trust in which Mr. Kuyers serves as a trustee; 85,107 of
these shares are subject to contractual restrictions on the resale thereof.
Mr. Kuyers is a Director of the Company.
(11) Includes 31,250 shares which may be acquired upon the exercise of options
which currently are exercisable or are exercisable within 60 days. Mr.
Becker is a Director of the Company and President of Dameron-Pierson, a
subsidiary of the Company.
(12) Includes 36,250 shares which may be acquired upon the exercise of options
which currently are exercisable or are exercisable within 60 days and 3,100
shares that are subject to contractual restrictions. Mr. Burgess is a
Director of the Company and President of BAT, a subsidiary of the Company.
(13) Includes 28,500 shares which may be acquired upon the exercise of options
which currently are exercisable or are exercisable within 60 days and 17,900
shares that are subject to contractual restrictions. Mr. Lefever is a
Director of the Company and was Chief Executive Officer and Chairman of the
Board of The Office Works, Inc. prior to its acquisition by the Company.
(14) Includes 25,000 shares which may be acquired upon the exercise of options
which currently are exercisable or are exercisable within 60 days. Mr.
Director is Executive Vice President, General Counsel and Secretary of the
Company.
(15) Includes 28,500 shares which may be acquired upon the exercise of options
which currently are exercisable or are exercisable within 60 days. Mr.
Quelch is a Director of the Company.
(16) Includes 200 shares owned by Mr. Morgan and 200 shares owned by Mr.
Morgan's wife. Mr. Morgan is a Director of the Company and President--North
American Office Products Group.
(17) Based upon a Schedule 13G filed on March 12, 1997.
(18) Based upon a Schedule 13G filed on February 14, 1997.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of March 26, 1997, the Company's authorized capital stock consists of
500,000,000 shares of Common Stock, par value $.001 per share, and 500,000
shares of preferred stock, par value $.001 per share (the "Preferred Stock"). As
of March 26, 1997, the Company had outstanding approximately 60,693,638 shares
of Common Stock and no shares of Preferred Stock. As of March 26, 1997, there
were approximately 614 record holders of Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of the Common Stock are entitled to such dividends as may be declared in
the discretion of the Board of Directors out of funds legally available
therefor. See "Dividend Policy." The holders of Common Stock are entitled to
share ratably in the net assets of the Company upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. The holders of Common Stock have no preemptive
rights to purchase shares of stock of the Company. Shares of Common Stock are
not subject to any redemption provisions and are not convertible into any other
securities of the Company. All outstanding shares of Common Stock are, and the
shares of Common Stock to be issued by the Company upon conversion of the
Offered Notes will be, upon payment therefor, fully paid and non-assessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Amended and Restated Certificate of Incorporation and
limitations prescribed by law, the Board of Directors is expressly authorized to
adopt resolutions to issue the shares, to fix the number of shares and to change
the number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences of the shares constituting
any class or series of the Preferred Stock, in each case without any further
action or vote by the stockholders. The Company has no current plans to issue
any shares of Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
45
<PAGE>
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation if such affiliate or associate was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. The Company has not adopted such an
amendment to its Amended and Restated Certificate of Incorporation or Amended
and Restated Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Amended and Restated Certificate of Incorporation
and under Delaware law, directors of the Company are not liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases illegal under
Delaware law or any transaction in which a director has derived an improper
personal benefit.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
PLAN OF DISTRIBUTION
The Company will issue the Common Stock from time to time in connection with
the acquisition by the Company of other businesses, assets or securities. It is
expected that the terms of the acquisitions involving the issuance of securities
covered by this Prospectus will be determined by direct negotiations with the
owners or controlling persons of the businesses, assets or securities to be
acquired by the Company. No underwriting discounts or commissions will be paid,
although finder's fees may be paid from time to time with respect to specific
mergers or acquisitions. Any person receiving such fees may be deemed to be an
underwriter within the meaning of the Securities Act. This Prospectus can be
used for the resale of shares of Common Stock by persons named in further
supplements to this Prospectus.
46
<PAGE>
RESTRICTIONS ON RESALE
Affiliates of entities acquired by the Company who do not become affiliates
of the Company may not resell Common Stock registered under the Registration
Statement to which this Prospectus relates except pursuant to an effective
registration statement under the Securities Act covering such shares, or in
compliance with Rule 145 promulgated under the Securities Act or another
applicable exemption from the registration requirements of the Securities Act.
Generally, Rule 145 permits such affiliates to sell such shares immediately
following the acquisition in compliance with certain volume limitations and
manner of sale requirements. Under Rule 145, sales by such affiliates during any
three-month period cannot exceed the greater of (i) 1% of the shares of Common
Stock of the Company outstanding and (ii) the average weekly reported volume of
trading of such shares of Common Stock on all national securities exchanges
during the four calendar weeks preceding the proposed sale. These restrictions
will cease to apply under most other circumstances if the affiliate has held the
Common Stock for at least one year, provided that the person or entity is not
then an affiliate of the Company. Individuals who are not affiliates of the
entity being acquired and do not become affiliates of the Company will not be
subject to resale restrictions under Rule 145 and, unless otherwise
contractually restricted, may resell Common Stock immediately following the
acquisition without an effective registration statement under the Securities
Act. The ability of affiliates to resell shares of the Common Stock under Rule
145 will be subject to the Company having satisfied its Exchange Act reporting
requirements for specified periods prior to the time of sale.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered by this Prospectus
has been passed upon for the Company by Morgan, Lewis & Bockius LLP, 1800 M
Street, N.W., Washington, D.C. 20036.
EXPERTS
The consolidated financial statements of the Company as of April 30, 1996
and 1995, and for each year in the three year period ended April 30, 1996,
except as they relate to School Specialty, Inc., The Re-Print Corporation,
Fortran Corporation, Bay State Computer Group, Inc., SFI Corp. and Hano Document
Printers, Inc., wholly owned subsidiaries of the Company, have been audited by
Price Waterhouse LLP, independent accountants, and insofar as they relate to
School Speciality, Inc., The Re-Print Corporation, Fortran Corporation, Bay
State Computer Group, Inc., SFI Corp. and Hano Document Printers, Inc., by Ernst
& Young LLP, BDO Seidman, LLP, Parent McLaughlin & Nangle, Rubin, Koehmstedt &
Nadler, PLC and KPMG Peat Marwick LLP whose reports thereon appear herein. Such
financial statements have been incorporated herein by reference in reliance upon
the reports of such independent accountants given on the authority of such firms
as experts in auditing and accounting.
The financial statements of Emmons-Napp Office Products, Inc. as of December
31, 1995 and 1994 and for the years then ended; the financial statements of
Raleigh Office Supply Company as of August 31, 1995 and for the year then ended;
the financial statements of McWhorter Stationery Co. as of March 31, 1996 and
for the year then ended; the financial statements of Mark's Office Furniture as
of March 31, 1996 and for the year then ended; the financial statements of
David's Office Supply and Furniture Company, Inc. as of May 31, 1996 and for the
year then ended; the financial statements of Mile High Office Supply, Inc. as of
December 31, 1995 and 1994 and for the years then ended; the financial
statements of WBT Holdings, Inc. (d.b.a. Office Furniture Distributors) as of
December 31, 1995 and for the year then ended; the financial statements of
Carolina Office Equipment Company as of March 31, 1996 and for the year then
ended; and the financial statements of The Office Furniture Store, Inc. as of
December 31, 1995 and for the year then ended have been included herein or
incorporated herein by reference in reliance on the reports of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
47
<PAGE>
The financial statements of Blue Star as of March 31, 1995 and for the year
then ended have been included herein in reliance on the report of Price
Waterhouse (Auckland, New Zealand), independent accountants, given on the
authority of such firm as experts in auditing and accounting.
The financial statements of the MISSCO Commercial Division as of March 31,
1995 and 1994, and for the year ended March 31, 1995, the nine-month period
ended March 31, 1994 and the year ended June 30, 1993 and the financial
statements of SFI Corp and Hano Document Printers, Inc., as of December 31, 1995
and for the year then ended have been included herein or incorporated herein by
reference in reliance on the reports of KPMG Peat Marwick LLP, independent
certified public accountants, also included herein, and upon the authority of
said firm as experts in auditing and accounting.
The financial statements of New Office Plus, Inc. as of December 31, 1995
and for the year then ended, have been included herein in reliance on the report
of Shinners, Hucovski & Co., independent accountants, given on the authority of
such firm as experts in auditing and accounting.
The financial statements of American Loose Leaf/Business Products, Inc. as
of September 30, 1995 and for the year then ended, have been included herein in
reliance on the report of Swink, Fiehler and Hoffman, PC, independent
accountants, given on the authority of such firm as experts in auditing and
accounting.
The financial statements of The Re-Print Corporation as of December 31, 1995
and 1994 and for the years then ended, have been incorporated herein by
reference in reliance on the report of BDO Seidman, LLP, independent
accountants, given on the authority of such firm as experts in auditing and
accounting.
The financial statements of Pear Commercial Interiors as of December 31,
1995 and for the year then ended, have been incorporated herein by reference in
reliance on the report of Ehrhardt Keefe Steiner & Hottman P.C., independent
accountants, given on the authority of such firm as experts in auditing and
accounting.
The financial statements of Arbuckle Foods Inc. as of August 31, 1995 and
for the year then ended, have been incorporated herein by reference in reliance
on the report of Thorne Little, independent accountants, given on the authority
of such firm as experts in auditing and accounting.
The financial statements of Prudential of Florida, Inc. as of December 31,
1995 and for the year then ended, have been incorporated herein by reference in
reliance on the report of Joel S. Baum P.A., independent accountant, given on
the authority of such firm as experts in auditing and accounting.
The financial statements of Wang of New Zealand as of June 30, 1995 and for
the year then ended, have been included herein in reliance on the report of
Ernst & Young (Auckland, New Zealand), independent accountants, given on the
authority of such firm as experts in auditing and accounting.
The financial statements of Whitcoulls Group Limited as of June 30, 1995,
1994, and 1993 and for the years then ended included herein have been audited by
Deloitte Touche Tohmatsu (Auckland, New Zealand), independent auditors, as
stated in their reports, which are included herein, and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The financial statements of International Interiors, Inc. as of September
30, 1995 and 1994 and for the years then ended have been incorporated herein by
reference in reliance on the report of Petherbridge, Davis & Company, PA,
independent accountants, given on the authority of such firm as experts in
auditing and accounting.
The financial statements of Ausdoc Office Pty Ltd as of June 30, 1996 and
1995 and for the years then ended; the financial statements of Canberra
Wholesale Stationers Pty Ltd as of June 30, 1996 and 1995 and for the years then
ended; the financial statements of H & P Stationery Pty Ltd as of June 30, 1996
and 1995 and for the years then ended; and the financial statements Perth
Stationery Supplies Pty Ltd as of June 30,
48
<PAGE>
1996 and 1995 and for the years then ended, have been included herein in
reliance upon the report of Day Neilson, independent accountants, given on the
authority of such firm as experts in auditing and accounting.
The financial statements of Fortran Corp. as of March 31, 1996 and for the
year then ended have been incorporated by reference herein in reliance on the
report of Rubin, Koehmstedt & Nadler, PLC, independent accountants, given on the
authority of such firm as experts in auditing and accounting.
The financial statements of PC Direct Limited as of March 31, 1996 and for
the year then ended have been incorporated by reference herein in reliance on
the report of KPMG (Auckland, New Zealand), independent accountants, given on
the authority of such firm as experts in auditing and accounting.
The financial statements of Bay State Computer Group, Inc. as of March 31,
1996 and for the year then ended have been incorporated by reference herein in
reliance on the report of Parent, McLaughin & Nangle, independent accountants,
given on the authority of such firm as experts in auditing and accounting.
49
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
U.S. OFFICE PRODUCTS COMPANY
Report of Price Waterhouse LLP, Independent Accountants.............................................. F-7
Report of Ernst & Young LLP, Independent Auditors.................................................... F-8
Report of BDO Seidman, LLP Independent Auditors...................................................... F-9
Report of Parent, McLaughlin & Nangle................................................................ F-10
Report of Rubin, Koehmstedt & Nadler, PLC............................................................ F-11
Reports of KPMG Peat Marwick LLP..................................................................... F-12-13
Consolidated Balance Sheet for the years ended April 30, 1995 and April 30, 1996 and for the nine
months ended January 25, 1997 (unaudited).......................................................... F-14
Consolidated Statement of Income for the years ended April 30, 1994, April 30, 1995 and April 30,
1996 and for the nine months ended January 31, 1996 (unaudited) and January 25, 1997 (unaudited)... F-15
Consolidated Statement of Stockholders' Equity for the fiscal years ended April 30, 1994, 1995 and
1996 and the nine months ended January 25, 1997.................................................... F-16-17
Consolidated Statement of Cash Flows for the years ended April 30, 1994, April 30, 1995 and April 30,
1996 and for the nine months ended January 31, 1996 (unaudited) and January 25, 1997 (unaudited)... F-18-19
Notes to Consolidated Financial Statements........................................................... F-20-35
Introduction to Pro Forma Financial Information...................................................... F-36-37
Pro Forma Combined Balance Sheet at January 25, 1997 (unaudited)..................................... F-38
Pro Forma Combined Statement of Income for the year ended April 30, 1996 (unaudited)................. F-39
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997 (unaudited)........ F-40
Pro Forma Combined Statement of Income for the nine months ended January 31, 1996 (unaudited)........ F-41
Pro Forma Combined Statement of Income for the year ended April 30, 1995 (unaudited)................. F-42
Pro Forma Combined Statement of Income for the year ended April 30, 1994 (unaudited)................. F-43
Notes to Pro Forma Combined Financial Statements..................................................... F-44-45
MISSCO CORPORATION COMMERCIAL DIVISION
Report of KPMG Peat Marwick LLP, Independent Auditors................................................ F-46
Balance Sheets as March 31, 1994 and 1995 and September 30, 1995 (unaudited)......................... F-47
Statements of Operations for the year ended June 30, 1993, the nine months ended March 31, 1994 and
the year ended March 31, 1995 and for the six months ended September 30, 1994 (unaudited) and 1995
(unaudited)........................................................................................ F-48
Statements of Divisional Equity (Deficit) for the year ended June 30, 1993, the nine months ended
March 31, 1994 and the year ended March 31, 1995, and for the six months ended September 30, 1995
(unaudited)........................................................................................ F-49
Statements of Cash Flows for the year ended June 30, 1993, the nine months ended March 31, 1994 and
the year ended March 31, 1995 and for the six months ended September 30, 1994 (unaudited) and 1995
(unaudited)........................................................................................ F-50
Notes to Financial Statements........................................................................ F-51-58
</TABLE>
F-1
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
EMMONS-NAPP OFFICE PRODUCTS, INC. COMMERCIAL DIVISION
Report of Price Waterhouse LLP, Independent Accountants.............................................. F-59
Balance Sheet as of December 31, 1994 and 1995....................................................... F-60
Statement of Operations for the years ended December 31, 1994 and 1995............................... F-61
Statement of Stockholders' Equity for the years ended December 31, 1994 and 1995..................... F-62
Statement of Cash Flows for the years ended December 31, 1994 and 1995............................... F-63
Notes to Financial Statements........................................................................ F-64
BLUE STAR GROUP LIMITED
Report of Price Waterhouse, Independent Accountants.................................................. F-68
Consolidated Balance Sheet as of March 31, 1995 and December 31, 1995 (unaudited).................... F-69
Consolidated Statement of Operations for the year ended March 31, 1995 and for the nine months ended
December 31, 1994 (unaudited) and 1995 (unaudited)................................................. F-70
Consolidated Statement of Shareholders' Equity for the year ended March 31, 1995 and for the nine
months ended December 31, 1995 (unaudited)......................................................... F-71
Consolidated Statement of Cash Flows for the year ended March 31, 1995 and for the nine months ended
December 31, 1994 (unaudited) and 1995 (unaudited)................................................. F-72
Notes to Consolidated Financial Statements........................................................... F-73
RALEIGH OFFICE SUPPLY COMPANY
Report of Price Waterhouse LLP, Independent Accountants.............................................. F-79
Balance Sheet as of August 31, 1995 and February 28, 1996 (unaudited)................................ F-80
Statement of Operations for the year ended August 31, 1995 and for the six months ended February 28,
1995 (unaudited) and 1996 (unaudited).............................................................. F-81
Statement of Shareholders' Equity at August 31, 1995 and at February 28, 1996 (unaudited)............ F-82
Statement of Cash Flows for the year ended August 31, 1995 and for the six months ended February 28,
1995 (unaudited) and 1996 (unaudited).............................................................. F-83
Notes to Financial Statements........................................................................ F-84
AMERICAN LOOSE LEAF/BUSINESS PRODUCTS, INC.
Report of Swink, Fiehler & Hoffman, Independent Auditors............................................. F-88
Consolidated Balance Sheets as of September 30, 1995 and June 30, 1996 (unaudited)................... F-89
Consolidated Statements of Income and Retained Earnings for the year ended September 30, 1995 and for
the nine months ended June 30, 1995 (unaudited) and 1996 (unaudited)............................... F-90
Consolidated Statements of Cash Flows for the year ended September 30, 1995 and for the nine months
ended June 30, 1995 (unaudited) and 1996 (unaudited)............................................... F-91
Supplemental Disclosures of Cash Flow Information for the year ended September 30, 1995 and for the
nine months ended June 30, 1995 (unaudited) and 1996 (unaudited)................................... F-92
Notes to the Consolidated Financial Statements....................................................... F-93
</TABLE>
F-2
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
NEW OFFICE PLUS, INC.
Report of Shinners, Hucovski and Company, S.C. Independent Auditors.................................. F-98
Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited)................................ F-99
Statements of Income for the year ended December 31, 1995 and for the three months ended March 31,
1996 (unaudited) and 1995 (unaudited).............................................................. F-101
Statements of Retained Earnings for the year ended December 31, 1995 and for the three months ended
March 31, 1996 (unaudited)......................................................................... F-102
Statements of Cash Flows for the year ended December 31, 1995 and three months ended March 31, 1996
(unaudited) and 1995 (unaudited)................................................................... F-103
Notes to Financial Statements........................................................................ F-105
CAROLINA OFFICE EQUIPMENT COMPANY
Report of Price Waterhouse LLP, Independent Accountants.............................................. F-111
Balance Sheet as of March 31, 1996................................................................... F-112
Statement of Operations for the year ended March 31, 1996............................................ F-113
Statement of Cash Flows for the year ended March 31, 1996............................................ F-114
Statement of Shareholders' Equity at March 31, 1996.................................................. F-116
Notes to Financial Statements........................................................................ F-117
WANG OF NEW ZEALAND
Report of Ernst & Young, Independent Auditors........................................................ F-121
Statement of Profit and Loss and Retained Earnings for the year ended June 30, 1995 and 1994......... F-122
Balance Sheet as of June 30, 1995 and 1994........................................................... F-123
Notes to the Financial Statements.................................................................... F-124
Consolidated Statement of Financial Performance for the six months ended December 31, 1995
(unaudited) and 1994 (unaudited) and for the twelve months ended June 30, 1995..................... F-128
Consolidated Statement of Movements in Equity for the six months ended December 31, 1995 (unaudited)
and 1994 (unaudited) and for the twelve months ended June 30, 1995................................. F-128
Consolidated Statement of Financial Position for the six months ended December 31, 1995 (unaudited)
and 1994 (unaudited) and for the twelve months ended June 30, 1995................................. F-129
Consolidated Statement of Cash Flows for the six months ended December 31, 1995 (unaudited) and 1994
(unaudited) and for the twelve months ended June 30, 1995.......................................... F-130
</TABLE>
F-3
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
WHITCOULLS GROUP LIMITED
Consolidated Statement of Financial Performance for the six months ended December 31, 1995
(unaudited) and 1994 (unaudited) and for the year ended June 30, 1995 (unaudited).................. F-132
Consolidated Statement of Movements in Equity for the six months ended December 31, 1995 (unaudited)
and 1994 (unaudited) and for the year ended June 30, 1995 (unaudited).............................. F-132
Consolidated Statement of Financial Position as at December 31, 1995 (unaudited) and 1994 (unaudited)
and June 30, 1995 (unaudited)...................................................................... F-133
Consolidated Statement of Cash Flows for the six months ended December 31, 1995 (unaudited) and 1994
(unaudited) and for the year ended June 30, 1995 (unaudited)....................................... F-134
Reconciliation of Consolidated Net Profit After Taxation to Net Cash Flows from Operating Activities
for the six months ended December 31, 1995 (unaudited) and 1994 (unaudited) and for the year ended
June 30, 1995 (unaudited).......................................................................... F-135
Notes to the Unaudited Financial Statements.......................................................... F-136
Report of Deloitte Touche Tohmatsu, Independent Auditors............................................. F-138
Profit and Loss Account for the years ended June 30, 1995 and 1994................................... F-139
Balance Sheet as of June 30, 1995 and 1994........................................................... F-140
Statement of Cash Flows for the years ended June 30, 1995 and 1994................................... F-141
Reconciliation of Net Cash Flows from Operating Activities to Net Profit After Taxation for the years
ended June 30, 1995 and 1994....................................................................... F-142
Notes to the Financial Statements.................................................................... F-143
Report of Deloitte Touche Tohmatsu, Independent Auditors............................................. F-160
Consolidated Profit and Loss Account for the years ended June 30, 1994 and 1993...................... F-161
Consolidated Balance Sheet as of June 30, 1994 and 1993.............................................. F-162
Consolidated Statement of Cash Flows for the years ended June 30, 1994 and 1993...................... F-163
Reconciliation of Consolidated Net Cash Flows from Operating Activities to Net Profit After Taxation
for the years ended June 30, 1994 and 1993......................................................... F-164
Notes to the Financial Statements.................................................................... F-165
Profit and Loss Account for the year ended June 30, 1996............................................. F-181
Statements of Movements in Equity for the year ended June 30, 1996................................... F-182
Balance Sheet as of June 30, 1996.................................................................... F-183
Statement of Cash Flows for the year ended June 30, 1996............................................. F-184
Reconciliation of Net Cash Flows from Operating Activities to Net Profit after Taxation.............. F-185
Notes to the Financial Statements.................................................................... F-186
Report of Deloitte Touche Tohmatsu, Independent Auditors............................................. F-204
</TABLE>
F-4
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
THE OFFICE FURNITURE STORE
Report of Price Waterhouse LLP, Independent Accountants.............................................. F-205
Balance Sheet as of December 31, 1995 and June 30, 1996 (unaudited).................................. F-206
Statement of Income for the year ended December 31, 1995 and for the six months ended June 30, 1995
(unaudited) and 1996 (unaudited)................................................................... F-207
Statement of Changes in Stockholders' Equity at December 31, 1995 and June 30, 1996 (unaudited)...... F-208
Statement of Cash Flows for the year ended December 31, 1995 and for the six months ended June 30,
1995 (unaudited) and 1996 (unaudited).............................................................. F-209
Notes to Financial Statements........................................................................ F-210
AUSDOC OFFICE PTY LTD
Directors' Report.................................................................................... F-214
Profit and Loss Account for the years ended June 30, 1996 and 1995................................... F-215
Balance Sheet as of June 30, 1996 and 1995........................................................... F-216
Statement of Cash Flows for the years ended 1996 and 1995............................................ F-217
Notes to and Forming Part of the Accounts............................................................ F-218
Statement by Directors............................................................................... F-227
Report of Day Neilson, Independent Auditors.......................................................... F-228
H&P STATIONERY PTY LTD
Directors' Report.................................................................................... F-229
Profit and Loss Account for the years ended June 30, 1996 and 1995................................... F-230
Balance Sheet as at June 30, 1996 and 1995........................................................... F-231
Statement of Cash Flows for the years ended 1996 and 1995............................................ F-232
Notes to and Forming Part of the Accounts............................................................ F-233
Statement by Directors............................................................................... F-243
Report of Day Neilson, Independent Auditors.......................................................... F-244
CANBERRA WHOLESALE STATIONERS PTY LTD
Directors' Report.................................................................................... F-245
Profit and Loss Account for the years ended June 30, 1996 and 1995................................... F-246
Balance Sheet as at June 30, 1996 and 1995........................................................... F-247
Statement of Cash Flows for the years ended 1996 and 1995............................................ F-248
Notes to and Forming Part of the Accounts............................................................ F-249
Statement by Directors............................................................................... F-257
Report of Day Neilson, Independent Auditors.......................................................... F-258
</TABLE>
F-5
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PERTH STATIONERY SUPPLIES PTY LTD
Directors' Report.................................................................................... F-259
Profit and Loss Account for the years ended June 30, 1996 and 1995................................... F-260
Balance Sheet as at June 30, 1996 and 1995........................................................... F-261
Statement of Cash Flows for the years ended 1996 and 1995............................................ F-262
Notes to and Forming Part of the Accounts............................................................ F-263
Statement by Directors............................................................................... F-269
Report of Day Neilson, Independent Auditors.......................................................... F-270
MARKS OFFICE FURNITURE
Report of Price Waterhouse, Independent Accountants.................................................. F-271
Balance Sheet as of March 31, 1996................................................................... F-272
Statement of Operations for the twelve months ended March 31, 1996................................... F-273
Statement of Changes in Owner's Equity for the twelve months ended March 31, 1996.................... F-274
Statement of Cash Flows for the twelve months ended March 31, 1996................................... F-275
Notes to Financial Statements........................................................................ F-277
</TABLE>
F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
U.S. Office Products Company
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of U.S. Office Products Company and
its subsidiaries at April 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.
Price Waterhouse LLP
Minneapolis, Minnesota
May 31, 1996, except as to the third paragraph
of Note 3 which is as of January 24, 1997, and
Note 14, which is as of July 10, 1996
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the balance sheets of School Specialty, Inc. (formerly known
as EDA Corporation) (the Company) as of December 31, 1995 and 1994, and the
related statements of operations, changes in shareholders' deficit and cash
flows for the years then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
February 2, 1996
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheets of The Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for three years ended December 31, 1995,
1994, and 1993 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for three years ended December 31, 1995, 1994, and 1993 in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
Atlanta, Georgia
February 8, 1996
F-9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
BAY STATE COMPUTER GROUP, INC.
Boston, Massachusetts
We have audited the accompanying balance sheets of Bay State Computer Group,
Inc. as of March 31, 1996 and 1995, and the related statements of earnings and
retained earnings, and cash flows for the three years ended March 31, 1996, 1995
and 1994 (none of which are presented herein separately). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bay State Computer Group,
Inc. as of March 31, 1996 and 1995, and the results of its operations and its
cash flows for the three years ended March 31, 1996, 1995, and 1994 in
conformity with generally accepted accounting principles.
[SIGNATURE APPEARS HERE]
Certified Public Accountants
May 23, 1996, except for Note N
as to which the date is
October 14, 1996
[LETTERHEAD OF PARENT, MCLAUGHLIN & NANGLE APPEARS HERE]
F-10
<PAGE>
[LETTERHEAD OF RUBIN, KOEHMSTEDT & NADLER, PLC]
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Fortran Corp.
Newington, Virginia
We have audited the accompanying balance sheet of Fortran Corp. as of March
31, 1996, and 1995 and the related statements of earnings, changes in
stockholders' equity, and cash flows for the years ended March 31, 1996, 1995,
and 1994 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fortran Corp. as of March
31, 1996, and 1995 and the results of its operations and its cash flows for
three years ended March 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
/S/ RUBIN, KOEHMSTEDT & NADLER
June 7, 1996, except for Note 9,
as to which the date is October 24, 1996
F-11
<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, which are not
included herein. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Norfolk, Virginia
August 28, 1996
F-12
<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, which are not included herein. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SFI Corp. as of December 31,
1995 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-13
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1995 1996
---------- ---------- JANUARY 25,
1997
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 19,183 $ 177,635 $ 56,462
Accounts receivable, less allowance for doubtful accounts of $1,301,
$4,304 and $7,857, respectively........................................ 122,847 206,140 336,434
Lease receivables........................................................ 24,807 30,442
Inventories.............................................................. 63,056 128,396 250,795
Prepaid expenses and other current assets................................ 6,670 28,122 52,831
---------- ---------- ------------
Total current assets................................................. 211,756 565,100 726,964
Property and equipment, net................................................ 40,617 95,411 202,678
Intangible assets, net..................................................... 27,154 143,452 585,841
Lease receivables.......................................................... 47,005 44,423
Other assets............................................................... 5,620 19,751 68,401
---------- ---------- ------------
Total assets......................................................... $ 285,147 $ 870,719 $ 1,628,307
---------- ---------- ------------
---------- ---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................................... $ 62,156 $ 134,590 $ 367,225
Accounts payable......................................................... 61,456 114,871 172,555
Accrued compensation..................................................... 10,342 20,207 38,966
Other accrued liabilities................................................ 15,619 29,919 69,342
---------- ---------- ------------
Total current liabilities............................................ 149,573 299,587 648,088
Long-term debt............................................................. 32,696 199,504 389,453
Deferred income taxes...................................................... 4,357 7,056 7,633
Other long-term liabilities................................................ 1,617 2,222 6,106
---------- ---------- ------------
Total liabilities.................................................... 188,243 508,369 1,051,280
---------- ---------- ------------
Commitments and contingencies
Minority interest.......................................................... 6,024 4,941
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,
44,174,854 and 51,352,131 shares issued and outstanding,
respectively........................................................... 27 44 51
Additional paid-in capital............................................... 50,855 299,027 496,189
Cumulative translation adjustment........................................ (193) 418 (3,772)
Retained earnings........................................................ 45,215 56,837 79,618
---------- ---------- ------------
Total stockholders' equity........................................... 96,904 356,326 572,086
---------- ---------- ------------
Total liabilities and stockholders' equity........................... $ 285,147 $ 870,719 $ 1,628,307
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE FISCAL YEAR ENDED APRIL 30, -------------------------
------------------------------------ JANUARY 31, JANUARY 25,
1994 1995 1996 1996 1997
---------- ---------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 597,511 $ 798,709 $ 1,386,212 $ 975,128 $ 1,807,652
Cost of revenues................................ 427,308 586,989 1,016,640 719,908 1,295,249
---------- ---------- ------------ ----------- ------------
Gross profit.............................. 170,203 211,720 369,572 255,220 512,403
Selling, general and administrative expenses.... 151,979 181,845 314,314 213,123 418,516
Nonrecurring acquisition costs.................. 8,078 6,094 10,957
Discontinuation of printing division at
subsidiary..................................... 682 682
---------- ---------- ------------ ----------- ------------
Operating income.............................. 18,224 29,875 46,498 35,321 82,930
Other (income) expense:
Interest expense.............................. 4,943 7,108 15,322 9,503 32,083
Interest income............................... (405) (682) (4,034) (1,405) (6,437)
Equity in net income of affiliate............. (265)
Foreign currency gain......................... (3,420)
Other......................................... (1,154) (1,122) (1,140) (1,402) (193)
---------- ---------- ------------ ----------- ------------
Income before provision for income taxes and
extraordinary item............................. 14,840 24,571 36,350 28,625 61,162
Provision for income taxes...................... 2,095 3,184 7,123 5,226 24,159
---------- ---------- ------------ ----------- ------------
Income before extraordinary item................ 12,745 21,387 29,227 23,399 37,003
Extraordinary item--loss on early termination of
credit facility, net of income tax benefit..... 612
---------- ---------- ------------ ----------- ------------
Net income.................................... $ 12,745 $ 21,387 $ 29,227 $ 23,399 $ 36,391
---------- ---------- ------------ ----------- ------------
---------- ---------- ------------ ----------- ------------
Weighted average common shares outstanding...... 36,781 34,395 49,759
------------ ----------- ------------
------------ ----------- ------------
Net income per share:
Income before extraordinary item.............. $ .79 $ .68 $ .74
Extraordinary item............................ (.01)
------------ ----------- ------------
Net income per share.......................... $ .79 $ .68 $ .73
------------ ----------- ------------
------------ ----------- ------------
Unaudited pro forma net income
(see Note 8)................................ $ 8,945 $ 14,916 $ 19,302 $ 15,557 $ 30,454
---------- ---------- ------------ ----------- ------------
---------- ---------- ------------ ----------- ------------
Unaudited pro forma net income per share:
Pro forma income before extraordinary item.... $ .52 $ .45 $ .62
Extraordinary item............................ (.01)
------------ ----------- ------------
Pro forma net income per share................ $ .52 $ .45 $ .61
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED APRIL 30, 1994, 1995 AND 1996
AND THE NINE MONTHS ENDED JANUARY 25, 1997
(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>
F-16
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED APRIL 30, 1994, 1995 AND 1996
AND THE NINE MONTHS ENDED JANUARY 25, 1997 (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 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 and for the issuance of
common stock in acquisitions..... 6,247,723 6 61,135 6,578
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....................... 611
Net income......................... 29,227
--
----------- --------- --- ----------- ----------- -----------
Balance at April 30, 1996............ -- -- 44,174,854 44 299,027 418 56,837
Issuance of common stock in
acquisitions..................... 5,122,401 5 145,665
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........................ 174,259 1 6,046
Issuance of common stock for stock
options exercised, including tax
benefit.......................... 122,796 2,945
Issuance of common stock for
employee stock purchase plan, net
of expenses of $63............... 120,539 2,380
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ 284
Dividends of certain Pooled
Companies........................ (13,860)
Cumulative translation
adjustment....................... (4,190)
Net income......................... 36,391
--
----------- --------- --- ----------- ----------- -----------
Balance at January 25, 1997
(unaudited)......................... -- $ -- 51,352,131 $ 51 $ 496,189 $ (3,772) $ 79,618
--
--
----------- --------- --- ----------- ----------- -----------
----------- --------- --- ----------- ----------- -----------
<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 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 and for the issuance of
common stock in acquisitions..... 67,719
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....................... 611
Net income......................... 29,227
----------- ---------
Balance at April 30, 1996............ -- 356,326
Issuance of common stock in
acquisitions..................... 145,670
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........................ 6,047
Issuance of common stock for stock
options exercised, including tax
benefit.......................... 2,945
Issuance of common stock for
employee stock purchase plan, net
of expenses of $63............... 2,380
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ 284
Dividends of certain Pooled
Companies........................ (13,860)
Cumulative translation
adjustment....................... (4,190)
Net income......................... 36,391
----------- ---------
Balance at January 25, 1997
(unaudited)......................... $ -- $ 572,086
----------- ---------
----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE FISCAL YEAR ENDED APRIL MONTHS ENDED
30, ------------------------
------------------------------- JANUARY 31, JANUARY 25,
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 12,745 $ 21,387 $ 29,227 $ 23,399 $ 36,391
Adjustment to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization expense................ 8,614 10,410 14,461 9,853 26,321
Deferred income taxes................................ (165) (51) (264) 825 3,600
Write-off of deferred compensation................... (1,501)
Foreign currency gain................................ (3,420)
Equity in net income of affiliate.................... (265)
Issuance of common stock in exchange for services
rendered........................................... 500
Changes in assets and liabilities (net of assets
acquired and liabilities assumed in business
combinations):
Accounts receivable................................ (9,964) (27,300) (21,986) (43,991) (36,024)
Lease receivables.................................. (17,664) (238)
Inventory.......................................... (2,615) (1,397) (7,565) (1,665) 4,395
Prepaid expenses and other current assets.......... (2,464) (1,243) (10,629) (7,845) (4,184)
Accounts payable................................... 4,305 7,603 12,199 14,919 (32,534)
Accrued liabilities................................ 1,625 5,453 10,135 324 (17,877)
--------- --------- --------- ----------- -----------
Net cash provided by (used in) operating
activities..................................... 12,081 14,862 7,914 (4,181) (24,836)
--------- --------- --------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment.................... (7,199) (7,864) (20,793) (16,845) (23,882)
Cash used in acquisitions.............................. (18,099) (95,574) (58,236) (332,537)
Investment in affiliate................................ (5,603) (41,291)
Deposits............................................... (74) (77) (256) (417) (1,310)
Other.................................................. (688) 274 (509) 158 (5,214)
--------- --------- --------- ----------- -----------
Net cash used in investing activities............ (7,961) (25,766) (122,735) (75,340) (404,234)
--------- --------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............... 8,568 6,198 168,170 11,388 221,101
Payments of long-term debt............................. (6,801) (8,107) (20,450) (10,264) (160,164)
Proceeds (payments) of short-term debt................. 1,504 3,859 (33,224) 35,443 215,062
Proceeds from issuance of common stock................. 33,454 176,287 52,537 38,113
Proceeds from exercise of stock options and warrants... 597 3,356
Proceeds from issuance of common stock in employee
stock purchase plan.................................. 2,380
Contributions of capital by stockholders of Pooled
Companies............................................ 2,557 1,921 1,970
Payments to stockholders of combined companies......... (27) (11,330) (42)
Adjustments to conform fiscal year-ends of certain
Pooled Companies..................................... 230 601 (1,615) (462) 286
Payments of dividends.................................. (7,179) (8,741) (16,506) (15,587) (13,860)
--------- --------- --------- ----------- -----------
Net cash provided by (used in) financing
activities..................................... (3,705) 18,491 273,217 74,976 308,244
--------- --------- --------- ----------- -----------
Effect of exchange rates on cash and cash equivalents.... 237 (422) (428) 99 (347)
Net increase (decrease) in cash and cash equivalents..... 652 7,165 157,968 (4,446) (121,173)
Cash and cash equivalents at beginning of period......... 11,366 12,018 19,183 19,183 177,635
--------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period............... $ 12,018 $ 19,183 $ 177,635 $ 14,737 $ 56,462
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
F-18
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE FISCAL YEAR MONTHS ENDED
ENDED APRIL 30, --------------------------
------------------------------- JANUARY 31, JANUARY 25,
1994 1995 1996 1996 1997
--------- --------- --------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid.............................................. $ 8,236 $ 11,361 $ 12,854 $ 6,234 $ 28,980
Income taxes paid.......................................... $ 3,234 $ 3,463 $ 8,524 $ 5,321 $ 21,085
</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 NINE
FOR THE FISCAL YEAR MONTHS ENDED
ENDED APRIL 30, ------------------------
------------------------------- JANUARY 31, JANUARY 25,
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable..................................... $ -- $ 23,462 $ 72,231 $ 30,561 $ 93,993
Inventories............................................. 20,074 51,425 22,442 126,506
Prepaid expenses and other current assets............... 1,779 8,914 4,001 15,159
Property and equipment.................................. 5,459 34,978 18,732 108,705
Intangible assets....................................... 21,079 118,422 74,665 447,202
Lease receivables....................................... 55,095 870
Other assets............................................ 339 1,257 1,074 5,273
Short-term debt......................................... (15,038) (105,814) (19,928) (17,102)
Accounts payable........................................ (15,627) (38,357) (21,357) (93,436)
Accrued liabilities..................................... (4,958) (16,244) (7,285) (83,894)
Long-term debt.......................................... (6,283) (17,949) (9,574) (116,807)
Deferred income taxes................................... (1,635)
Other long-term liabilities............................. (437) (247) (887) (8,262)
Minority interest....................................... (5,349)
--------- --------- --------- ----------- -----------
Net assets acquired..................................... $ -- $ 29,849 $ 156,727 $ 92,444 $ 478,207
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
The acquisitions were funded as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Common stock............................................ $ -- $ 8,750 $ 60,367 $ 34,208 $ 145,670
Notes payable........................................... 3,000 786
Cash.................................................... 18,099 95,574 58,236 332,537
--------- --------- --------- ----------- -----------
$ -- $ 29,849 $ 156,727 $ 92,444 $ 478,207
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</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 consolidated financial statements.
F-19
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--BUSINESS ORGANIZATION
U.S. Office Products Company ("U.S. Office Products" and the "Company") was
founded in October 1994 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 2--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.
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.
F-20
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-21
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-22
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
F-23
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 January 25, 1997 and the results
of income and of cash flows for the nine months ended January 31, 1996 and
January 25, 1997, as presented in the accompanying unaudited supplemental
consolidated financial statements.
NOTE 3--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 13,307,350 shares of common
stock to acquire 30 companies in acquisitions accounted for under the
pooling-of-interests method. Except as noted below, 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 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 $284 for the
nine months ended January 25, 1997.
F-24
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--BUSINESS COMBINATIONS (CONTINUED)
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 NINE
MONTHS ENDED
JANUARY 25,
1997
------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................................. $ 55,126 $ 121,722 $ (4,639)
Costs and expenses....................................... 52,891 124,382 (4,923)
--------- ---------- ------------
Net income (loss)........................................ $ 2,235 $ (2,660) $ 284
--------- ---------- ------------
--------- ---------- ------------
</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 $ 897,542 $ 1,386,212
Net income......................................... $ 7,828 $ 21,399 $ 29,227
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 NINE MONTHS ENDED JANUARY 25, 1997
(UNAUDITED):
- -----------------------------------------------------
Revenue............................................ $ 1,473,192 $ 344,460 $ 1,807,652
Net income......................................... $ 25,069 $ 11,322 $ 36,391
FOR THE NINE MONTHS ENDED JANUARY 31, 1996
(UNAUDITED):
- -----------------------------------------------------
Revenue............................................ $ 267,837 $ 707,291 $ 975,128
Net income......................................... $ 5,226 $ 18,173 $ 23,399
</TABLE>
Certain of the Pooled Companies were individually insignificant and the
financial statements for years prior to fiscal 1996 have not been restated for
these operations. The effect of these acquisitions has been recognized as of May
1, 1995 as an increase in stockholders' equity of $10,012.
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.
F-25
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--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 $ 1,732,620
Net income........................................................ 22,069 32,278
Net income per share.............................................. 0.54 0.72
</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 4--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 33,465
Furniture and fixtures................................................ 23,208 51,779
Warehouse equipment................................................... 24,969 34,336
Equipment under capital leases........................................ 5,307 8,665
Leasehold improvements................................................ 8,209 8,507
---------- ----------
79,117 141,291
Less: Accumulated depreciation........................................ (38,500) (45,880)
---------- ----------
Net property and equipment............................................ $ 40,617 $ 95,411
---------- ----------
---------- ----------
</TABLE>
Depreciation expense for the fiscal years ended April 30, 1994, 1995 and
1996 was $6,453, $8,275 and $10,868, respectively.
F-26
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--INTANGIBLE ASSETS
Intangible assets and accumulated amortization consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Goodwill............................................................... $ 23,944 $ 142,205
Other.................................................................. 8,309 8,596
--------- ----------
32,253 150,801
Less: Accumulated amortization......................................... (5,099) (7,349)
--------- ----------
$ 27,154 $ 143,452
--------- ----------
--------- ----------
</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 6--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............................... (16,847)
---------
Present value of net lease receivable............................. $ 71,812
---------
---------
</TABLE>
F-27
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7--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 7,130
Current maturities of long-term debt............................................. 8,195 11,225
--------- ----------
Total short-term debt...................................................... $ 62,156 $ 134,590
--------- ----------
--------- ----------
</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 43,134
Capital lease obligations........................................................ 1,381 5,129
--------- ----------
40,891 210,729
Less: Current maturities of long-term debt....................................... (8,195) (11,225)
--------- ----------
Total long-term debt....................................................... $ 32,696 $ 199,504
--------- ----------
--------- ----------
</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
F-28
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7--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........................................................ 20,323
---------
$ 210,729
---------
---------
</TABLE>
NOTE 8--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 $ 5,943
State.......................................................... 455 704 608
Foreign taxes currently payable................................ 809 836
--------- --------- ---------
2,260 3,235 7,387
--------- --------- ---------
Deferred income tax expense (benefit)............................ (165) (51) (264)
--------- --------- ---------
Total provision for income taxes........................... $ 2,095 $ 3,184 $ 7,123
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-29
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--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) (28.0)
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% 19.6%
----- ----- -----
----- ----- -----
</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.
F-30
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--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 NINE MONTHS ENDED
ENDED APRIL 30, ------------------------
------------------------------- JANUARY 31, JANUARY 25,
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net income per consolidated statement of income........ $ 12,745 $ 21,387 $ 29,227 $ 23,399 $ 36,391
Pro forma income tax provision adjustment.............. 3,800 6,471 9,925 7,842 5,937
--------- --------- --------- ----------- -----------
Pro forma net income................................... $ 8,945 $ 14,916 $ 19,302 $ 15,557 $ 30,454
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
NOTE 9--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 10--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.
F-31
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--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 11--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 12--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.
F-32
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 12--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.
F-33
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 266,959 $ 328,080 $ 380,089 $ 411,084 $ 1,386,212
Gross profit....................................... 70,003 85,456 99,761 114,352 369,572
Operating income................................... 3,766 12,196 19,359 11,177 46,498
Net income......................................... 2,919 8,317 12,163 5,828 29,227
Net income per share............................... .10 .22 .33 .13 .79
<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
</TABLE>
NOTE 14--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.................................................................... $ 2,105,775
Net income.................................................................. 41,974
Net income per share........................................................ 0.88
</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.
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.
F-34
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--SUBSEQUENT EVENTS (CONTINUED)
The net proceeds to the Company, after deducting underwriting discounts and
commissions and offering expenses, were approximately $223,000.
NOTE 15--SUBSEQUENT EVENTS (UNAUDITED)
During the first nine months of fiscal 1997, the Company completed a total
of 90 business combinations, 30 accounted for under the pooling-of-interests
method and 60 accounted for under the purchase method. In the third quarter of
fiscal 1997, the Company completed a total of 24 business combinations, 9
accounted for under the pooling-of-interests method and 15 accounted for under
the purchase method. In addition to these business combinations, the Company
acquired 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.
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 January 25, 1997 and through March 26, 1997, the Company has
completed 13 business combinations for an aggregate purchase price of $24.7
million, consisting of approximately $6.2 million of cash and .6 million shares
of the Company's common stock with an aggregate market value on the dates of
acquisition of approximately $18.5 million.
In February and March 1997, the Company completed the public sale, at a
gross price of $33.00 per share, of 8,682,331 shares of common stock, including
the purchase by the underwriters of 637,000 shares of common stock for their
over-allotment option. The net proceeds to the Company, after deducting
underwriting discounts and commissions and offering expenses, were approximately
$274.5 million and have been used to repay a portion of the outstanding balance
under the Company's bank Credit Facility.
F-35
<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 March 26, 1997. The unaudited pro
forma combined balance sheet gives effect to the 13 businesses acquired by the
Company after January 25, 1997 (the "Fiscal 1997 Post 3rd Quarter
Acquisitions"), as if all such acquisitions had occurred as of the Company's
most recent balance sheet date, January 25, 1997.
The pro forma combined statement of income for the year ended April 30, 1996
gives effect to (i) the 26 acquisitions completed during fiscal 1996 which were
business combinations accounted for under the purchase method of accounting (the
"Fiscal 1996 Purchased Companies") as if all such acquisitions had been made on
May 1, 1995; (ii) the 71 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 2 acquisitions completed after January 25, 1997 which
were combinations accounted for under the pooling-of-interests method of
accounting as if all such acquisitions had been made on May 1, 1995 (the "Fiscal
1997 Post 3rd Quarter Pooled Companies", which together with the Fiscal 1997
Purchased Companies are referred to as the "Fiscal 1997 Completed
Acquisitions"); (iv) the 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; (v) 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; (vi) 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 (vii) the sales by the Company in
February and March 1997 of 8,682,331 shares of Common Stock as if such sales had
been made on May 1, 1995.
The historical financial statements of the Company for the nine month
periods ended January 25, 1997 and January 31, 1996 and the fiscal year ended
April 30, 1996 give retroactive effect to the results of the 30 companies
acquired by the Company during the nine months ended January 25, 1997 and the 14
companies acquired during fiscal 1996 which were business combinations accounted
for under the pooling-of-interests method of accounting. The historical
financial statements of the Company for the fiscal years ended April 30, 1995
and 1994 give retroactive effect to the results of 23 of the companies acquired
by the Company during the nine months ended January 25, 1997 and the 14
companies acquired during fiscal 1996 which were business combinations accounted
for under the pooling-of-interests method of accounting. (Seven of the companies
acquired by the Company during the nine months ended January 25, 1997, which
were business combinations accounted for under the pooling-of-interests method
of accounting, were not included in the historical financial statements of the
Company for the fiscal years ended April 30, 1995 and 1994 because they are
considered to be individually insignificant (the "Insignificant Companies").)
The pro forma combined statement of income for the year ended April 30, 1996
includes (i) the audited financial statements of the Company for the year ended
April 30, 1996; (ii) the unaudited financial information of the Fiscal 1996
Purchased Companies for the period from May 1, 1995 to the consummation date;
(iii) the unaudited financial information for the Fiscal 1997 Purchased
Companies for the most recently completed fiscal year, except that unaudited
financial information for the year ended April 30, 1996 is included for each
such acquisition where the entity's fiscal year end is not within 93 days of the
Company's year end; and (iv) the unaudited financial information of the Fiscal
1997 Post 3rd Quarter Pooled Companies for the most recently completed fiscal
year.
F-36
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
The pro forma combined statement of income for the nine months ended January
25, 1997 includes the unaudited financial information of the Company and gives
effect to (i) the 71 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 2 acquisitions completed after January 25, 1997
which were combinations accounted for under the pooling-of-interests method of
accounting as if all such acquisitions had been made on May 1, 1996.
The pro forma combined statement of income for the nine months ended January
31, 1996 includes the unaudited financial information of the Company and gives
effect to the Fiscal 1996 Purchased Companies and the Fiscal 1997 Completed
Acquisitions as if all such acquisitions had been made on May 1, 1995.
The pro forma combined statement of income for the years ended April 30,
1995 and 1994 includes the historical financial information of the Company and
gives effect to the Insignificant Companies and the Fiscal 1997 Post 3rd 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.
F-37
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 25, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR 1997
U.S. OFFICE ------------------------------ PRO FORMA
PRODUCTS COMPLETED PRO FORMA OFFERING PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
----------- ---------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 56,462 $ 563 $ (4,918)(a) $ -- $ 275,522(b) $ --
(52,107)(a) (275,522)(b)
Accounts receivable............... 336,434 9,101 -- 345,535 345,535
Lease receivable.................. 30,442 -- -- 30,442 30,442
Inventory......................... 250,795 2,790 -- 253,585 253,585
Prepaid and other current
assets.......................... 52,831 681 -- 53,512 53,512
----------- ------- ----------- ---------- ----------- -----------
Total current assets.......... 726,964 13,135 (57,025) 683,074 -- 683,074
Property and equipment, net......... 202,678 2,121 -- 204,799 204,799
Intangible assets, net.............. 585,841 1,485 14,869(a) 602,195 602,195
Lease receivables................... 44,423 -- -- 44,423 44,423
Other assets, including equity
investments....................... 68,401 1,281 -- 69,682 69,682
----------- ------- ----------- ---------- ----------- -----------
Total assets.................. $ 1,628,307 $18,022 $(42,156) $1,604,173 $ -- $ 1,604,173
----------- ------- ----------- ---------- ----------- -----------
----------- ------- ----------- ---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt................... $ 367,225 $ 4,886 (51,245)(a) $ 320,866 $(275,522)(b) 45,344
Accounts payable.................. 172,555 6,214 -- 178,769 178,769
Accrued compensation.............. 38,966 548 -- 39,514 39,514
Other accrued liabilities......... 69,342 1,850 -- 71,192 71,192
----------- ------- ----------- ---------- ----------- -----------
Total current liabilities..... 648,088 13,498 (51,245) 610,341 (275,522) 334,819
Long-term debt...................... 389,453 862 (862)(a) 389,453 389,453
Deferred income taxes............... 7,633 -- -- 7,633 7,633
Other long -term liabilities........ 6,106 157 -- 6,263 6,263
----------- ------- ----------- ---------- ----------- -----------
Total liabilities............. 1,051,280 14,517 (52,107) 1,013,690 (275,522) 738,168
Minority Interest................... 4,941 -- -- 4,941 4,941
Stockholders' equity common stock... 51 3 (1)(a) 53 9(b) 62
Additional paid-in capital........ 496,189 772 12,454(a) 509,415 275,513(b) 784,928
Cumulative translation
adjustment...................... (3,772) -- -- (3,772) (3,772)
Retained earnings................. 79,618 228 -- 79,846 79,846
Equity of purchased companies..... 2,502 (2,502)(a) -- --
----------- ------- ----------- ---------- ----------- -----------
Total stockholders' equity.... 572,086 3,505 9,951 585,542 275,522 861,064
----------- ------- ----------- ---------- ----------- -----------
Total liabilities and
stockholders' equity........ $ 1,628,307 $18,022 $(42,156) $1,604,173 $ -- $ 1,604,173
----------- ------- ----------- ---------- ----------- -----------
----------- ------- ----------- ---------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-38
<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.................. $ 1,386,212 $ 307,954 $ 1,069,327 $ - $ 2,763,493 $ - $ 2,763,493
Cost of revenues.......... 1,016,640 214,072 736,592 - 1,967,304 - 1,967,304
------------ ----------- ------------ ----------- ------------ ----------- ------------
Gross profit............ 369,572 93,882 332,735 -- 796,189 -- 796,189
Selling, general and
administrative
expenses................ 314,314 84,070 278,416 8,759(c) 670,073 -- 670,073
(12,954)(d)
(2,532)(e)
Nonrecurring acquisition
costs................... 8,078 -- -- (8,078)(e) -- - -
Nonrecurring restructuring
costs................... - 8,092 -- - 8,092 - 8,092
Discontinuation of
printing division at
subsidiary.............. 682 -- -- - 682 - 682
------------ ----------- ------------ ----------- ------------ ----------- ------------
Operating income........ 46,498 1,720 54,319 14,805 117,342 -- 117,342
Other (income) expense:
Interest expense........ 15,322 2,761 10,150 11,825(f) 40,058 (18,804)(l) 21,254
Interest income......... (4,034) -- (502) 4,536(f) -- --
Other................... (1,140) (24) (999) (671)(g) (2,834) (2,834)
Equity in net income of
affiliated company...... (1,155)(h) (1,155) (1,155)
------------ ----------- ------------ ----------- ------------ ----------- ------------
Income (loss) before
provision for income
taxes................... 36,350 (1,017) 45,670 270 81,273 18,804 100,077
Provision for income
taxes................... 7,123 45 13,214 14,069(i) 34,451 7,522 41,973
------------ ----------- ------------ ----------- ------------ ----------- ------------
Net income (loss)......... $ 29,227 $ (1,062) $ 32,456 $ (13,799) $ 46,822 $ 11,282 $ 58,104
------------ ----------- ------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------ ----------- ------------
Weighted average shares
outstanding............. 36,781 - - - 52,460(j) - 61,142(m)
Net income per share...... $ 0.79 - - - $ 0.89 - $ 0.95
------------ ----------- ------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------ ----------- ------------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-39
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(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........................ $ 1,807,652 $ 359,058 $ -- $ 2,166,710 $ -- $ 2,166,710
Cost of revenues................ 1,295,249 257,486 -- 1,552,735 -- 1,552,735
------------ ----------- ----------- ------------ ----------- -------------
Gross profit................ 512,403 101,572 -- 613,975 -- 613,975
Selling, general and
administrative expenses....... 418,516 91,455 1,418(c) 507,377 -- 507,377
(4,012)(d)
Nonrecurring acquisition
costs......................... 10,957 -- (10,957)(e) -- -- --
Nonrecurring restructuring
costs......................... -- -- -- -- -- --
Discontinuation of printing
division at subsidiary........ -- -- -- -- -- --
------------ ----------- ----------- ------------ ----------- -------------
Operating income............ 82,930 10,117 13,551 106,598 -- 106,598
Other (income) expense:
Interest expense.............. 32,083 3,130 (146)(f) 35,067 (14,103)(l) 20,964
Interest income............... (6,437) (142) 6,579(f) -- -- --
Foreign currency gian......... (3,420) -- -- (3,420) -- (3,420)
Other......................... (193) (1,084) -- (1,277) -- (1,277)
Equity in net income of
affiliated company............ (265) -- (1,009)(h) (1,274) -- (1,274)
------------ ----------- ----------- ------------ ----------- -------------
Income (loss) before provision
for income taxes and
extraordinary item............ 61,162 8,213 8,127 77,502 14,103 91,605
Provision for income taxes...... 24,159 3,107 5,820(i) 33,086 5,641 38,727
------------ ----------- ----------- ------------ ----------- -------------
Income before extraordinary
item.......................... $ 37,003 $ 5,106 $ 2,307 $ 44,416 $ 8,462 $ 52,878
------------ ----------- ----------- ------------ ----------- -------------
------------ ----------- ----------- ------------ ----------- -------------
Weighted average shares
outstanding................... 49,759 -- -- 53,149(j) -- 61,831(m)
Net income per share before
extraordinary item............ $ 0.74 -- -- $ 0.84 -- $ 0.86
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-40
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------
U.S. OFFICE 1996 1997 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..................... $975,128 $293,615 $821,973 $ -- $2,090,716 $ -- $2,090,716
Cost of revenues............. 719,908 206,593 580,382 -- 1,506,883 -- 1,506,883
----------- --------- ------------ ----------- ---------- ----------- ----------
Gross profit............. 255,220 87,022 241,591 -- 583,833 -- 583,833
Selling, general and
administrative expenses.... 213,123 78,348 204,324 6,622(c) 498,345 498,345
(4,072)(d)
Nonrecurring acquisition
costs...................... 6,094 -- -- (6,094)(e) -- --
Nonrecurring restructuring
charges.................... -- 8,092 -- -- 8,092 8,092
Discontinuation of printing
division at subsidiary..... 682 -- -- -- 682 682
----------- --------- ------------ ----------- ---------- ----------- ----------
Operating income......... 35,321 582 37,267 3,544 76,714 -- 76,714
Other (income) expense:
Interest expense........... 9,503 2,776 8,856 13,932(f) 35,067 (14,103)(l) 20,964
Interest income............ (1,405) (37) (738) 2,180(f) --
Other...................... (1,402) (1,622) (551) -- (3,575) (3,575)
Equity in net income of
affiliated company......... -- -- -- (866)(h) (866) (866)
----------- --------- ------------ ----------- ---------- ----------- ----------
Income (loss) before
provision for income
taxes...................... 28,625 (535) 29,700 (11,702) 46,088 14,103 60,191
Provision for income taxes... 5,226 244 8,791 5,184(i) 19,445 5,641 25,086
----------- --------- ------------ ----------- ---------- ----------- ----------
Net income (loss)............ $ 23,399 $ (779) $ 20,909 $(16,886) $ 26,643 $ 8,462 $ 35,105
----------- --------- ------------ ----------- ---------- ----------- ----------
----------- --------- ------------ ----------- ---------- ----------- ----------
Weighted average shares
outstanding................ 34,395 52,286(j) 60,968(m)
Net income per share......... $ 0.68 $ 0.51 $ 0.58
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-41
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
OTHER
FISCAL
U.S. OFFICE 1997 PRO FORMA
PRODUCTS POOLINGS ADJUSTMENTS TOTAL
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues....................................................... $ 798,709 $ 117,833 $ -- $ 916,542
Cost of revenues............................................... 586,989 84,446 -- 671,435
----------- ---------- ----------- -----------
Gross profit............................................... 211,720 33,387 -- 245,107
Selling, general and administrative expenses................... 181,845 26,832 -- 208,677
----------- ---------- ----------- -----------
Operating income........................................... 29,875 6,555 -- 36,430
Other (income) expense:
Interest expense............................................. 7,108 483 -- 7,591
Interest income.............................................. (682) (168) -- (850)
Other........................................................ (1,122) 600 -- (522)
----------- ---------- ----------- -----------
Income before provision for income taxes....................... 24,571 5,640 -- 30,211
Provision for income taxes..................................... 3,184 81 9,969(k) 13,234
----------- ---------- ----------- -----------
Net income..................................................... $ 21,387 $ 5,559 $ (9,969) $ 16,977
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-42
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1994
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
OTHER
U.S. OFFICE FISCAL 1997 PRO-FORMA
PRODUCTS POOLINGS ADJUSTMENTS TOTAL
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues..................................................... $ 597,511 $ 91,180 $ -- $ 688,691
Cost of revenues............................................. 427,308 64,164 -- 491,472
----------- ----------- ----------- ----------
Gross profit............................................... 170,203 27,016 -- 197,219
Selling, general and administrative expenses................. 151,979 23,637 -- 175,616
----------- ----------- ----------- ----------
Operating income........................................... 18,224 3,379 -- 21,603
Other (income) expense:
Interest expense........................................... 4,943 422 -- 5,365
Interest income............................................ (405) (1) -- (406)
Other...................................................... (1,154) 629 -- (525)
----------- ----------- ----------- ----------
Income before provision for income taxes..................... 14,840 2,329 -- 17,169
Provision for income taxes................................... 2,095 174 5,285(k) 7,554
----------- ----------- ----------- ----------
Net income................................................... $ 12,745 $ 2,155 $ (5,285) $ 9,615
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-43
<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 ($14,869) in transactions accounted for as purchases
represents the excess of the cost over the fair value of the net
assets acquired. The Company amortizes goodwill over a period of 40
years. The recoverability of the unamortized goodwill is assessed on
an ongoing basis by comparing anticipated undiscounted future cash
flows from operations to net book value.
(ii) Adjustment to reflect the reduction in short-term and long-term debt
of certain acquired companies and existing short-term debt of the
Company.
(b) Adjustment to reflect $275,522 of net proceeds from the sales of
8,682 shares of Common Stock by the Company in February and March
1997 (net of expenses and underwriting discount) and the utilization
of the proceeds to repay short-term debt.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(c) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1996 Purchased
Companies and the Fiscal 1997 Purchased Companies. The goodwill is being
amortized over an estimated life of 40 years.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
YEAR ENDED ------------------------
APRIL 30, JANUARY 25, JANUARY 31,
1996 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Fiscal 1996 Purchased Companies............................................ $ 1,570 $ -- $ 688
Fiscal 1997 Purchased Companies............................................ 7,189 1,418 5,934
----------- ----------- -----------
$ 8,759 $ 1,418 $ 6,622
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(d) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations of
executive compensation agreements resulting from certain acquisitions.
(e) Adjustment to reflect the reduction of (i) nonrecurring acquisition
costs related to pooling-of-interests business combinations of $8,078 for the
year ended April 30, 1996, $10,957 and $6,094 for the nine months ended January
25, 1997 and January 31, 1996, respectively, and (ii) certain other
restructuring charges from certain acquisitions of $2,532 for the year ended
April 30, 1996.
(f) Adjustment to reflect an increase (decrease) in interest expense
resulting from the utilization of the proceeds from the sales of the February
Notes and the May Notes to effect acquisitions as if such debt had been
outstanding for the entire period. In addition, the adjustment reflects an
increase in interest expense resulting from the amortization of debt issue costs
over the terms of the February Notes and the May Notes. Adjustment also reflects
a decrease in interest income resulting from the utilization of the proceeds
from the issuance of the Common Stock and the February Notes in the February
Offerings and the May Notes to effect certain transactions and refinance
existing debt.
F-44
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS AND SHARE NUMBERS IN THOUSANDS)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
(g) Adjustment to reflect the elimination of the minority interest
representing 49% of the net income of Blue Star Group Limited for the year ended
April 30, 1996.
(h) Adjustment to reflect the 49% equity interest in the net income of
Dudley Stationery Limited.
(i) Adjustment to calculate the provision for income taxes on the combined
pro forma results at an effective income tax rate of approximately 42%. The
difference between the effective tax rate of 42% and the statutory tax rate of
35% relates primarily to state income taxes and non-deductible goodwill.
(j) The weighted average shares outstanding used to calculate pro forma
earnings per share is based on 52,460, 53,149 and 52,286 shares of Common Stock
and Common Stock equivalents outstanding for the year ended April 30, 1996 and
the nine months ended January 25, 1997 and January 31, 1996, respectively. The
amounts are comprised of 51,352 shares outstanding for each of the periods, 547
shares issued for acquisitions completed subsequent to January 25, 1997 and 561,
1,250, and 387 common stock equivalents considered to be outstanding related to
stock options, for the year ended April 30, 1996, and the nine month periods
ended January 25, 1997 and January 31, 1996, respectively.
(k) Adjustment to reflect the income taxes for certain acquisitions
accounted for under the poolings-of-interest method which were taxed as
subchapter S corporations as if these companies had been subject to taxation as
C corporations. As a result of being subchapter S corporations, any tax
liabilities prior to acquisition were the responsibility of the individual
company stockholder.
(l) Adjustment to reflect a decrease in interest expense as a result of the
utilization of the net proceeds of $275,522 from the sales in February and March
1997 by the Company of 8,682 shares of Common Stock to repay short term debt at
an effective rate of 6.825%.
(m) Adjustment to include in weighted average shares outstanding the 8,682
shares that were sold by the Company in February and March 1997.
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MISSCO Corporation:
We have audited the accompanying balance sheets of MISSCO
Corporation--Commercial Division as of March 31, 1994 and 1995 and the related
statements of operations, divisional equity (deficit) and cash flows for the
year ended June 30, 1993, the nine-month period ended March 31, 1994 and the
year ended March 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MISSCO
Corporation--Commercial Division at March 31, 1994 and 1995 and the results of
its operations and its cash flows for the year ended June 30, 1993, the
nine-month period ended March 31, 1994 and the year ended March 31, 1995, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Jackson, Mississippi
June 30, 1995, except as to the penultimate
paragraph of note 4, which is as of
August 4, 1995 and note 13, which
is as of August 16, 1995
F-46
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
BALANCE SHEETS
MARCH 31, 1994 AND 1995 AND SEPTEMBER 30, 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1994 1995 1995
----------- ----------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Current assets:..............................................................
Cash and cash equivalents.................................................. $ -- $ 1,589 $ 1,215
Receivables (notes 4 and 8):...............................................
Trade accounts........................................................... 9,575 9,273 11,304
Employee and other....................................................... 419 712 447
----------- ----------- -------------
9,994 9,985 11,751
Less allowance for doubtful receivables (note 12)........................ 191 548 176
----------- ----------- -------------
Net receivables........................................................ 9,803 9,437 11,575
----------- ----------- -------------
Net investment in sales-type leases, current portion (notes 2 and 4)......... 730 701 709
Inventories (note 4):
Merchandise................................................................ 7,656 8,191 7,733
Materials and supplies..................................................... 307 322 314
----------- ----------- -------------
Total inventories...................................................... 7,963 8,513 8,047
----------- ----------- -------------
Prepaid expenses........................................................... 325 318 567
----------- ----------- -------------
Total current assets................................................... 18,821 20,558 22,113
----------- ----------- -------------
Property, plant and equipment, at cost (notes 2, 3 and 4).................... 10,070 11,504 11,876
Less accumulated depreciation and amortization............................. 4,881 5,754 6,260
----------- ----------- -------------
Net property, plant and equipment...................................... 5,189 5,750 5,616
----------- ----------- -------------
Other assets:................................................................
Net investment in sales-type leases, non-current portion (notes 2 and 4)... 668 1,090 1,102
Investment in marketable securities (note 6)............................... 878 675 675
Cash surrender value of life insurance (note 4)............................ 112 123 123
Interdivisional receivables, net........................................... 677 -- --
Other...................................................................... 342 407 133
----------- ----------- -------------
Total other assets..................................................... 2,677 2,295 2,033
----------- ----------- -------------
$ 26,687 $ 28,603 $ 29,762
----------- ----------- -------------
----------- ----------- -------------
LIABILITIES AND DIVISIONAL EQUITY (DEFICIT)
Current liabilities:.........................................................
Book overdraft in bank account............................................. $ 22 $ -- $ --
Notes payable to officers and employees (note 11).......................... 1,415 1,845 --
Current instalments of long-term debt (note 4)............................. 2,074 1,568 14,519
Current instalments of capital lease obligations (note 7).................. 6 24 --
Accounts payable........................................................... 6,983 5,566 6,333
Accrued expenses........................................................... 1,792 2,050 2,078
Deferred revenue on maintenance contracts.................................. 399 394 430
----------- ----------- -------------
Total current liabilities.............................................. 12,691 11,447 23,360
----------- ----------- -------------
Deferred compensation (note 6)............................................... 878 675 675
Long-term debt, excluding current instalments (note 4)....................... 10,938 16,074 5,403
Capital lease obligations, excluding current instalments (note 7)............ 20 34 --
Interdivisional payables, net................................................ -- 1,050 1,138
----------- ----------- -------------
Total liabilities...................................................... 24,527 29,280 30,576
Divisional equity (deficit).................................................. 2,160 (677) (814)
----------- ----------- -------------
Commitments and contingencies (notes 6 and 7)................................
----------- ----------- -------------
$ 26,687 $ 28,603 $ 29,762
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1993, NINE-MONTH PERIOD ENDED MARCH 31, 1994,
YEAR ENDED MARCH 31, 1995 AND SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1994 AND
1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH SIX-MONTH PERIOD ENDED
YEAR ENDED PERIOD YEAR ENDED ------------------------
JUNE 30, ENDED MARCH MARCH 31, SEPTEMBER SEPTEMBER
1993 31, 1994 1995 30, 1994 30, 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 42,911 $ 40,986 $ 61,542 $ 29,799 $ 37,552
Cost of sales (including occupancy
and delivery costs).............. 32,540 32,116 47,751 23,539 29,156
----------- ----------- ----------- ----------- -----------
Gross profit................... 10,371 8,870 13,791 6,260 8,396
Selling, general and administrative
expenses (note 10)............... 10,295 9,316 15,746 6,973 8,184
----------- ----------- ----------- ----------- -----------
Operating income (loss)........ 76 (446) (1,955) (713) 212
Interest, rent and other income.... 375 154 225 120 129
Interest expense (note 10)......... 452 455 1,168 437 540
----------- ----------- ----------- ----------- -----------
Loss before income tax
benefit...................... (1) (747) (2,898) (1,030) (199)
Income tax benefit (note 5)........ -- (299) (898) (319) (62)
----------- ----------- ----------- ----------- -----------
Net loss....................... $ (1) $ (448) $ (2,000) $ (711) $ (137)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
STATEMENTS OF DIVISIONAL EQUITY (DEFICIT)
YEAR ENDED JUNE 30, 1993, NINE-MONTH PERIOD ENDED MARCH 31, 1994,
YEAR ENDED MARCH 31, 1995 AND SIX-MONTH PERIOD ENDED SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEDUCTIONS
--------------------------------------- ADDITIONS
BALANCE AT ACQUISITION ------------------------
BEGINNING CASH AND RETIREMENT ISSUANCE NET
OF PERIOD DIVIDENDS OF STOCK NET LOSS OF STOCK EARNINGS
----------- ----------- --------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended June 30, 1993................ $ 3,250 $ (155) $ (631) $ (1) $ -- $ --
Nine-month period ended March 31,
1994.................................. 2,463 (112) (143) (448) 400 --
Year ended March 31, 1995............... 2,160 (82) (755) (2,000) -- --
Unaudited:
Six-month period ended September 30,
1995.................................. (677) -- -- (137) -- --
<CAPTION>
BALANCE AT
END OF
PERIOD
-----------
<S> <C>
Year ended June 30, 1993................ $ 2,463
Nine-month period ended March 31,
1994.................................. 2,160
Year ended March 31, 1995............... (677)
Unaudited:
Six-month period ended September 30,
1995.................................. (814)
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 1993, NINE-MONTH PERIOD
ENDED MARCH 31, 1994, YEAR ENDED MARCH 31, 1995 AND
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH SIX-MONTH PERIOD ENDED
YEAR ENDED PERIOD ENDED YEAR ENDED ----------------------------
JUNE 30, MARCH 31, MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1994 1995
----------- ------------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (1) $ (448) $ (2,000) $ (711) $ (137)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization................. 754 526 884 422 481
Gain on sale of assets........................ (220) (1) (21) -- --
Increase (decrease) in compensation
deferrals................................... 6 51 (203) 22 --
Changes in operating assets and liabilities:
Receivables................................. (1,391) (3,045) 366 (42) (2,138)
Net investment in sales-type leases......... (75) (204) (393) (260) (20)
Inventories................................. (678) (790) (550) (746) 466
Prepaid expenses............................ (316) 173 7 (83) (249)
Other assets................................ (60) (248) (93) (285) 274
Interdivisional receivables/payables........ 1,769 84 1,727 (3,408) 88
Accounts payable and accrued expenses....... 1,528 2,075 (1,159) 1,613 795
Deferred revenue on maintenance contracts... (8) (28) (5) -- 36
----------- ------------- ----------- ------------- -------------
Net cash provided (used) by operating
activities.............................. 1,308 (1,855) (1,440) (3,478) (404)
----------- ------------- ----------- ------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment...... (768) (3,003) (1,429) (1,004) (347)
Proceeds from sale of assets.................... 677 4 33 -- --
Increase in cash surrender value of life
insurance..................................... (6) (13) (11) -- --
Purchases of marketable securities.............. (847) (58) (1,219) (22) --
Proceeds from sales of marketable securities.... 848 -- 1,422 -- --
----------- ------------- ----------- ------------- -------------
Net cash used by investing activities..... (96) (3,070) (1,204) (1,026) (347)
----------- ------------- ----------- ------------- -------------
Cash flows from financing activities:
Increase (decrease) in book overdraft in bank
account....................................... (108) 22 (22) 508 --
Proceeds from long-term debt.................... 1,653 6,950 3,003 412 --
Repayment of long-term debt..................... (834) (1,686) (5,236) (3,053) (331)
Increase in capital lease obligations........... -- 25 44 -- --
Repayment of capital lease obligations.......... (484) (5) (12) (4) (58)
Increase (decrease) in borrowings under line of
credit, net................................... (787) (617) 6,863 7,161 2,611
Increase (decrease) in notes payable to officers
and employees................................. 201 24 430 (17) (1,845)
Dividends on common and preferred stock......... (155) (112) (82) (60) --
Acquisition and retirement of common and
preferred stock............................... (631) (143) (755) (443) --
Proceeds from sale of common stock.............. -- 400 -- -- --
----------- ------------- ----------- ------------- -------------
Net cash provided (used) by financing
activities.............................. (1,145) 4,858 4,233 4,504 377
----------- ------------- ----------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents............................. 67 (67) 1,589 -- (374)
Cash and cash equivalents at beginning of
period.......................................... -- 67 -- -- 1,589
----------- ------------- ----------- ------------- -------------
Cash and cash equivalents at end of period........ $ 67 $ -- $ 1,589 $ -- $ 1,215
----------- ------------- ----------- ------------- -------------
----------- ------------- ----------- ------------- -------------
Supplemental disclosure--interest paid............ $ 457 $ 368 $ 1,092 $ 454 $ 660
----------- ------------- ----------- ------------- -------------
----------- ------------- ----------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1993 AND MARCH 31, 1994 AND 1995
(IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) REPORTING EQUITY
The accompanying financial statements include the accounts of the office
products, leasing and corporate segments of MISSCO Corporation (the Company)
which have been combined for reporting purposes as MISSCO
Corporation--Commercial Division (the Division). The Division is not a separate
legal or historical reporting entity.
The office products segment includes the Company's commercial locations
selling primarily office supplies, furniture and machines. The leasing segment
leases, as lessor, office furniture and equipment and data processing equipment
to commercial customers. The corporate segment, where substantially all debt and
the various equity components of the Company are recorded, provides
administrative and management support to all of the Company's segments.
The Division, as aggregated, represents approximately 68% of the Company's
assets at March 31, 1995 and 57% of its fiscal 1995 net sales.
All significant intradivisional balances and transactions have been
eliminated.
(b) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
net realizable value.
(c) INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109. Deferred income taxes are included in the
Company's financial statements and reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by enacted tax rules and regulations.
The income tax benefits allocated to the Division are based on the Company's
actual tax rate for the periods presented. All income tax assets and liabilities
have been reclassified to interdivisional receivables/ payables in the
accompanying balance sheets.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance and repairs
are charged to expense as incurred, while improvements and renovations are
capitalized.
Depreciation of plant and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Assets under capital
leases are amortized on the straight-line method over the shorter of the lease
term or estimated useful life of the asset.
(e) INVESTMENTS
Investments in marketable securities are carried at cost, which approximates
fair value. The Company has not implemented Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The effect of implementation would not have a material effect on
the accompanying financial statements.
F-51
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1993 AND MARCH 31, 1994 AND 1995
(IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) RECEIVABLES
Trade receivables are primarily concentrated with various commercial
customers. The Company performs on-going credit evaluations of its customers and
generally does not require collateral on trade receivables. The Company believes
that trade receivables are well diversified, thereby reducing potential credit
risk, and that an adequate allowance for any uncollectible trade receivables is
maintained.
At March 31, 1994 and 1995, the Division did not have a significant
concentration of sales or accounts receivable with any single customer.
(g) OTHER ASSETS
Goodwill is being amortized over 5 or 15 years using the straight-line
method. The net carrying value of goodwill was $147 and $185 at March 31, 1994
and 1995, respectively. A covenant not-to-compete is being amortized over 5
years using the straight-line method. The net carrying value of the covenant
not-to-compete was $46 and $36 at March 31, 1994 and 1995, respectively.
The recoverability of unamortized intangible assets is assessed by the
Company on an ongoing basis by comparing anticipated undiscounted future cash
flows from operations to net carrying values. At March 31, 1994 and 1995, the
Company believes that no impairment of intangible assets has occurred and that
no revision of estimated useful lives is required.
(h) CASH EQUIVALENTS
The Company considers temporary investments with a maturity of three months
or less when purchased to be cash equivalents.
(i) MAINTENANCE CONTRACTS
Revenues related to maintenance contracts, which have terms that do not
exceed one year, are amortized into income over the contract term using the
straight-line method.
(j) UNAUDITED INTERIM FINANCIAL INFORMATION
In the opinion of the Company's management, all adjustments, consisting only
of normal recurring adjustments that are necessary for a fair presentation, have
been included in the Division's unaudited financial information for the interim
periods ended September 30, 1994 and 1995.
NOTE 2--LEASING ACTIVITIES
Substantially all customer leases have terms of one to five years. The
carrying value of items leased to customers under operating leases was $93 and
$92 (net of accumulated depreciation of $52 and $53) at March 31, 1994 and 1995,
respectively.
F-52
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1993 AND MARCH 31, 1994 AND 1995
(IN THOUSANDS)
NOTE 2--LEASING ACTIVITIES (CONTINUED)
Components of the net investment in sales-type leases follow:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
----------- -----------
<S> <C> <C>
Total minimum lease payments to be received................................... $ 1,631 $ 2,066
Less allowance for doubtful receivables....................................... 8 30
----------- -----------
Net minimum lease payments receivable......................................... 1,623 2,036
Estimated unguaranteed residual value of leased property...................... 34 110
Less unearned income.......................................................... 259 355
----------- -----------
Total net investment in sales-type leases................................. 1,398 1,791
Less current portion.......................................................... 730 701
----------- -----------
Total net investment in sales-type leases, non-current
portion................................................................. $ 668 $ 1,090
----------- -----------
----------- -----------
</TABLE>
Executory costs such as insurance, maintenance and taxes are borne directly
by the lessees. There are no contingent rentals. Certain leases are pledged as
collateral on indebtedness (note 4).
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
----------- -----------
<S> <C> <C>
Land.......................................................................... $ 724 $ 724
Buildings and improvements.................................................... 3,766 4,589
Store fixtures................................................................ 333 342
Machinery, tools and equipment................................................ 1,541 1,617
Warehouse and office equipment................................................ 3,489 4,165
Assets under capital leases (note 7).......................................... 42 67
Construction in progress...................................................... 175 --
----------- -----------
$ 10,070 $ 11,504
----------- -----------
----------- -----------
</TABLE>
Certain items of property, plant and equipment are pledged as collateral on
indebtedness (note 4).
F-53
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1993 AND MARCH 31, 1994 AND 1995
(IN THOUSANDS)
NOTE 4--LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
----------- -----------
<S> <C> <C>
Notes payable under bank line of credit................................................. $ 3,167 $ 10,030
10% notes payable, due annually in varying amounts through 1999, with interest payable
semiannually; issued in connection with the Company's purchase of its common stock.... 233 194
7.5%-11% notes payable, due in various monthly installments through 2000, collateralized
by equipment and assignment of sales-type leases...................................... 1,053 1,476
Note payable to bank with interest at the prime rate plus 1/2%, due in monthly
installments of $17 plus interest through April 2001; collateralized by property
located in Jackson, Mississippi and all accounts receivable and inventories of the
Company............................................................................... 1,417 1,217
Note payable to bank with interest at the prime rate plus 1/2%, due in monthly
installments of $33 plus interest through April 1996; collateralized by all accounts
receivable and inventories of the Company. This note was repaid in fiscal 1995. ...... 833 --
5-6% notes payable to insurance companies, collateralized by cash surrender value of
life insurance........................................................................ 11 11
7.5% note payable, due in monthly installments of $4 through March 2003; issued in
connection with the Company's purchase of its common stock............................ 313 288
7.5% note payable to bank, due in monthly installments of $5 through March 1997;
collateralized by property located in Mobile, Alabama................................. 156 108
7.5% note payable to bank, due in monthly installments of $12 through December 1996;
collateralized by various property located in Jackson, Mississippi.................... 352 230
Note payable to bank with interest at the prime rate plus 1/2%, due in monthly
installments of $50 plus interest through November 1998; collateralized by all
accounts receivable and inventories of the Company. This note was repaid in fiscal
1995.................................................................................. 2,800 --
7.68% note payable, due in monthly installments of $6 through January 1999;
collateralized by equipment and inventories........................................... 271 223
7.5% note payable, due in monthly installments of $4 through May 2004; issued in
connection with the Company's purchase of its common stock............................ -- 303
Note payable to bank with interest at the prime rate plus 1/2%, due in monthly
installments of $8 through April 2001; collateralized by various property located in
Jackson, Mississippi.................................................................. -- 572
8.5% note payable, due in monthly installments of $4 through November 1997;
collateralized by equipment........................................................... -- 124
</TABLE>
F-54
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1993 AND MARCH 31, 1994 AND 1995
(IN THOUSANDS)
NOTE 4--LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
----------- -----------
<S> <C> <C>
9.25% note payable, due in monthly installments of $13 through December 1999;
collateralized by furniture and equipment............................................. -- 595
Unsecured 7% note payable, due in annual installments through 1998; issued in connection
with the Company's purchase of Crawford, Inc. (note 9)................................ 250 157
7.5% note payable to bank, due in monthly installments of $9 through January 1999;
collateralized by furniture and fixtures located in Birmingham, Alabama............... 454 368
6.78% note payable to bank, due in monthly installments of $14 through January 2004;
collateralized by building located in Birmingham, Alabama............................. 1,702 1,746
----------- -----------
13,012 17,642
Less current installments of long-term debt............................................. 2,074 1,568
----------- -----------
Long-term debt, excluding current installments.......................................... $ 10,938 $ 16,074
----------- -----------
----------- -----------
</TABLE>
In September 1994, the Company executed a new line of credit agreement with
another commercial bank and terminated the existing line of credit agreement.
The new $13,000 line of credit agreement is secured by all accounts receivable
and inventories of the Company. Interest is payable monthly at the bank's prime
rate. On August 4, 1995, the Company's primary lender committed to renew the
line of credit agreement, which was scheduled to expire in August 1995, until
August 1996. Borrowings under the line of credit agreements are classified as
long-term debt in the March 31, 1994 and 1995 balance sheets.
A summary of long-term debt maturities follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
- -------------------------------------------------------------------------
<S> <C>
1996..................................................................... $ 1,568
1997..................................................................... 11,492
1998..................................................................... 1,087
1999..................................................................... 813
2000..................................................................... 585
Thereafter............................................................... 2,097
---------
$ 17,642
---------
---------
</TABLE>
NOTE 5--INCOME TAXES
The Company files consolidated Federal and state income tax returns. While
the Division does not have a formal tax-sharing and allocation agreement with
the Company, the income tax benefits allocated to the Division are based on the
Company's actual tax rate of 39% for the year ended June 30, 1993, 40% for the
nine-month period ended March 31, 1994 and 31% for the year ended March 31,
1995.
F-55
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1993 AND MARCH 31, 1994 AND 1995
(IN THOUSANDS)
NOTE 6--EMPLOYEE BENEFIT PLANS
The Company has a contributory profit sharing plan which covers
substantially all employees. Participant contributions may be matched by the
Company at rates established each year by the Board of Directors. A matching
contribution has not been adopted by the Board of Directors. In addition, the
plan provides for a non-contributory stock ownership arrangement. Contributions
made by the Company for the purpose of acquiring its common stock are at the
discretion of the Board of Directors.
No contributions were made during the years ended June 30, 1993 or March 31,
1995; a $120 contribution was made to the plan by the Company during the
nine-month period ended March 31, 1994. The plan provides participants a 60 day
option to have the Company purchase distributed common stock at the most recent
appraised value.
The Company also has a deferred compensation plan covering selected
employees. Participants may elect to defer receipt of a portion of their
compensation until retirement, death or disability. The Company has segregated
investments in marketable securities to fund this obligation, but those assets
are not restricted. Earnings accrue to participants on the deferred compensation
obligation at amounts agreed to by the Company, currently the earnings of the
segregated assets.
NOTE 7--LEASED ASSETS AND LEASE COMMITMENTS
The following schedule summarizes assets recorded under capital leases:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
------------- -------------
<S> <C> <C>
Automobiles and equipment........................................... $ 42 $ 67
Less accumulated amortization....................................... 18 26
--- ---
Net assets under capital leases..................................... $ 24 $ 41
--- ---
--- ---
</TABLE>
A summary of future minimum lease payments follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING MARCH 31 LEASES LEASES
- ---------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1996.................................................................. $ 26 $ 734
1997.................................................................. 24 569
1998.................................................................. 8 427
1999.................................................................. 6 230
2000.................................................................. -- 41
--- -----------
Total future minimum lease payments............................... 64 $ 2,001
-----------
-----------
Less imputed interest at approximately 10.5%.......................... 6
---
Present value of future minimum lease payments........................ 58
Less current installments............................................. 24
---
Capital lease obligations, excluding current installments............. $ 34
---
---
</TABLE>
Division rental expense on operating leases was $581, $468 and $798,
respectively, for the year ended June 30, 1993, the nine-month period ended
March 31, 1994 and the year ended March 31, 1995. Most of the leases require the
payment of taxes, maintenance, insurance and certain other operating expenses
F-56
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1993 AND MARCH 31, 1994 AND 1995
(IN THOUSANDS)
NOTE 7--LEASED ASSETS AND LEASE COMMITMENTS (CONTINUED)
applicable to leased premises and equipment. There are no material contingent
rentals or subleases under the lease arrangements.
Management expects that in the normal course of business expired leases will
be renewed or replaced by other leases.
NOTE 8--PERFORMANCE GUARANTIES
The Company periodically has an independent party guarantee its performance
under contractual obligations. At March 31, 1995, the Company had pledged to the
guarantor Division trade accounts receivable with a carrying value of $519. This
pledge is the first lien on these receivables.
NOTE 9--ACQUISITION
In November 1993, the Company purchased certain assets associated with
Crawford, Inc., a commercial furniture dealer located in Birmingham, Alabama,
for approximately $850. This transaction was accounted for using the purchase
method, and the purchase price was primarily allocated to equipment, inventories
and goodwill.
NOTE 10--INTERDIVISIONAL ALLOCATIONS
The corporate segment of the Company provides both warehouse (purchasing,
receiving, storage and distribution) and administrative (accounting, computer
and management support) services to various Company segments and locations.
Allocation methods for warehouse and administrative expenses have varied based
on sales volume, operating expense levels and management's judgment during the
three periods ended March 31, 1995. Warehouse and administrative allocations to
the Division approximated $1,960 (50% of the total incurred) for the year ended
June 30, 1993; $1,680 (53%) for the nine-month period ended March 31, 1994; and
$2,790 (56%) for the year ended March 31, 1995.
Substantially all of the debt of the Company is recorded at the corporate
segment. Borrowings and related interest specific to a particular segment are
not subject to allocation. Interest expense related to general short-term
borrowings is allocated to the various Company segments and locations based on
trade accounts receivable outstanding more than thirty days. Interest expense on
general short-term debt allocated to the Division totaled $126 during the year
ended June 30, 1993, $144 during the nine-month period ended March 31, 1994 and
$323 during the year ended March 31, 1995.
NOTE 11--NOTES PAYABLE TO OFFICERS AND EMPLOYEES
Notes payable to officers and employees consist of demand notes bearing
interest at or near the prime rate. Subsequent to March 31, 1995, all of these
notes were repaid.
F-57
<PAGE>
MISSCO CORPORATION--COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1993 AND MARCH 31, 1994 AND 1995
(IN THOUSANDS)
NOTE 12--ALLOWANCE FOR DOUBTFUL RECEIVABLES
The changes in the Division's allowance for doubtful receivables for the
year ended June 30, 1993, the nine-month period ended March 31, 1994 and the
year ended March 31, 1995 are as follows:
<TABLE>
<CAPTION>
ADDITIONS-
BALANCE AT AMOUNTS DEDUCTIONS- BALANCE
BEGINNING CHARGED TO ACCOUNTS AT END
OF PERIOD EXPENSE WRITTEN OFF OF PERIOD
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended June 30, 1993.............................. $ 65 $ 131 $ 62 $ 134
Nine-month period ended March 31, 1994................ 134 89 32 191
Year ended March 31, 1995............................. 191 489 132 548
</TABLE>
NOTE 13--SUBSEQUENT EVENT
On August 16, 1995, the Company entered into a definitive agreement whereby
U. S. Office Products Company will pay the Company $22,700 in cash and buy
certain assets and assume certain liabilities of the Division. The business
combination will be accounted for using the purchase method. Management believes
the transaction will be consummated on or around September 29, 1995.
F-58
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Emmons-Napp Office Products, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, divisional equity and of cash flows present fairly, in all
material respects, the financial position of Emmons-Napp Office Products,
Inc. --Commercial Division (a division of Emmons -- Napp Office Products,
Inc. (the Company)) at December 31, 1995 and December 31, 1994, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Division's and the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. 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 provide a
reasonable basis for the opinion expressed above.
As described in note 1 to the Financial Statements, on January 15, 1996
the Company sold certain assets and liabilities to U.S. Office Products.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
May 15, 1996
F-59
<PAGE>
EMMONS-NAPP OFFICE PRODUCTS, INC.
COMMERCIAL DIVISION
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash.............................................................................. $ -- $ 2,410
Accounts receivable:
Trade receivables, less allowance for doubtful accounts of $67,000 and $117,000,
respectively.................................................................. 2,811,195 $2,675,932
Accounts Receivable from Related Party.......................................... -- 1,152,874
Other receivables............................................................... 397,995 --
Inventories..................................................................... 1,084,832 854,122
Prepaid expenses................................................................ 54,700 422,481
------------ ------------
Total current assets.......................................................... 4,348,722 5,107,819
Property and equipment, net....................................................... 964,131 1,187,786
Goodwill, net of accumulated amortization of $80,238 and $101,309, respectively... 107,485 --
Other assets...................................................................... 12,882 18,382
------------ ------------
Total assets.................................................................. $5,433,220 $6,313,987
------------ ------------
------------ ------------
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable................................................................ $1,642,130 $1,835,480
Accrued expenses................................................................ 741,365 682,136
Current portion of capital lease obligations.................................... 90,781 51,016
------------ ------------
Total current liabilities..................................................... 2,474,276 2,568,632
Bank debt......................................................................... 675,013 --
Capital lease obligations......................................................... 273,517 130,988
------------ ------------
Total liabilities............................................................. 3,422,806 2,699,620
------------ ------------
------------ ------------
Commitments and contingencies (Note 6 and 7)
Divisional equity................................................................. 2,010,414 3,614,367
------------ ------------
Total liabilities and divisional equity....................................... $5,433,220 $6,313,987
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-60
<PAGE>
EMMONS-NAPP OFFICE PRODUCTS, INC.
COMMERCIAL DIVISION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------- -------------
<S> <C> <C>
Revenues........................................................................ $ 25,822,855 $ 27,016,701
Cost of sales................................................................... 19,717,414 20,671,424
------------- -------------
Gross margin.................................................................. 6,105,441 6,345,277
Selling, general and administrative expenses.................................... 4,270,002 4,056,876
------------- -------------
Operating income................................................................ 1,835,439 2,288,401
Interest expense................................................................ 120,039 44,448
------------- -------------
Net income.................................................................. $ 1,715,400 $ 2,243,953
------------- -------------
------------- -------------
Unaudited pro forma net income (see Note 9)..................................... $ 1,029,400 $ 1,305,824
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-61
<PAGE>
EMMONS-NAPP OFFICE PRODUCTS, INC.
COMMERCIAL DIVISION
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DIVISIONAL
EQUITY
------------
<S> <C>
Balance at December 31, 1993........................................................................ $ 845,014
Net income........................................................................................ 1,715,400
Dividends paid.................................................................................... (550,000)
------------
Balance at December 31, 1994........................................................................ 2,010,414
Net income........................................................................................ 2,243,953
Dividends paid.................................................................................... (640,000)
------------
Balance at December 31, 1995........................................................................ $ 3,614,367
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE>
EMMONS-NAPP OFFICE PRODUCTS, INC.
COMMERCIAL DIVISION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $ 1,715,400 $ 2,243,953
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 169,729 329,373
Increase (decrease) in cash resulting from changes in:
Accounts receivable.......................................................... (721,490) 533,258
Accounts receivable from Related Party....................................... -- (1,152,874)
Inventories.................................................................. 61,539 230,710
Prepaid expenses............................................................. (8,683) (373,281)
Accounts payable............................................................. 356,304 193,350
Accrued expenses............................................................. 107,585 (59,229)
------------- -------------
Total adjustments.......................................................... (35,016) (298,693)
------------- -------------
Net cash provided by operating activities.................................. 1,680,384 1,945,260
------------- -------------
Cash flows from financing activities:
Purchases of property and equipment............................................ (314,300) (445,543)
Cash paid in acquisitions...................................................... (42,009) --
Changes in other noncurrent assets............................................. (690) --
------------- -------------
Net cash used for investing activities..................................... (356,999) (445,543)
------------- -------------
Cash flows from financing activities:
Payments on bank debt.......................................................... (698,001) (767,192)
Principal payments under capital leases........................................ (75,384) (90,115)
Dividends to stockholders...................................................... (550,000) (640,000)
------------- -------------
Net cash used for financing activities..................................... (1,323,385) (1,497,307)
------------- -------------
Net (decrease) increase in cash.................................................. 0 2,410
Cash, beginning of period........................................................ 0 0
------------- -------------
Cash, end of period.............................................................. $ 0 $ 2,410
------------- -------------
------------- -------------
Supplemental disclosures
Cash paid for:
Interest....................................................................... $ 119,755 $ 54,985
</TABLE>
A capital lease obligation of $260,737 was incurred during 1994 when the
Division entered into a lease for new furniture and fixtures.
The accompanying notes are an integral part of the financial statements.
F-63
<PAGE>
EMMONS-NAPP OFFICE PRODUCTS, INC.
COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements represent the accounts of Emmons-Napp
Office Products, Inc. -- Commercial Division (the Division) of Emmons-Napp
Office Products, Inc. (the Company).
The Division is not a separate legal or historical reporting entity, but
rather represents the activities and resulting account balances of certain
activities of the Company. These activities consist primarily of wholesale
supply of office supplies and office furniture and retail sale of office
supplies through retail stores located in Wisconsin and Michigan.
The Division represents approximately 40% and 69% of the Company's assets at
December 31, 1994 and December 31, 1995, respectively, and 73% and 77% of its
net sales for the years ended December 31, 1994 and 1995, respectively.
Certain expenses of the Company, including sales commissions, wages,
utilities and rent, are directly identifiable to the Division's operations. The
Company's methodology for allocating various other general and administrative
expenses to the Division vary based on sales volume, employee head count,
operating expense levels, and management's judgement. These allocations consider
the incremental costs associated with operating the Division and management
believes that the allocations of such costs to the Division is reasonable.
Allocations of general and administrative expenses to the Division approximated
$1.1 million for the year ended December 31, 1994 and $310,000 for the year
ended December 31, 1995.
Substantially all of the Company's bank debt is attributable to operations
other than the Division's. Bank debt is allocated based upon working capital
requirements. Interest expense related to the debt is allocated based on the
average outstanding debt balance. Interest expense on the debt allocated to the
Division totalled $91,000 for the year ended December 31, 1994 and $21,000 for
the year ended December 31, 1995.
On January 15, 1996 the Company sold certain assets and liabilities of
the Division to U.S. Office Products Company for $14.2 million consisting of
$9 million of cash and 315,152 shares of common stock with a market value of
$5.2 million. The business combination will be accounted for using the
purchase method.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE REECOGNITION
Revenues are recognized upon the delivery of office products to customers.
TRADE RECEIVABLES
The Division performs on-going credit evaluations of its customers and
generally does not require collateral on trade receivables. The Division
believes that trade receivables are well diversified, thereby reducing potential
credit risk, and that an adequate allowance for any uncollectible trade
receivables is maintained.
At December 31, 1994 and December 31, 1995 the Division did not have a
significant concentration of sales or accounts receivable with any single
customer.
INVENTORIES
Inventories, are stated at the lower of cost or market with cost being
determined on the first in, first out method and consists primarily of products
held for sale.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over the
estimated useful lives ranging from six to fifteen years using the straight-line
method. Expenditures which substantially increase an asset's value or extend its
useful life are capitalized. Property and equipment leased under capital leases
are being
F-64
<PAGE>
EMMONS-NAPP OFFICE PRODUCTS, INC.
COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortized over the lessor of their useful lives or their lease terms which are
five years. Expenditures for maintenance and repairs are charged against income
as incurred. When items of property are sold or otherwise disposed of, cost and
related accumulated depreciation are eliminated from the accounts. Any gain or
loss is reflected in income.
GOODWILL
Goodwill 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 estimated useful lives of 10
years.
The recoverability of unamortized goodwill is assessed by the Division on an
ongoing basis by comparing anticipated undiscounted future cash flows from
operations to net carrying values. At December 31, 1994 and December 31, 1995,
the Division believes that no impairment of goodwill has occurred and that no
revision of estimated useful lives is required.
INCOME TAXES
The Company has elected under the Internal Revenue Code to be treated as an
S Corporation. In lieu of corporate income taxes for federal and most state
income tax purposes, the shareholders of the Company are taxed on their
proportionate share of the taxable income and utilize their proportionate share
of the Company's tax credits. Therefore, no provision or liability for income
taxes exists at the Company or Divisional level as any income taxes are the
responsibility of the Company's shareholders.
NOTE 3 -- OTHER RECEIVABLES
Other receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Rebates receivable............................................ $ 375,099 $ 400,232
Other......................................................... 22,896 --
------------ ------------
$ 397,995 $ 400,232
------------ ------------
------------ ------------
</TABLE>
NOTE 4 -- PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Furniture and fixtures........................................ $ 895,909 $ 955,792
Autos and trucks.............................................. 386,970 412,456
Leasehold improvements........................................ 42,739 122,836
------------ ------------
1,325,618 1,491,084
Less: Accumulated depreciation and amortization............... 361,487 303,298
------------ ------------
Net property and equipment.................................... $ 964,131 $1,187,786
------------ ------------
------------ ------------
</TABLE>
Depreciation and amortization expense was approximately $154,000 and
$190,000 for the years ended December 31, 1994 and 1995, respectively.
F-65
<PAGE>
EMMONS-NAPP OFFICE PRODUCTS, INC.
COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- BANK DEBT
The Company has a revolving line of credit with a bank maturing at January
25, 1996 and provides for the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Maximum borrowings............................................ $4,000,000 $3,000,000
Interest rate:
Prime plus .375% per annum.................................. 8.875%
Prime per annum............................................. 8.5%
</TABLE>
Maximum borrowings under this agreement are secured by and may not exceed
50% and 75% of the Company's inventory and accounts receivable, respectively.
Division inventory and accounts receivable secure this debt beyond the amount of
debt included in the Division's financial statements. Total Company borrowings
under this agreement were $2,180,000 and 0 at December 31, 1994 and December 31,
1995, respectively. The agreement contains various restrictive covenants,
including the maintenance of minimum working capital, tangible net worth and
current ratio amounts and a maximum debt to net worth ratio as well as
limitations on capital expenditures. At December 31, 1994 and 1995, the Company
had violated certain financial ratio covenants relative to the agreement;
however, management obtained covenant waivers from the bank effective through
January 25, 1996.
NOTE 6 -- LEASE COMMITMENTS
The Division leases certain vehicles and computer equipment, and office,
stores and warehouse space under various non-cancelable lease arrangements which
have been accounted for as capital or operating leases, as appropriate. Future
minimum lease payments required under the leases in effect at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING TOTAL
---------- ---------- ------------
<S> <C> <C> <C>
Year ending December 31,
1996........................................................... $ 64,488 $ 185,384 $ 249,872
1997........................................................... 64,488 152,385 216,873
1998........................................................... 64,488 133,561 198,049
1999........................................................... 16,119 117,036 133,155
2000........................................................... -- 91,779 91,779
Thereafter..................................................... -- -- --
---------- ---------- ------------
Total future minimum lease payments............................ $ 209,583 $ 680,145 $ 889,728
---------- ------------
---------- ------------
Less imputed interest.......................................... 27,579
----------
Present value of future minimum lease payments................. 182,004
Less current portion........................................... 51,016
---------- ----------
Long-term capitalized lease obligation......................... $ 130,988
---------- ----------
---------- ----------
</TABLE>
Assets under capital lease with a cost of approximately $260,737 and net
book values of approximately $221,623 and $169,471 at December 31, 1994 and
December 31, 1995, respectively, are included in property and equipment in the
accompanying balance sheet. Amortization of the related lease obligations is
included with depreciation expense.
Rental expense for operating leases approximated $393,000 and $260,000 for
the year ended December 31, 1994 and 1995, respectively.
F-66
<PAGE>
EMMONS-NAPP OFFICE PRODUCTS, INC.
COMMERCIAL DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- LEASE COMMITMENTS (CONTINUED)
The Division leases office, warehouse, and store space from four
companies whose owners are stockholders of the Company. The amounts paid to
these companies for the years ended December 31, 1994 and 1995 were
approximately $120,000 and $89,000, respectively.
NOTE 7 -- CONTINGENCIES
The Company has established a self-funded health insurance plan for its
employees including those of the Division. The plan administrators are
responsible for the approval, processing and payment of claims, after which
they bill the Division for reimbursement. The Division is also responsible
for a monthly administrative fee. As part of the health care coverage of the
plan, the Division purchases stop-loss coverage which pays claims in excess
of $20,000 per plan participant. The Division has recorded a $31,000 reserve
at December 31, 1994 and 1995 for reported and unreported claims which were
incurred and not paid on or before the respective dates. Management believes
the established reserve is adequate and resolution of these contingencies
will not have a material impact on the Division's financial statements.
NOTE 8 -- EMPLOYEE BENEFIT PLAN
The Company maintains a qualified defined contribution 401(k) plan
covering substantially all Divisional employees meeting age, length of
service and full time status requirements. The plan provides for voluntary
contributions by plan participants of up to 15% of their compensation.
Expense under the plan in the years ended December 31, 1994 and 1995 was
$37,000 and $26,000, respectively.
NOTE 9 -- UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma tax information is presented as if the
Company had been a subchapter C corporation subject to federal and state income
taxes throughout the periods presented and had accounted for income taxes in
accordance with Statement of Financial Accounting Standard No. 109 (SFAS 109).
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------ -------------
<S> <C> <C>
Net income before pro forma adjustments...................... $1,715,400 $ 2,176,373
Provision for income taxes................................... 686,000 870,549
------------ -------------
Pro forma net income......................................... $1,029,400 $ 1,305,824
------------ -------------
------------ -------------
</TABLE>
F-67
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Blue Star Group Limited
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Blue Star
Group Limited and its subsidiaries as of March 31, 1995, and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States 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 audit provides a reasonable basis
for the opinion expressed above.
As described in Note 12 to the financial statements, the Company and its
shareholders tentatively agreed to sell their outstanding shares of stock to
U.S. Office Products Company.
PRICE WATERHOUSE
Auckland, New Zealand
August 4, 1995, except as to Note 12,
which is as of December 11, 1995
F-68
<PAGE>
BLUE STAR GROUP LIMITED
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1995
------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash.......................................................... $ -- $ --
Accounts receivable, less allowance for doubtful accounts of
$128,700.................................................... 10,430,265 24,831,841
Inventories................................................... 5,462,645 12,476,823
------------- -------------
Total current assets........................................ 15,892,910 37,308,664
Property and equipment, net................................... 14,659,205 11,491,424
Deferred taxes................................................ 166,616 209,680
Long-term lease receivables................................... 2,674,129 8,498,898
Investments................................................... 1,628,983 2,131,700
Intangible assets, net........................................ 2,459,895 2,908,081
------------- -------------
Total assets................................................ $ 37,481,738 $ 62,548,447
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Commercial bills.............................................. 11,082,510 18,904,350
Short-term debt............................................... 1,694,023 2,653,837
Accounts payable.............................................. 6,359,859 12,961,119
Income taxes payable.......................................... 681,095 1,993,740
Other accrued expenses........................................ 2,521,093 2,992,527
------------- -------------
Total current liabilities................................... 22,338,580 39,505,573
Long-term debt.................................................. 2,991,185 9,228,688
Minority interest............................................... 159,699 275,364
Subordinated shareholder advances............................... 10,327,419 9,368,644
------------- -------------
Total liabilities........................................... 35,816,883 58,378,269
------------- -------------
Commitments and contingencies
Shareholders' equity
Common stock, no par value; 6,250,000 shares authorized,
issued and outstanding...................................... 347,750 347,750
Foreign currency translation.................................. 118,359 92,965
Retained earnings............................................. 1,198,746 3,729,463
------------- -------------
Total shareholders equity................................... 1,664,855 4,170,178
------------- -------------
Total liabilities and shareholders' equity.................. $ 37,481,738 $ 62,548,447
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-69
<PAGE>
BLUE STAR GROUP LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ------------------------
ENDED DECEMBER DECEMBER
MARCH 31, 31, 31,
1995 1994 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues............................................ $45,685,329 $30,409,119 $73,227,004
Cost of sales....................................... (31,605,613) (19,365,651) (44,715,154)
----------- ----------- -----------
Gross profit........................................ 14,079,716 11,043,468 28,511,850
Selling, general and administrative expenses........ (11,716,810) (8,480,827) (24,349,783)
----------- ----------- -----------
Operating income.................................... 2,362,906 2,562,641 4,162,067
Other (income) expense:
Interest expense.................................. 562,827 406,407 1,334,396
Other expense, net................................ 67,614 33,467 (1,144,216)
Minority interest................................... (33,775) 607,331 115,193
----------- ----------- -----------
Income before provision for income taxes............ 1,766,240 1,515,436 3,856,694
Provision for income taxes.......................... 489,745 536,424 1,325,977
----------- ----------- -----------
Net income.......................................... $ 1,276,495 $ 979,012 $ 2,530,717
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-70
<PAGE>
BLUE STAR GROUP LIMITED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
NUMBER SHARE TRANSLATION RETAINED
OF SHARES CAPITAL RESERVE EARNINGS TOTAL$
---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994....................... 5,000,000 $ 266,500 $ 20,134 $ (77,749) $ 208,885
Net income.................................... 1,276,495 1,276,495
Issue of share capital........................ 1,250,000 81,250 81,250
Movement on foreign currency transaction
reserve..................................... 98,225 98,225
---------- ---------- ----------- ------------ ------------
Balance at March 31, 1995....................... 6,250,000 347,750 118,359 1,198,746 1,664,855
Net income.................................... 2,530,717 2,530,717
Movement on foreign currency transaction
reserve..................................... (25,394) (25,394)
---------- ---------- ----------- ------------ ------------
Balance at December 31, 1995 (unaudited)........ 6,250,000 $ 347,750 $ 92,965 $ 3,729,463 $ 4,170,178
---------- ---------- ----------- ------------ ------------
---------- ---------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-71
<PAGE>
BLUE STAR GROUP LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR -----------------------
ENDED MARCH DECEMBER DECEMBER
31, 1995 31, 1994 31, 1995
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 1,276,495 $ 979,012 $ 2,530,717
Adjustments to reconcile net income to net cash
provided by operating activities
Foreign exchange movement............................ 65,086 46,804 (33,079)
Depreciation and amortization........................ 1,054,100 541,759 5,927,907
Loss on disposal of equipment........................ 141,748 5,842 --
Minority interest.................................... (71,767) 672,556 114,928
Increase (decrease) in cash resulting from changes
in:
Accounts receivable................................ (7,586,941) (1,223,366) (18,491,854)
Inventories........................................ (1,825,185) (895,029) (4,798,993)
Accounts payable and accrued liabilities........... 4,316,020 2,194,873 5,862,811
Income tax payable................................. 281,358 475 1,267,207
----------- ---------- -----------
Total adjustments................................ (3,625,581) 1,343,914 (10,151,073)
----------- ---------- -----------
Net cash provided by (used for) operating activities... (2,349,086) 2,322,926 (7,620,356)
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.................. (11,221,998) (1,049,025) (1,967,194)
Cash paid in acquisition............................. (2,745,343) (2,713,666) (2,159,201)
Proceeds from disposal of equipment.................. 504,173 38,177 --
Purchase of investments.............................. (812,977) (711,522) (495,198)
----------- ---------- -----------
Net cash used for investing activities................. (14,276,145) (4,436,036) (4,621,593)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from commercial bills....................... 6,792,500 1,895,375 7,770,700
Increases to long-term debt.......................... 3,776,190 -- 6,157,070
Loans and advances................................... 6,103,484 781,041 (1,684,007)
Purchase of treasury stock........................... (109,849) -- --
Proceeds from issuance of common stock............... 81,250 -- --
----------- ---------- -----------
Net cash provided by (used for) financing activities... 16,643,575 2,676,416 12,243,763
----------- ---------- -----------
NET (DECREASE) INCREASE IN CASH
CASH, beginning of period.............................. 18,344 563,306 1,814
Foreign exchange movements............................. (18,344) (16,798) (1,814)
----------- ---------- -----------
CASH, end of period.................................... $ -- $ 546,508 $
----------- ---------- -----------
----------- ---------- -----------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest........................................... $ 476,745 $ 455,775 $ 1,167,843
Taxes.............................................. 218,990 54,235 56,396
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-72
<PAGE>
BLUE STAR GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BUSINESS ORGANIZATION
Blue Star Group Limited and its subsidiaries ("the Company") is a wholesale
supplier of office supplies, office furniture, and computer equipment and retail
operator of office supply retail stores located in New Zealand. The consolidated
financial statements include the accounts of the Company and all its
subsidiaries. All intercompany transactions and balances have been eliminated in
consolidation.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--These financial statements have been prepared in
accordance with the accounting principles generally accepted in the United
States. The information included in these financial statements is presented in
U.S. dollars. The Company maintains its financial information in New Zealand
dollars and then translates this information into U.S. dollars for purposes of
these financial statements. Amounts denominated in New Zealand dollars at the
balance sheet dates are translated into U.S. dollars at the rate of exchange
prevailing at these dates. Transactions denominated in New Zealand dollars
during the year have been translated into U.S. dollars at rates approximating
the monthly average exchange rate.
REVENUE RECOGNITION--Revenues related to office products are recognized upon
the delivery of the products to the customer. The Company also leases equipment
to customers under both short term and long term lease agreements. Revenue
realted 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.
INVENTORIES--Inventories are stated at the lower of cost or net realisable
value and consist of products held for sale. Cost is determined using the
first-in, first-out (FIFO) method.
FIXED ASSETS--All fixed assets are initially recorded at cost. Fixed assets
other than land are depreciated at rates considered adequate to write off the
cost of assets over their estimated economic lives. Leasehold improvements are
depreciated over the shorter of 20% diminishing value or the term of the lease.
For other assets the following rates are used:
<TABLE>
<S> <C>
Buildings.............................................. 2% straight line
Motor vehicles......................................... 25% diminishing value
Plant and equipment.................................... 9.5%-40% diminishing value
Fixtures and fittings.................................. 9.5%-20% diminishing value
Telecommunications equipment........................... 16.7% straight line
</TABLE>
Expenditures for maintenance and repairs are charged against income as
incurred. When items of property are sold or otherwise disposed of, the cost and
related accumulated depreciation are eliminated from the accounts. Any gain or
loss is reflected in income.
Assets acquired under capital leases are included as fixed assets in the
balance sheet. Capital leases effectively transfer from the lessor to the lessee
substantially all the risks and benefits of ownership of the leased property.
Where assets are acquired by means of capital leases, the lower of the present
value of minimum lease payments or fair value is recognised as an asset at the
beginning of the lease term and depreciated over the expected useful life of the
leases asset on a basis consistent with similar assets. A corresponding
liability is also established and each lease payment is allocated between the
liability and interest expense.
Other leases where all the risks and benefits of ownership are effectively
retained by the lessor are classified as operating leases. Operating lease
payments are charged to expense over the periods of expected benefit.
F-73
<PAGE>
BLUE STAR GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equipment leased to customers under short term operating leases are included
as fixed assets in the balance sheet and depreciated over their expected useful
lives.
INCOME TAXES--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No.109, "Accounting of Income
Taxes". 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.
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 September 30, 1995 and 1994 and the results of operations and cash flows for
the six months then ended as presented in the accompanying unaudited interim
financial statements.
INVESTMENTS--are considered available for sale and are stated at market
value using the quoted price on the New Zealand Stock Exchange at the close of
business on the last day of the year. Changes in market value during the year
were insignificant.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
1995
-------------
<S> <C>
Freehold land.................................................................. $ 25,631
Buildings...................................................................... 1,599,043
Leasehold improvements......................................................... 571,659
Plant and equipment............................................................ 2,336,596
Furniture and fittings......................................................... 656,591
Motor vehicles................................................................. 369,613
Telecommunications equipment................................................... 10,429,033
-------------
15,988,166
Less: accumulated depreciation and amortization................................ (1,328,961)
-------------
Net property and equipment..................................................... $ 14,659,205
-------------
-------------
</TABLE>
Depreciation expense was approximately $986,486 for the year ended March 31,
1995.
NOTE 4--INTANGIBLE ASSETS
Intangible assets consist 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. The recoverability of unamortized goodwill
is assessed on an ongoing basis by comparing anticipated undiscounted future
cash flows from operations to net book value. Goodwill consists of the
following:
<TABLE>
<CAPTION>
MARCH 31,
1995
------------
<S> <C>
Goodwill........................................................................ $ 2,539,977
Less: Accumulated amortization.................................................. (80,082)
------------
$ 2,459,895
------------
------------
</TABLE>
Amortization expense was approximately $67,614 for the year ended March 31,
1995.
F-74
<PAGE>
BLUE STAR GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM LEASE RECEIVABLES
<TABLE>
<CAPTION>
MARCH 31,
1995
------------
<S> <C>
Gross lease receivables......................................................... $ 5,156,855
Less unearned interest.......................................................... (928,855)
------------
4,228,000
Less current portion............................................................ 1,553,871
------------
Non-current receivables......................................................... $ 2,674,129
------------
------------
</TABLE>
NOTE 6--BUSINESS COMBINATIONS
During the year ended March 31, 1995, the Comapny completed several
acquisitions which were individually immaterial. The aggregate consideration
paid for these businesses approximated $3.1 millon which included cash of $2.7
million and borrowings of $.4 million. The net assets acquired approximated $1.6
million which resulted in the recognition of goodwill of $1.5 million. The
operating results of the businesses have been included in the Company's
financial statements from the effective date of the acquisitions.
NOTE 7--CREDIT FACILITIES
SHORT-TERM DEBT
Short term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
1995
-------------
<S> <C>
Commercial bills payable to a bank, secured by the assets of the Company, excluding
finance receivables. Interest is charged at 11%. The facility has a review date of July
1996................................................................................... $ 11,082,501
Bank overdraft........................................................................... 393,002
Current maturities of long-term debt..................................................... 1,694,023
-------------
$ 13,169,526
-------------
-------------
</TABLE>
The bank overdraft bears interest at 12.4%. This facility is technically
repayable on demand and is due to be reviewed in July 1996. The overdraft is
secured by the Company's assets, excluding the finance receivables.
F-75
<PAGE>
BLUE STAR GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--CREDIT FACILITIES (CONTINUED)
LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
1995
-------------
<S> <C>
Draw down facility with a finance company to finance the sale of office equipment and
automation products. Facility capped at $6,500,000. Interest is payable at a rate of
12% and capital is repaid in accordance with the lease contract. The facility is
secured by the Company's lease receivables............................................. $ 3,070,488
Finance leases payable over the term of the contracts ranging from 1-5 years at an
interest rate of 12.5%................................................................. 466,441
Other loans partly secured over certain group properties at an average interest rate of
11.5%.................................................................................. 1,148,279
Less: Current maturities................................................................. (1,694,023)
-------------
$ 2,991,185
-------------
-------------
</TABLE>
Future annual maturities of long-term debt at March 31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................. 1,694,023
1997............................................. 1,715,821
1998............................................. 1,170,045
1999............................................. 105,319
---------
4,685,208
---------
---------
</TABLE>
The bank borrowings have restricted covenants attached which necessitate a
minimum interest cover of 2.5 and maximum gearing levels.
SHAREHOLDER ADVANCES
Advances from shareholders of $10,327,419 are due on demand by the
shareholders but are subordinated to the amounts owed to the Bank and cannot be
called until the Bank has been repaid. These advances do not accrue an interest
charge.
F-76
<PAGE>
BLUE STAR GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--LEASE OBLIGATIONS
The Company leases certain vehicle and office, store and warehouse space
under various non-cancellable lease arrangements which have been accounted for
as capital or operating leases, as appropriate. Future minimum, lease payments
required under long-term leases in effect at March 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL
(NET OF
IMPUTED
INTEREST OPERATING TOTAL
--------------- ------------ ------------
<S> <C> <C> <C>
1996.............................................. $ 103,772 $ 872,561 $ 976,333
1997.............................................. 128,675 747,331 876,006
1998.............................................. 128,675 747,331 876,006
1999.............................................. 105,319 510,693 616,012
2000.............................................. -- 272,321 272,321
--------------- ------------ ------------
466,441 $ 3,150,237 $ 3,616,678
------------ ------------
------------ ------------
Less current portion.............................. (103,772)
---------------
Long-term capitalized lease obligations........... $ 362,669
---------------
---------------
</TABLE>
Assets under capital lease with a cost of $405,219 and net book value of
$367,160 at March 31, 1995, are included in property and equipment in the
accompanying balance sheet. Amortization of the related lease obligations is
included within depreciation expense.
Rental expense for operating leases was $592,288 for the year ended March
31, 1995.
NOTE 9--INCOME TAXES
The income tax provision consisted of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MARCH 31,
1995
-----------
<S> <C>
Current expense.................................................................. $ 656,361
Deferred (benefit)............................................................... (166,616)
-----------
$ 489,745
-----------
-----------
</TABLE>
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MARCH 31,
1995
-------------
<S> <C>
Statutory tax rate................................................................ 33.0%
Minority interest................................................................. (1.0)
Other--net........................................................................ (4.3)
---
27.7%
---
---
</TABLE>
Deferred income taxes of $166,616 as of March 31, 1995 relate to differences
in the amounts of depreciation recognized for income tax, as opposed to
financial reporting, purposes.
NOTE 10--COMMITMENTS AND CONTINGENCIES
There are no contingent liabilities outstanding at March 31, 1995.
F-77
<PAGE>
BLUE STAR GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
On March 31, 1995 a deposit had been paid on the purchase of a business from
Keycom Central Limited. The total purchase price had been agreed as $123,523.
There are no other commitments at March 31, 1995.
NOTE 11--FINANCIAL INSTRUMENTS
The Company is party to a number of financial instruments in the ordinary
course of business including lease and trade payables, lease and trade
receivables, bank overdrafts and investments. The group is not party to any
contracts with off balance sheet exposure. Financial instruments which
potentially subject the company to concenrations of credit risk consist of cash
and receivables.
LEASE RECEIVABLES
The Company has entered into lease arrangements with customers comprising
principal and interest receivables. The Company has a credit policy through
which credit risk is managed. Under this policy management have assessed the
collectability of debtors and this is represented by a due allowance for
doubtful accounts. The maximum exposure of credit risk on receivables due from
customers is equal to the principal and unearned interest outstanding.
TRADE RECEIVABLES
The maximum credit risk is the book value of these financial instruments.
<TABLE>
<S> <C>
Total lease receivables...................... 5,156,855
Total trade receivables...................... 8,266,585
-----------
Total credit risk............................ 13,423,440
-----------
-----------
</TABLE>
Concentrations of credit risk with respect to trade and other receivables
are limited due to the relatively low value owed by any single customer.
NOTE 12--SUBSEQUENT EVENT
On December 11, 1995 the US Office Products Company ("US Office Products")
entered into an agreement with Blue Star Group Limited pursuant to which US
Office Products will acquire a 51% interest in Blue Star Group Limited.
F-78
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Shareholders of
Raleigh Office Supply Company, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Raleigh Office Supply Company,
Inc. at August 31, 1995, and the results of its operations and its cash flows
for the year then ended 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 audit. We conducted our audit 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 audit
provides a reasonable basis for the opinion expressed above.
As described in Note 12 to the financial statements, on March 6, 1996 the
Company's shareholders entered into a letter of intent to sell all of its
issued and outstanding shares of common stock to U.S. Office Products Company.
Price Waterhouse LLP
Minneapolis, Minnesota
March 8, 1996
F-79
<PAGE>
Raleigh Office Supply Company, Inc.
Balance Sheet
<TABLE>
<CAPTION>
August 31, February 28,
1995 1996
------ -----
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash, including interest-bearing deposits $1,906,070 $ 800,478
Accounts receivable -- trade 3,341,272 3,610,594
Accrued interest receivable 17,057 --
Current portion notes receivable -- related parties 35,920 --
Inventories 2,182,999 2,768,672
--------- ---------
Total current assets 7,483,318 7,179,744
Property and equipment, net 835,715 792,079
Notes receivable -- related parties 74,080 128,265
Excise tax deposit 84,150 84,150
Other assets 185,623 10,885
---------- ---------
Total assets $8,662,886 $8,195,123
----------- ----------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 628,228 $ 551,369
Accrued profit-sharing contribution 165,000 --
Deposit from customers 53,893 --
Accrued liabilities:
Salaries and wages 321,095 200,891
Sales tax 76,055 51,054
Other liabilities 35,086 1,703
---------- ----------
Total current liabilities 1,279,357 805,017
---------- ----------
Commitments
Shareholders' equity:
Class A common stock, par value $10 per share; 1,000 shares
authorized, and 922 shares issued and outstanding 9,220 9,220
Class B common stock, par value $10 per share; 199,000
shares authorized, and 9,677 shares issued and outstanding 96,770 96,770
Additional paid-in capital 269,540 269,540
Retained earnings 7,007,999 7,014,576
---------- ----------
Total shareholders' equity 7,383,529 7,390,106
---------- ----------
Total liabilities and shareholders' equity $8,662,886 $8,195,123
---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-80
<PAGE>
Raleigh Office Supply Company, Inc.
Statement of Operations
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
August 31, February 28,
1995 1995 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Sales $28,003,087 $13,739,623 $13,464,204
Cost of sales 21,817,362 10,230,792 9,961,242
----------- ----------- -----------
Gross profit 6,185,725 3,508,831 3,502,962
Selling, general and administrative expenses 5,335,977 3,211,787 2,993,695
---------- ---------- ----------
Operating income 849,748 297,044 509,267
Interest expense 191 -- --
Other income, net of other expense (56,659) (38,296) (298,828)
---------- ---------- -----------
Net income $ 906,216 $ 335,340 $ 808,095
---------- ---------- -----------
Unaudited pro forma net income (see
Note 12) $ 543,730 $ 201,204 $ 484,857
---------- ----------- -----------
</TABLE>
F-81
<PAGE>
Raleigh Office Supply Company, Inc.
Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Additional
COMMON STOCK Paid-in Retained
CLASS A CLASS B CAPITAL EARNINGS TOTAL
------- ------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1994 $9,220 $96,770 $ 269,540 $6,501,783 $6,877,313
Distribution to shareholders (400,000) (400,000)
Net income 906,216 906,216
------ ------- ---------- ----------- ---------
Balance at August 31, 1995 9,220 96,770 269,540 7,007,999 7,383,529
Distribution to shareholders (801,518) (801,518)
Net income (unaudited) 808,095 808,095
-------- -------- ----------- ----------- ---------
Balance at February 28,
1996 (unaudited) $ 9,220 $96,770 $ 269,540 $ 7,014,576 $7,390,106
------- ------- ---------- ----------- ----------
</TABLE>
F-82
<PAGE>
Raleigh Office Supply Company, Inc.
Statement of Cash Flows
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
August 31, February 28,
1995 1995 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 906,216 $ 335,340 $ 808,095
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 232,439 115,558 105,000
Gain on sale of investments (15,806) (15,806) --
Loss on disposal of property and equipment 107,026 -- --
(Increase) decrease in assets:
Accounts receivable - trade (226,656) (660,875) (216,345)
Inventories 136,413 (171,642) (585,673)
Excise tax deposit (6,349) -- --
Other assets (9,769) (244,056) 120,553
Interest receivable (17,057) -- --
Increase (decrease) in liabilities:
Accounts payable (125,262) 77,741 (76,859)
Accrued profit sharing contributions 1,300 (89,893) (285,204)
Deposit from customer (22,788) -- --
Accrued liabilities 85,061 (39,484) (112,277)
---------- ---------- -----------
Net cash provided by (used in)
operating activities 1,044,768 (693,117) (242,710)
--------- --------- ----------
Cash flows from investing activities:
Capital expenditures (318,769) (317,435) (61,364)
Proceeds from sale of marketable securities 1,000,000 1,000,000 --
Proceeds from disposal of property and equipment 13,635 -- --
Receipts on notes receivable - officers 10,000 -- --
Advances to related parties (100,000) -- --
---------- ----------- ------------
Net cash provided by (used in)
investing activities 604,866 682,565 (61,364)
---------- ----------- ------------
Cash flows from financing activities:
Principal payments on capital lease obligations (25,600) -- --
Dividends paid to stockholders (400,000) (392,880) (801,518)
----------- ----------- ------------
Net cash used in financing activities (425,600) (392,880) (801,518)
----------- ----------- ------------
Net increase (decrease) in cash 1,224,034 (403,432) (1,105,592)
Cash at beginning of period 682,036 682,036 1,906,070
---------- ---------- ------------
Cash at end of period $1,906,070 $ 278,604 $ 800,478
---------- ---------- -------------
Supplemental information:
Interest paid $ 191 $ -- $ --
---------- ----------- -----------
</TABLE>
F-83
<PAGE>
Raleigh Office Supply Company, Inc.
Notes to Financial Statements
Note 1 -- Business Organization
Raleigh Office Supply Company, Inc. (the "Company") is a retailer and
distributor of office supplies and office furnishings in North Carolina. The
Company's operations are segregated into two divisions, Raleigh Office Supply
and Carolina Office Supply.
Note 2 -- Summary of Significant Accounting Principals
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
CONCENTRATION OF CREDIT RISK -- The Company sells office supplies and office
furniture to companies located primarily in the Raleigh-Durham-Chapel Hill
area of North Carolina. Financial instruments which potentially subject the
Company to credit risk consist primarily of accounts receivable. The Company
grants credit to customers in the ordinary course of business. No customer
represents a significant concentration of credit risk.
REVENUE RECOGNITION -- Revenues are recognized upon the delivery of office
products to customers.
ACCOUNTS RECEIVABLE -- Management has determined that accounts receivable are
fully collectible; therefore, no allowance for doubtful accounts has been
provided.
INVENTORIES -- Inventories of office supplies and furnishings are stated at
the lower of cost or market with cost determined by the first-in, first-out
("FIFO") method and consist primarily of product held for sale.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost and are
depreciated over their estimated useful lives primarily utilizing accelerated
methods.
CLASSIFICATION OF PROPERTY ESTIMATED USEFUL LIFE
Buildings and improvements 7 -- 31.5 years
Vehicles 3-5 years
Furniture and equipment 3-7 years
F-84
<PAGE>
Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized. Upon
disposition of property and equipment, the cost and related accumulated
depreciation is removed from the accounts and any resulting gain or loss is
reflected in operations for the period.
INCOME TAXES -- The Company is a Subchapter S Corporation for income tax
purposes and, accordingly, any income tax liabilities are the responsibility
of the stockholders. The Company's Subchapter S Corporation status will
terminate on consummation of the Merger discussed in Note 12.
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 February 28, 1996 and the results of operations and cash flows
for the six months ended February 28, 1996 and 1995, as presented in the
accompanying unaudited financial statements.
Note 3 -- Interest Bearing Deposits
Cash includes interest bearing deposits of $1,853,000 at August 31, 1995 with
original maturities of three months or less.
Note 4 -- Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
August 31,
1995
----
<S> <C>
Land $ 114,740
Buildings 1,120,629
Furniture and fixtures 854,576
Autos and trucks 762,791
----------
2,852,736
Less: Accumulated depreciation and amortization (2,017,021)
----------
Net property and equipment $ 835,715
----------
</TABLE>
F-85
<PAGE>
Note 5 -- Notes Receivable and Related Party Transactions
The Company had 7.6% notes receivable from officers totaling $10,000 at
August 31, 1995, collateralized by liens on real estate. Final payment on
these notes will be in September, 1995. Interest income related to these
notes totaled $775 in 1995.
During 1995, the Company loaned $100,000 to Village Book and Stationery,
Inc., a company affiliated by common ownership. Subsequent to year-end the
Company loaned Village Book and Stationery, Inc. an additional $30,000. The
note carries interest at 8.75% and calls for monthly payments of principal
and interest of $2,683 beginning in October, 1995 through September, 2000.
Note 6 -- Credit Facilities
At August 31, 1995, the Company maintained an unsecured line of credit with
First Citizens Bank, NC allowing for borrowings of up to $500,000. No draws
were made on this line during 1995.
Note 7 -- Capital Stock
Class A common shareholders have the exclusive right to vote at all meetings
of shareholders. Class B common shareholders have the same rights as Class A
common shareholders except that the Class B common shares are non-voting
shares, except as provided by statute. Dividends are based on total
outstanding shares of Class A and B common stock.
Note 8 -- Lease Obligations
During 1995, the Company renegotiated its lease for retail and storage space
at its Durham location. Under the terms of the new one year lease, which was
effective in August, 1995, the Company is required to pay a base annual rent
of $60,000 for a one-year term ending August, 1996.
Rental expense related to this lease was $103,255 in 1995.
F-86
<PAGE>
Note 9 -- Profit Sharing Plan
The Company maintains a profit-sharing plan for full-time employees who meet
eligibility requirements regarding term of service and age. The annual
contribution to the plan is at the discretion of the Board of Directors with
a maximum allowable by the Internal Revenue Service of fifteen percent of the
salaries of eligible participants. For 1995 the Board elected to make a
contribution of $165,000.
Note 10 -- Self-insured Health Plan
The Company maintains a self-insured health insurance plan for substantially
all full-time employees. Under the terms of the plan, employee medical
expenses over a specified deductible amount are paid by the Company. The
Company maintains separate insurance for individual medical expenses in
excess of $25,000. For 1995 group insurance costs and unreimbursed medical
expenses were $266,206.
Note 11 -- Unaudited Pro Forma Income Tax Information
The following unaudited pro forma tax information is presented as if the
Company had been a subchapter C corporation subject to federal and state
income taxes throughout the periods presented and had accounted for income
taxes in accordance with Statement of Financial Accounting Standard No. 109.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
August 31, February 28,
1995 1995 1996
----- ---- -----
<S> <C> <C> <C>
Net income per statement of operations $ 906,216 $ 335,340 $ 808,095
Pro forma income tax provision adjustment 362,486 134,136 323,238
------------ ----------- -------------
Pro forma net income $ 543,730 $ 201,204 $ 484,857
------------ ------------ -------------
</TABLE>
Note 12 -- Subsequent Events
On March 6, 1996, the Company and its shareholders entered into a letter of
intent with U. S. Office Products Company ("U. S. Office Products") pursuant
to which the Company's shareholders agreed to merge the Company with U. S.
Office Products. Pursuant to the Merger Agreement, all of the outstanding
shares of the Company's common stock would be purchased by U. S. Office
Products.
F-87
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of American Loose Leaf/Business Products, Inc.:
We have audited the accompanying consolidated balance sheet of American Loose
Leaf/Business Products, Inc. and subsidiary as of September 30, 1995 and the
related consolidated statement of income and retained earnings, and
consolidated cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Loose Leaf/Business Products, Inc. and subsidiary as of September 30, 1995,
and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
June 26, 1996 /s/ Swink, Fiehler & Hoffman
F-88
<PAGE>
AMERICAN LOOSE LEAF/BUSINESS PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(SEE NOTE 12)
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, 1996
ASSETS NOTES 1995 (UNAUDITED)
- ------ ----- ------------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 1 $ 302,722 $ 295,563
Accounts receivable:
Trade (net of allowance for doubtful
accounts of $35,000) 1,5 6,885,862 6,496,699
Other 156,419
Income taxes 1,7 7,850
Inventory 1,2 3,380,925 3,639,703
Deferred income tax asset 1,7 142,000 142,000
Prepaid expenses 72,434 719,686
----------- -----------
Total current assets 10,948,212 11,293,651
PROPERTY AND EQUIPMENT-NET 1,3,6 4,246,293 4,158,981
OTHER ASSETS 1,4 570,624 810,781
----------- -----------
TOTAL $15,765,129 $16,263,413
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit 5 $ 1,300,000 $
Current maturities of long-term debt 6 357,195 1,103,903
Accounts payable 3,263,750 4,096,751
Accrued liabilities 944,495 831,989
Income taxes payable 1,7 26,701
----------- -----------
Total current liabilities 5,892,141 6,032,643
DEFERRED INCOME TAX LIABILITY 1 746,000 711,500
LONG-TERM DEBT 6,10 986,275 672,500
----------- -----------
Total liabilities 7,624,416 7,416,643
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 3,000 shares
authorized, 1,719 shares issued and outstanding 171,900 171,900
Paid in capital 40 40
Retained earnings 1 7,968,773 8,674,830
----------- -----------
Total stockholders' equity 8,140,713 8,846,770
----------- -----------
TOTAL $15,765,129 $16,263,413
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-89
<PAGE>
AMERICAN LOOSE LEAF/BUSINESS PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(SEE NOTE 12)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
SEPTEMBER 30, JUNE 30, 1995 JUNE 30, 1996
NOTES 1995 (UNAUDITED) (UNAUDITED)
----- ------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES 1 $49,194,648 $35,544,683 $42,549,403
COST OF SALES 36,421,239 26,339,993 32,098,233
----------- ----------- -----------
GROSS PROFIT 12,773,409 9,204,690 10,451,170
----------- ----------- -----------
EXPENSES:
Warehousing and purchasing 1,483,459 1,113,643 1,341,097
Delivery 1,150,921 836,470 998,192
Selling and customer service 5,242,656 3,807,932 3,685,483
Occupancy 488,301 355,893 442,844
Office and data processing 1,254,259 918,448 1,678,832
Administrative 812,308 587,204 1,073,351
----------- ----------- -----------
Total 10,431,904 7,619,590 9,219,799
----------- ----------- -----------
OPERATING INCOME 2,341,505 1,585,100 1,231,371
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 12,453 9,607 4,300
Interest expense 5,6 (192,242) (136,590) (174,544)
Miscellaneous - net 66,925 51,605 108,770
----------- ----------- -----------
Total (112,864) (75,378) (61,474)
----------- ----------- -----------
NET INCOME BEFORE INCOME TAXES 2,228,641 1,509,722 1,169,897
PROVISION FOR INCOME TAXES 1,7 881,000 586,000 463,840
----------- ----------- -----------
NET INCOME 1,347,641 923,722 706,057
RETAINED EARNINGS,
BEGINNING OF PERIOD 1 6,621,132 6,621,132 7,968,773
----------- ----------- -----------
RETAINED EARNINGS,
END OF PERIOD $ 7,968,773 $ 7,544,854 $ 8,674,830
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-90
<PAGE>
AMERICAN LOOSE LEAF/BUSINESS PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(SEE NOTE 12)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
SEPTEMBER 30, JUNE 30, 1995 JUNE 30, 1996
1995 (UNAUDITED) (UNAUDITED)
------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,347,641 $ 923,722 $ 706,057
----------- ----------- ---------
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 363,230 243,109 273,200
Gain on sale of assets (1,055) (11,309)
Deferred income tax provision 33,000 --
Decrease (increase) in current assets:
Accounts receivable (574,082) 45,580 389,163
Inventory (430,083) (1,092,366) (258,778)
Prepaid expenses 21,379 (92,900) (452,048)
Increase (decrease) in current liabilities:
Accounts payable and accrued liabilities 940,865 163,479 693,794
Income taxes payable (19,207) -- --
----------- ----------- ---------
Total adjustments 334,047 (733,098) 634,022
----------- ----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,681,688 190,624 1,340,079
----------- ----------- ---------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Business acquisitions (2,231,547) (1,367,557) (275,000)
Proceeds from sale of assets 1,055 100,438
Property additions (295,827) (204,477) (305,609)
(Increase) decreaes in other assets 5,568
----------- ----------- ---------
NET CASH USED BY INVESTING ACTIVITIES (2,520,751) (1,572,034) (480,171)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank line of credit borrowings - net 1,100,000 1,316,643 (553,292)
Payments of long-term debt (210,000) (157,500) (313,775)
----------- ----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 890,000 1,159,143 (867,067)
(USED) ----------- ----------- ---------
NET INCREASE IN CASH 50,937 (222,267) (7,159)
(DECREASE)
CASH, BEGINNING OF PERIOD 251,785 251,785 302,722
----------- ----------- ---------
CASH, END OF PERIOD $ 302,722 $ 29,518 $ 295,563
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-91
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
SEPTEMBER 30, JUNE 30, 1995 JUNE 30, 1996
1995 (UNAUDITED) (UNAUDITED)
------------- -------------- --------------
<S> <C> <C> <C>
Interest $ 187,149 $ 123,562 $ 191,734
----------- ----------- ---------
----------- ----------- ---------
Income taxes $ 875,057 $ 555,529 $ 791,791
----------- ----------- ---------
----------- ----------- ---------
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
The Company obtained seller financing for business acquisitions in 1995 and
1996 in the approximate amounts of $300,000 and $100,000, respectively.
</TABLE>
See accompanying notes to consolidated financial statements.
F-92
<PAGE>
AMERICAN LOOSE LEAF/BUSINESS PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
American Loose Leaf/Business Products, Inc. (the "Company") is a
manufacturer of loose leaf binders, data binders and presentation
folders, and a distributor of office supply products and furniture
primarily for business use. The Company sells its products to customers
on credit throughout the United States with a majority of its customers
located in Missouri and Illinois.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
CHANGE IN BASIS OF ACCOUNTING
Prior to 1995, the Company prepared its financial statements using the
income tax basis of accounting which is a comprehensive basis of accounting
other than generally accepted accounting principles. Beginning in 1995,
the Company adopted generally accepted accounting principles for financial
reporting purposes. The Company has recorded certain assets and liabilities
required by generally accepted accounting principles and has increased
retained earnings as of October 1, 1994 by $606,589 for the cumulative
effect of the basis of accounting change.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company's wholly owned
subsidiary, Forty-Fifteen Papin Redevelopment Corporation. Significant
intercompany transactions have been eliminated.
CASH EQUIVALENTS
For purposes of the statement of cash flow, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
INVENTORY
Inventory is stated at the lower of LIFO (last-in, first-out) cost or
market. The effect of the LIFO method was to decrease net income in 1995
by approximately $162,000.
F-93
<PAGE>
PROPERTY
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method based on
the estimated useful lives of the assets ranging from five to forty years.
GOODWILL
Goodwill and other intangibles acquired in purchase transactions are being
amortized over 15 years using the straight-line method.
FINANCING FEES
Costs incurred in connection with the obtaining of long-term debt have been
capitalized and are being amortized on a straight-line basis over the life
of the related debt agreement and are included in other assets for
financial reporting purposes.
INCOME TAXES
Deferred income taxes are determined on the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Deferred income taxes arise from temporary differences
between the tax basis of assets and liabilities and their reported amounts
in the financial statements.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited financial statements for the
nine months ended June 30, 1996 and 1995 include all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of the Company's financial position, results of operations and
cash flows. Operating results for the nine months ended June 30, 1996 and
1995 are not necessarily indicative of the results that may be expected for
the years ending September 30, 1996 and 1995.
2. INVENTORY
Inventory consists of the following at September 30, 1995:
1995
----
Raw materials and work-in-progress $ 658,942
Finished goods 3,253,364
----------
Total 3,912,306
Less LIFO reserve 531,381
----------
Inventory - net $3,380,925
----------
----------
F-94
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 1995:
1995
----
Land $ 130,207
Buildings 3,242,981
Machinery and equipment 1,576,744
Furniture and fixtures 254,063
Computer equipment 303,250
Autos and trucks 284,268
----------
Total 5,791,513
Less accumulated depreciation 1,545,220
----------
Property - net $4,246,293
----------
----------
4. OTHER ASSETS
Other assets consist of the following at September 30, 1995:
1995
----
Goodwill and noncompetition agreements - net $ 201,219
Cash surrender value of life insurance 141,971
Financing costs - net 23,534
Buying co-op preferred stock 78,900
Deposits 125,000
----------
Total $ 570,624
----------
----------
5. BANK LINE OF CREDIT
The Company has a $3,000,000 operating line of credit with a lending bank
that is due December 31, 1995, with interest at the bank's daily federal
funds rate plus 190 basis points (8.65% at September 30, 1995). On January
1, 1996, the operating line of credit was renewed for one year and
increased to $3,500,000.
Trade accounts receivable are collateral under the credit agreement. The
credit agreement requires the company to comply with certain restrictive
covenants including, but not limited to: maintenance of specified
financial ratios such as indebtedness to net worth, minimal working capital
and a minimum net worth.
F-95
<PAGE>
6. LONG-TERM DEBT
Long-term debt consists of industrial revenue bonds that were issued in
December 1985 in the amount of $3,050,000, and refinanced in 1989 and 1994.
The bonds are payable in monthly installments of $17,500 plus interest at
7.4%. Maturities of the bonds are as follows: 1996, $210,000; 1997,
$210,000; 1998, $210,000; 1999, $212,000; 2000, $198,000.
The bonds are collateralized by a first deed of trust on various real
estate of the Company, and the guarantee of the Company. Additionally, the
loan agreements contain restrictive covenants including, but not limited
to: maintenance of specified financial ratios such as indebtedness to net
worth, additional indebtedness, limitations on capital expenditures and
maintenance of a minimum net worth.
The Company also obtained seller financing in the acquisition of the assets
of a business in 1995 in the amount of $303,471. The note is payable
$13,450 monthly including interest at 6% through September 1997.
7. PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following for the year ended
September 30, 1995:
1995
----
Current $848,000
Deferred:
Current (44,000)
Noncurrent 77,000
--------
Total $881,000
--------
--------
A reconciliation between the federal income tax rate of 34% and the
Company's effective tax rate is as follows:
1995
----
AMOUNT %
------ ---
Expected income tax $757,740 34.0
State and city income taxes, net
of federal income tax effect 71,320 3.2
Non-deductible expenses and other-net 51,940 2.3
-------- -----
Provision for income taxes $881,000 39.5
-------- -----
-------- -----
8. LEASE COMMITMENTS
The Company is obligated for minimum lease payments under noncancelable
operating-type leases for sales offices and delivery vehicles. Rental
expense for the year ended September 30, 1995 on the above lease
commitments was approximately $151,000. Minimum lease payments for the
remainder of the initial lease terms are approximately as follows: 1996,
$153,000; 1997, $121,000; 1998, $50,000, 1999, $27,000; 2000, $12,000.
F-96
<PAGE>
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution profit sharing plan 401(K) covering
substantially all employees in which the Company matches a certain percent
contributed by the employee. Total expense relating to the plan for the
year ended September 30, 1995 was approximately $71,000.
The Company offers health care benefits for employees and their families
under a program of partial self-insurance. The Company pays covered claims
up to $60,000 per individual per year. Stop loss coverage has been
obtained for any claims in excess of $60,000 per individual and 125% of the
expected aggregate covered claims. A provision of $70,000 has been
estimated and accrued for claims incurred but not paid as of September 30,
1995. Net health care cost for the year ended September 30, 1995 was
approximately $222,000.
10. BUSINESS ACQUISITIONS
The Company acquired certain assets of two separate businesses in 1995
that were accounted for as purchase transactions in the aggregate amount of
approximately $2,535,000. Seller financing of approximately $300,000 was
obtained in 1995 for one transaction and has been included in notes payable
at September 30, 1995.
11. COMMITMENTS
The Company is obligated to purchase 597 shares of its common stock from a
minority shareholder, upon the shareholder's death, for a predetermined
price of $558,800 pursuant to a shareholder agreement dated June 10, 1988.
12. SUBSEQUENT EVENTS
On January 15, 1996, the Company acquired certain assets of an office
products distributor that was accounted for as a purchase transaction in
the amount of approximately $523,000.
On May 31, 1996, the Company signed a letter of intent with respect to a
proposed merger of the Company into a wholly-owned subsidiary of U.S.
Office Products, Inc., ("USOP"). The merger is subject to the approval of
the Board of Directors of both the Company and USOP, the approval of the
shareholders of the Company and certain other considerations, including
receipt of the opinion of counsel that the merger will qualify as a
tax-free reorganization. Management believes the merger will be
consummated on or before July 31, 1996.
F-97
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
New Office Plus, Inc.
Green Bay, Wisconsin
We have audited the accompanying balance sheet of New Office Plus, Inc.
as of December 31, 1995, and the related statements of income, retained
earnings and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of New Office Plus,
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.
SHINNERS, HUCOVSKI AND COMPANY, S.C.
July 3, 1996
F-98
<PAGE>
NEW OFFICE PLUS, INC.
BALANCE SHEETS
December 31, 1995 and March 31, 1996
<TABLE>
<CAPTION>
(unaudited)
December 31, March 31,
ASSETS 1995 1996
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 64,889 $ 65,280
Receivables:
Trade, less allowance for
uncollectible accounts of
$5,000 1,305,076 1,445,409
Rebates 147,800 138,661
Inventories (note 2) 905,985 946,720
Prepaid expenses - 11,397
Notes receivable - stockholders 18,200 18,200
------------ -----------
Total current assets 2,441,950 2,625,667
OTHER ASSETS
Cash value of life insurance 60,259 60,259
Investment (note 3) 17,200 17,200
------------ -----------
77,459 77,459
PROPERTY AND EQUIPMENT
Office furniture and equipment 334,496 334,496
Vehicles 442,407 442,407
Leased machines 89,974 89,974
Computer equipment 268,852 269,014
Leasehold improvements 93,428 93,428
------------ -----------
1,229,157 1,229,319
Less accumulated depreciation 813,639 848,040
------------ -----------
415,518 381,279
------------ -----------
$ 2,934,927 $ 3,084,405
============ ===========
</TABLE>
See Notes to Financial Statements.
F-99
<PAGE>
<TABLE>
<CAPTION>
(unaudited)
December 31, March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES
Note payable - line of credit (note 4) $ 52,000 $ 312,000
Current maturities of long-term debt
(note 5) 83,000 50,000
Accounts payable 514,265 547,182
Accrued expenses:
Sales tax 44,509 44,401
Real estate taxes 31,935 9,006
Payroll and payroll taxes 111,784 80,826
Interest 1,317 1,317
Vacation 55,000 55,000
Deferred revenue on service contracts 250,000 250,000
------------ -----------
Total current liabilities 1,143,810 1,349,732
LONG-TERM DEBT, less current maturities
(note 5) 180,314 209,307
COMMITMENT
STOCKHOLDERS' EQUITY
Common stock, par value $100 per share;
authorized 750 shares; issued and
outstanding 500 shares 50,000 50,000
Retained earnings 1,560,803 1,475,366
------------ -----------
1,610,803 1,525,366
------------ -----------
$ 2,934,927 $ 3,084,405
============ ===========
</TABLE>
F-100
<PAGE>
NEW OFFICE PLUS, INC.
STATEMENTS OF INCOME
Year Ended December 31, 1995 and
Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
(unaudited)
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1995 1996 1995
------------ ---- ----
<S> <C> <C> <C>
Sales $13,187,410 $3,595,727 $3,282,187
Cost of sales 8,738,412 2,389,586 2,159,703
----------- ---------- ----------
Gross profit 4,448,998 1,206,141 1,122,484
Operating expenses 4,051,438 1,081,560 997,472
----------- ---------- ----------
Operating income 397,560 124,581 125,012
Other income (expense):
Miscellaneous income 15,264 64 1,192
Interest income 7,754 1,420 2,882
Interest expense (56,704) (8,257) (15,057)
----------- ---------- ----------
(33,686) (6,773) (10,983)
----------- ---------- ----------
Net income $ 363,874 $ 117,808 $ 114,029
----------- ---------- ----------
----------- ---------- ----------
Pro forma net income
(note 10) $ 222,874 $ 71,800 $ 70,000
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See Notes to Financial Statements.
F-101
<PAGE>
NEW OFFICE PLUS, INC.
STATEMENTS OF RETAINED EARNINGS
Year Ended December 31, 1995 and
Three Months Ended March 31, 1996
RETAINED
EARNINGS
--------
Balance, January 1, 1995 $1,291,649
Net income 363,874
Distributions to stockholders (94,720)
----------
Balance, December 31, 1995 1,560,803
Net income (unaudited) 117,808
Distributions to stockholders
(unaudited) (203,245)
----------
Balance, March 31, 1996
(unaudited) $1,475,366
----------
----------
See Notes to Financial Statements.
F-102
<PAGE>
NEW OFFICE PLUS, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995 and
Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
(unaudited)
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1995 1996 1995
------------ ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 363,874 $ 117,808 $ 114,029
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 183,524 34,401 47,360
Gain on sale of equipment (2,828) -- --
Changes in operating assets and
liabilities:
Trade receivables (135,142) (140,333) (141,938)
Rebates receivable (23,500) 9,139 --
Inventories (62,391) (40,735) (205,598)
Prepaid expenses -- (11,397) (16,812)
Accounts payable 211,104 32,917 93,473
Accrued expenses 16,062 (53,995) (63,948)
Deferred revenue on service
contracts 15,000 -- --
--------- -------- --------
Net cash provided by (used in)
operating activities 565,703 (52,195) (173,434)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (115,785) (162) (52,509)
Purchase of investment (17,200) -- --
Increase in cash value of life
insurance (3,334) -- --
Proceeds from sale of equipment 3,835 -- --
--------- -------- --------
Net cash used in investing
activities (132,484) (162) (52,509)
--------- -------- --------
--------- -------- --------
</TABLE>
See Notes to Financial Statements.
F-103
<PAGE>
<TABLE>
<CAPTION>
(unaudited)
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1995 1996 1995
------------ ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on line
of credit (248,000) 260,000 300,000
Principal payments on long-term
borrowings (89,503) (4,007) (12,119)
Distributions to stockholders (94,720) (203,245) (34,824)
-------- -------- --------
Net cash provided by (used in)
financing activities (432,223) 52,748 253,057
-------- -------- --------
Increase in cash 996 391 27,114
Cash:
Beginning 63,893 64,889 61,483
-------- -------- --------
Ending $ 64,889 $ 65,280 $ 88,597
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments for interest $ 56,516 $ 8,257 $ 15,057
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITY
Purchase of equipment through
long-term debt $ 33,981 $ -- $ --
-------- -------- --------
-------- -------- --------
</TABLE>
F-104
<PAGE>
NEW OFFICE PLUS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
The Company's operations are in the retail sales of office
supplies, furniture and equipment and in the service and maintenance
of office equipment. The Company extends credit to its customers
located in northeastern Wisconsin.
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from these estimates.
A summary of the Company's significant accounting policies follows:
Revenue recognition:
Revenue from sales of office supplies are recognized upon
shipment to customers. Revenues from sales of office furniture
are recognized upon delivery to customers. Revenues from service
contracts are recognized over the contract period.
Inventories:
Inventories are stated at the lower of cost (last-in, first-out
method), or market and represent products held for sale.
Property and equipment:
Property and equipment is stated at cost. Depreciation is
calculated using the straight-line method over the following
estimated useful lives:
YEARS
-------
Office furniture and equipment 5-8
Vehicles 4-6
Leased machines 3-8
Computer equipment 5-8
Leasehold improvements 7-20
F-105
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
(continued)
Income taxes:
The Company has elected to be taxed as an S corporation.
Accordingly, income taxes have not been provided for in the
financial statements as the stockholders report the Company's
earnings on their personal income tax returns.
The Company anticipates that it will make cash distributions to
its stockholders to fund the individual income taxes
attributable to the inclusion of Company income on their
personal income tax returns.
Fair value of financial instruments:
The carrying value of financial instruments, including cash,
accounts receivable, accounts payable and notes payable,
approximates fair value.
Unaudited interim financial statements:
In the opinion of management, the Company has made all
adjustments, consisting of normal recurring accruals, necessary
for a fair presentation of the financial condition of the
Company as of March 31, 1996 and the results of operations and
cash flows for the three months ended March 31, 1996 and 1995,
as presented in the accompanying unaudited interim financial
statements.
Note 2. Inventories
Inventories are summarized as follows:
DECEMBER 31,
1995
------------
Inventories (on a FIFO basis):
Supplies $451,488
Furniture 105,754
Machines 303,818
Service parts 133,976
Other 4,804
--------
999,840
F-106
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 2. Inventories (continued)
Less allowance to adjust
the carrying value of
inventories to last-in,
first-out (LIFO) basis 93,855
--------
Inventories at LIFO $905,985
--------
--------
Note 3. Investment
Investment consists of the following:
DECEMBER 31,
1995
------------
Independent Stationers, Inc.,
Class A common stock $17,200
--------
--------
The above investment is stated at cost, which is not in excess of
market.
Independent Stationers, Inc. is the Company's major supplier of office
supplies. Agreements between the Company and Independent Stationers,
Inc. are transacted on terms available to other owners of
Independent Stationers, Inc.
Note 4. Note Payable - Line of Credit
In accordance with a loan and security agreement with a bank, the
Company can borrow, on a demand basis, up to $800,000. Borrowings
under this agreement provide for interest at 1/2% over the bank's
prime rate, adjusted quarterly, and are secured by substantially all
assets of the Company.
Other information on the line of credit is as follows:
DECEMBER 31,
1995
------------
Interest rate 9%
Balance outstanding $52,000
F-107
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 5. Long-Term Debt
Long-term debt consists of the following:
DECEMBER 31,
1995
------------
9 1/2%*, note payable to bank,
collateralized by specific
assets of the Company, due
in monthly installments of
$1,997 including interest
through March, 1999 $ 72,181
8 3/4%, note payable to bank,
collateralized by specific
assets of the Company, due
in monthly installments of
$175 including interest
through September, 1997 3,203
9 3/4%, note payable to bank,
collateralized by specific
assets of the Company, due
in monthly installments of
$127 including interest
through February, 1998 2,812
9 3/4%, note payable to bank,
collateralized by specific
assets of the Company, due
in monthly installments of
$280 including interest
through August, 1999 9,907
9%, unsecured note payable to
a stockholder, due May, 1997 20,000
9%, unsecured note payable to
a stockholder, due March, 1997 21,000
9%, unsecured note payable
to an individual, due
November, 1997 12,000
2.9% to 9%, notes payable
to finance companies,
collateralized by specific
vehicles, due in various
monthly installments of $222
to $643 including interest
through September, 1999 122,211
--------
263,314
Less current maturities 83,000
--------
$180,314
--------
--------
F-108
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 5. Long-Term Debt (continued)
* Interest is subject to adjustment, based on the bank's prime rate
plus 1%.
Long-term debt payable over the next four years is as follows:
YEAR ENDING
DECEMBER 31,
------------
1996 $ 83,000
1997 110,000
1998 43,000
1999 27,314
Note 6. Operating Leases
The Company leases its Green Bay facilities and a warehouse on a
month-to-month basis from a partnership consisting of family members
of the Company's stockholders and from a stockholder, respectively.
The Company is required to pay executory costs such as property
taxes, maintenance and insurance.
The Company leases its Appleton facilities from an employee under a
noncancellable agreement which expires January, 1998. The Company's
annual minimum lease payments are $40,800 per year through January,
1998. The Company is required to pay utility costs.
Rent expense associated with the above operating leases for the year
ended December 31, 1995 was $142,800.
Note 7. Profit-Sharing Plan
The Company has adopted a qualified, contributory, defined
contribution profit-sharing plan covering substantially all
full-time employees who have completed at least one full year of
employment. The Plan allows employees to defer a percentage of their
salaries. The Company contributes, on behalf of the participants, an
amount equal to 50% of the employee's contribution up to 3% of the
employee's gross wage. Additional contributions can be made to the
Plan at the discretion of the Board of Directors. The Company's
contribution to the Plan was $39,973 for 1995.
F-109
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 8. Subsequent Events
During 1995, the Company and its stockholders entered into a letter
of intent with U.S. Office Products Company ("U.S. Office Products")
pursuant to which the Company would merge with U.S. Office Products.
The letter of intent calls for the exchange of all of the
outstanding shares of the Company's common stock for shares of U.S.
Office Products common stock.
Note 9. Acquisition/Commitment
On January 3, 1995, the Company purchased certain assets and the
rights to certain businesses of Landers Office Products, Inc. of
Appleton, Wisconsin. Landers is a retail supplier of office
supplies, furniture and machines. The purchase price of $241,208
including $53,280 for inventory, $148,033 for accounts receivable,
$38,895 for equipment and $1,000 for intangibles, was paid in cash.
In connection with the acquisition, the Company has entered into an
agreement whereby the former owner is to receive 10% of the gross
profit earned on the acquired accounts. For the year ended December
31, 1995, operating expenses includes $26,694 expensed in connection
with this agreement.
Note 10. Unaudited Pro Forma Net Income Tax Information
The following unaudited pro forma income tax information is
presented as if the Company had been a subchapter C corporation
subject to federal and state income taxes throughout the period
presented. In this presentation, income taxes have been accounted
for in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes":
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------
1995 1996 1995
------------ ---- ----
Net income before
pro forma tax
adjustments $363,874 $117,808 $114,029
Provision for
income taxes 141,000 46,008 44,029
-------- -------- --------
Pro forma net
income $222,874 $ 71,800 $ 70,000
-------- -------- --------
-------- -------- --------
F-110
<PAGE>
Report of Independent Accountants
July 10, 1996
To the Board of Directors and Shareholders of
Carolina Office Equipment Company
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Carolina Office Equipment Company
at March 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
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 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 7 to the financial statements, effective May 28, 1996 the
Company entered into a definitive agreement to sell all of its issued and
outstanding shares of common stock to U.S. Office Products Company.
Price Waterhouse LLP
Minneapolis, Minnesota
F-111
<PAGE>
CAROLINA OFFICE EQUIPMENT COMPANY
BALANCE SHEET
March 31,
1996
---------
Assets
Current assets:
Cash $503,495
Trade receivables net of an allowance
for doubtful accounts of $40,385 1,587,059
Rebates receivable 112,866
Prepaids 9,386
Inventories 1,276,230
Notes receivable 358,720
----------
Total current assets 3,847,756
Property and equipment, net 294,183
Other assets 40,600
----------
Total assets $4,182,539
----------
Liabilities and Shareholders' Equity
Current liabilities:
Revolving line of credit $ 98,800
Accounts payable 603,287
Other accrued expenses 318,966
Notes payable 48,701
Due to affiliates 20,884
Taxes payable 187,255
----------
Total liabilities 1,277,893
----------
Commitments (Note 5)
Shareholders' equity:
Common stock, $0.01 par value, 10,000,000 shares authorized,
issued and outstanding 100,000
Paid in capital 172,532
Treasury stock (197,823)
Retained earnings 2,829,937
----------
Total shareholders' equity 2,904,646
----------
Total liabilities and shareholders' equity $4,182,539
----------
F-112
<PAGE>
CAROLINA OFFICE EQUIPMENT COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
March 31,
1996
----
Sales $12,023,096
Cost of sales 8,438,047
----------
Gross profit 3,585,049
Selling, general and administrative expenses 2,868,291
----------
Operating income 761,758
Interest expense (51,047)
Interest income 116,956
----------
Income before income taxes 782,667
Income taxes 294,546
----------
Income from continuing operations 488,121
----------
Income from discontinued operations (net of taxes of $115,565) 163,140
----------
Net income $651,261
----------
F-113
<PAGE>
CAROLINA OFFICE EQUIPMENT COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED
March 31,
1996
----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $651,261
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 130,357
Increase (decrease) in cash resulting from changes:
Accounts and other receivable (311,399)
Inventories (177,083)
Other current assets (23,355)
Due from affiliates 467,114
Taxes payable 200,261
Accounts payable (345,176)
Notes receivable 122,872
Accrued liabilities 149,600
----------
Net cash provided by operating activities 864,452
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (177,307)
Intangible purchases (42,000)
----------
Net cash used for investing activities (219,307)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of stockholder loans (157,855)
Proceeds from long-term debt 81,081
Payments on long-term debt (140,511)
Net change in revolving line of credit (70,000)
----------
Net cash used for financing activities (287,285)
----------
Cash carved out to Systems (351,471)
----------
NET INCREASE IN CASH 6,389
Beginning of period 497,106
----------
End of period $503,495
----------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $116,956
----------
F-114
<PAGE>
Cash paid for taxes $249,149
----------
NON-CASH TRANSACTIONS:
Dividends amounting to $1,047,720 were paid via the extinguishment of certain
intercompany and related party balances. See Note 1 for a discussion of assets
and liabilities carved out of the Company.
F-115
<PAGE>
CAROLINA OFFICE EQUIPMENT COMPANY
STATEMENT OF SHAREHOLDERS' EQUITY
Total Equity
------------
Balance at March 31, 1995 $ 4,953,740
Net income 651,261
Dividends
In form of amounts paid via extinguishment of
intercompany balances (1,047,720)
In form of spin-off of systems division assets (1,652,635)
----------
Balance at March 31, 1996 $2,904,646
----------
F-116
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1 - Business Organization
The accompanying financial statements represent the accounts of Carolina Office
Equipment Company, Inc. ("COECO"). COECO is the successor company to Carolina
Office Equipment Company of Wilson, Inc., Carolina Office Equipment Company of
Greenville, Inc., Your Office By the Sea, Inc. and Carolina Office Equipment
Company, Inc. which were merged into one legal entity on March 31, 1996.
COECO's activities primarily consist of the sale of office furniture and
supplies throughout Eastern North Carolina. Prior to the merger COECO was also
engaged in the sale and service of office equipment and machinery. Effective
March 31, 1996 these equipment and machinery businesses were carved out into a
separate legal entity (COECO Office Systems of Rocky Mount ["Systems"]). The
assets obtained by and liabilities assumed by Systems have been excluded from
the March 31, 1996 balance sheet. The assets and liabilities carved out were
determined using specific identification where possible, and in the alternate
were allocated to Systems based on historical relationships between Systems and
the remaining COECO units.
In connection with the carve out of Systems assets amounting to approximately
$1,860,000 and liabilities of $208,000 have been excluded from COECO's March 31,
1996 balance sheet. Directly identifiable revenues and expenses related to
Systems have been reflected in discontinued operations additionally certain
other allocatable expenses such as occupation cost, taxes, and other "overhead"
cost have been allocated to System's operations based on historical
relationships between Systems and the remaining COECO units. These revenues and
expenses have been reflected on the income statement as income from discontinued
operations.
The net assets of the Systems division were comprised as follows:
Cash $351,471
Other current assets 1,435,260
Long-term assets 74,065
Liabilities (208,161)
----------
Net assets $1,652,635
----------
Note 2 - Summary of Significant Accounting Policies
FISCAL YEAR -- The Company's fiscal year ends on March 31.
REVENUE RECOGNITION -- Revenues are recognized upon the delivery of office
products to customers.
TRADE RECEIVABLES -- Trade receivables are concentrated with various commercial
customers. The Company performs on-going credit evaluations of its customers
and believes that trade receivables are well diversified, thereby reducing
potential credit risk.
REBATES RECEIVABLE -- Rebates receivable represent group and annual wholesaler
rebates earned by the Company as well as certain cooperative advertising claims
as of March 31, 1996.
F-117
<PAGE>
INVENTORIES -- Inventories are stated at the lower of cost or market value with
cost determined on the first-in, first-out (FIFO) method and consists primarily
of product held for sale.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost and are
depreciated over estimated useful lives ranging from five to eight years using
the accelerated methods. Expenditures which substantially increase asset value
or extend useful life are capitalized. Expenditures for maintenance and repairs
are charged against income as incurred. When items of property are sold or
otherwise disposed of, the cost and related accumulated depreciation are
eliminated from the accounts. Any gain or loss is reflected in income.
INTANGIBLE ASSETS -- Intangible assets, comprised entirely of franchise fees
paid during the current year, are amortized on a straight line basis over the
life of the underlying agreements (15 years). The recoverability of these
assets is assessed by management on an ongoing basis.
INCOME TAXES -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." 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 carrying amounts and the tax basis of
existing assets and liabilities. No tax assets or liabilities have been
established as of March 31, 1996 due to the lack of material differences between
the tax bases of the Company's assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amount of cash, accounts
receivables, accounts payable, and notes payable approximates fair value because
of the short maturity of those instruments.
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 certain assets and
liabilities and disclosure of contingencies at the date of the financial
statements and the related reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Management
believes that the estimates used are reasonable.
F-118
<PAGE>
Note 3 - Property and Equipment
Property and equipment consist of the following:
March 31,
1996
----------
Leasehold improvements $ 95,804
Furniture, fixtures and equipment 328,342
Autos and trucks 246,812
Data processing equipment and machinery 98,252
Machinery and equipment 641,364
----------
1,410,574
Less: accumulated depreciation and amortization 1,116,391
----------
Net property and equipment $ 294,183
----------
Note 4 - Credit Facilities
The Company's revolving line of credit with a bank provides for borrowings up to
$1,000,000, matures on November 6, 1996, and bears interest at prime. These
borrowings are secured by a first lien on the Company's accounts receivable.
Notes payable consists of amounts due a bank, payable in monthly principal and
interest instalments of $3,731 payable through June, 1997. Secured by furniture
and fixtures used for rental purposes.
Note 5 - Commitments
The Company leases store and warehouse space from its shareholders. All such
leases are classified as operating leases. Future annual minimum lease payments
required under long-term leases in effect at March 31, 1996 are as follows:
Operating
---------
Fiscal 1997 $232,560
1998 223,710
1999 155,970
2000 104,400
2001 104,400
----------
$821,040
----------
For the year ended March 31, 1996 rental expense under all operating leases
amounted to approximately $260,000.
F-119
<PAGE>
Note 6 - Employee Benefit Plans
The Company maintains a qualified defined contribution 401(k) savings plan
covering substantially all employees. The plan provides for voluntary
contributions by plan participants of up to the legal limit of their
compensation. The Company makes discretionary matching contributions. For the
period ended March 31, 1996, the Company accrued contributions amounting to
approximately $40,000.
Note 7 - Subsequent Events
On May 28, 1996, the Company and its shareholders entered into a definitive
agreement with U. S. Office Products Company ("U. S. Office Products") pursuant
to which all of the outstanding shares of the Company's common stock were
purchased by U. S. Office Products for 271,186 shares of common stock.
F-120
<PAGE>
[LETTERHEAD]
AUDITOR'S REPORT
TO THE SHAREHOLDERS OF WANG NEW ZEALAND LIMITED
We have audited the financial statements as set out in the Current Report on
Form 8-K. The financial statements provide information about the past
financial performance and financial position of the company and group as at
30 June 1995. This information is stated in accordance with the accounting
policies.
DIRECTORS' RESPONSIBILITIES
The directors are responsible for the preparation of financial statements
which comply with generally accepted accounting practice and give a true and
fair view of the financial position of the company and group as at 30 June
1995 and of the results of their operations and cash flows for the year ended
on that date.
AUDITOR'S RESPONSIBILITIES
It is our responsibility to express an independent opinion on the financial
statements presented by the directors and report our opinion to you.
BASIS OF OPINION
An audit includes examining on a test basis, evidence relevant to the amounts
and disclosures in the financial statements. It also includes assessing:
- - the significant estimates and judgements made by the directors in the
preparation of the financial statements; and
- - whether the accounting policies are appropriate to the company and group
circumstances, consistently applied and adequately disclosed.
We conducted our audit in accordance with generally accepted auditing
standards in New Zealand. We planned and performed our audit so as to obtain
all the information and explanations which we considered necessary in order
to provide us with sufficient evidence to give reasonable assurance that the
financial statements are free from material misstatements, whether caused by
fraud or error. In forming our opinion we also evaluated the overall adequacy
of the presentation of information in the financial statements.
Order than in our capacity as auditor and taxation advisor, we have no
relationship with, or interest in, the company.
UNQUALIFIED OPINION
We have obtained all the information and explanations we have required.
In our opinion:
- - proper accounting records have been kept by the company as far as appears
from our examination of those records; and
- - the financial statements as set out in the Current Report on
Form 8-K:
- comply with generally accepted accounting practice; and
- give a true and fair view of the financial position of the company and
group as at 30 June 1995 and the results of their operations and cash
flows for the year ended on that date.
Our audit was completed on 28 July 1995 and our unqualified opinion is
expressed as at that date.
/s/ ERNST & YOUNG
Auckland
F-121
<PAGE>
Wang New Zealand Limited and Subsidiaries
Statement of Profit and Loss and Retained Earnings
<TABLE>
<CAPTION>
GROUP PARENT
1995 1994 1995 1994
For the Year Ended 30 June 1995 Notes $000 $000 $000 $000
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE 72,105 53,462 68,496 53,462
- -----------------------------------------------------------------------------------------------
PROFIT BEFORE TAX (3) 5,320 4,256 4,585 4,256
Tax expense (4) (1,764) (1,444) (1,522) (1,444)
- -----------------------------------------------------------------------------------------------
PROFIT AFTER TAX 3,556 2,812 3,063 2,812
Retained earnings brought forward 6,207 9,141 6,207 9,141
Dividend paid to WLI (5) - (4,335) - (4,335)
Dividends (5) (1,785) (1,411) (1,785) (1,411)
- -----------------------------------------------------------------------------------------------
RETAINED EARNINGS CARRIED FORWARD 7,978 6,207 7,485 6,207
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes form part of these financial statements.
F-122
<PAGE>
Wang New Zealand Limited and Subsidiaries
Balance Sheet
<TABLE>
<CAPTION>
GROUP PARENT
1995 1994 1995 1994
As at 30 June 1995 NOTES $000 $000 $000 $000
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDERS' FUNDS
Issued and paid-up capital
17,000,000 ordinary shares of $1 each (6) 17,000 17,000 17,000 17,000
Retained earnings 7,978 6,207 7,485 6,207
- -----------------------------------------------------------------------------------------------
Total Shareholders' Funds 24,978 23,207 24,485 23,207
- -----------------------------------------------------------------------------------------------
Represented by:
FIXED AND LONG TERM ASSETS
Fixed assets (7) 2,765 2,663 2,738 2,663
Lease receivables (8) 1,445 3,254 1,445 3,254
- -----------------------------------------------------------------------------------------------
4,210 5,917 4,183 5,917
- -----------------------------------------------------------------------------------------------
INVESTMENT IN SUBSIDIARIES (9) - - 80 80
FUTURE TAXATION BENEFIT (10) 1,437 1,184 1,437 1,184
CURRENT ASSETS
Cash at Bank 11,504 8,015 11,116 7,953
Accounts receivable and prepayments (11) 10,572 8,784 10,339 8,740
Inventories (12) 3,642 5,306 3,636 5,306
Lease receivables (8) 2,380 3,371 2,380 3,371
Income tax refund due 75 4 74 5
Related party account receivable (17) - - 1 -
- -----------------------------------------------------------------------------------------------
28,173 25,480 27,546 25,375
- -----------------------------------------------------------------------------------------------
Total Assets 33,820 32,581 33,246 32,556
- -----------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accruals (13) 7,400 8,015 7,319 7,990
Payable to Directors 15 15 15 15
Related party accounts (17) 152 443 152 443
Provision for dividend (5) 1,275 901 1,275 901
- -----------------------------------------------------------------------------------------------
Total Liabilities 8,842 9,374 8,761 9,349
- -----------------------------------------------------------------------------------------------
Net Assets 24,978 23,207 24,485 23,207
- -----------------------------------------------------------------------------------------------
</TABLE>
For and on behalf of the Board
/s/ Brian Allison /s/ Timothy EC Saunders
Brian Allison DIRECTOR Timothy EC Saunders DIRECTOR 28 July 1995
The accompanying notes form part of these financial statements.
Statement of Cash Flows
<TABLE>
<CAPTION>
GROUP PARENT
1995 1994 1995 1994
As at 30 June 1995 NOTES $000 $000 $000 $000
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from customers 72,546 57,515 69,127 57,515
Interest received 493 397 492 394
- ------------------------------------------------------------------------------------------------
73,039 57,912 69,619 57,909
- ------------------------------------------------------------------------------------------------
Cash was applied to:
Suppliers and employees 64,801 49,256 61,957 49,256
Taxes paid 2,088 1,200 1,845 1,200
Interest paid - 38 - 38
- ------------------------------------------------------------------------------------------------
66,889 50,494 63,802 50,494
- ------------------------------------------------------------------------------------------------
Net cash flows from operating activities (19) 6,150 7,418 5,817 7,415
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was provided from:
Proceeds from sale of fixed assets 151 144 85 144
Cash was applied to:
Purchases of fixed assets 1,040 1,388 967 1,388
Purchase of BHN Information Systems
New Zealand Limited net assets (22) 361 - 361 -
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,250) (1,244) (1,243) (1,244)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was applied to:
Settlement of bank borrowings - 1,300 - 1,300
Dividend - WLI (5) - 4,335 - 4,335
Dividends (5) 1,411 510 1,411 510
- ------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,411) (6,145) (1,411) (6,145)
Net increase in cash held 3,489 29 3,163 26
Add:opening cash brought forward 8,015 7,986 7,953 7,927
- ------------------------------------------------------------------------------------------------
Cash Balances in the Balance Sheet 11,504 8,015 11,116 7,953
- ------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes form part of these financial statements
F-123
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 1995
(1) STATEMENT OF ACCOUNTING POLICIES
1.1 REPORTING ENTITY Wang New Zealand Limited is a public company registered
under the Companies Act 1955 and listed on the New Zealand Stock Exchange.
The group consists of Wang New Zealand Limited and its subsidiaries. Wang
New Zealand Limited is an issuer for the purposes of the Financial
Reporting Act 1993. The financial statements and group financial
statements of Wang New Zealand Limited have been prepared in accordance
with the Financial Reporting Act 1993.
1.2 MEASUREMENT BASE The accounting principles recognised as appropriate for
the measurement and reporting of earnings and financial position on a
historical cost basis are followed by the group.
1.3 SPECIFIC ACCOUNTING POLICIES The following specific accounting policies
which significantly affect the measurement of profit and financial position
have been applied:
BASIS OF CONSOLIDATION - PURCHASE METHOD The consolidated financial
statements include the holding company and its subsidiaries accounted for
using the purchase method. All significant intercompany transactions are
eliminated on consolidation. In the parent company's financial statements
investments in subsidiaries are stated at the lower of cost and net
realisable value.
FIXED ASSETS Fixed assets are stated at cost less accumulated
depreciation. Depreciation is provided over the expected economic lives of
the assets as follows:
- --------------------------------------------------------------------------------
Leasehold Improvements 16.7% per annum straight line
Furniture, fittings and motor
vehicles 20.0% per annum straight line
Service & technical equipment 28.5% per annum diminishing value basis
Demonstration & rental equipment 28.5% per annum diminishing value basis
Software 14.7% per annum straight line.
- --------------------------------------------------------------------------------
INVENTORIES Inventories are valued at the lower of cost (actual or
weighted average costs) and net realisable value after making due allowance
for obsolescence.
TRANSLATION OF FOREIGN CURRENCIES Foreign currency
transactions throughout the year have been converted into New Zealand
currency at the ruling rate of exchange at the date of the transaction.
At balance date where there are foreign monetary assets and liabilities,
these are translated at the closing rate, and exchange variations arising
from these translations are included in the Consolidated Statement of
Profit and Loss and Retained Earnings as operating items.
INCOME TAX The income tax expense charged to the Consolidated Statements
of Profit and Losses and Retained Earnings includes both the current year
expense and the income tax effects of timing differences calculated using
the liability method.
Tax effect accounting is applied on a comprehensive basis to all timing
differences. A debit balance in the deferred tax account, arising from
timing differences or income tax benefits from income tax losses, is only
recognised if there is virtual certainty of realisation.
LEASE RECEIVABLE REVENUE The actuarial method has been used to allocate
interest income over the term of the lease.
FINANCIAL INSTRUMENTS The group has the following classes of financial
instruments:
--Cash at bank
--Trade, lease and other accounts receivable and payable
The financial instruments are valued at their estimated net realisable
value. Receivables are shown at cost less a provision for doubtful debts.
The book value therefore represents the anticipated net realisable value.
1.4 CHANGES IN ACCOUNTING POLICIES There have been no changes in accounting
policies. All policies have been applied on bases consistent with those
used in previous years.
(2) PRINCIPAL ACTIVITY
The group is principally engaged in the business of systems integration,
bringing together both hardware and software technologies which meet a
customer's specific business process needs and provides the ongoing service
and support thereafter.
(3) OPERATING PROFIT
Operating profit is arrived at:
GROUP PARENT
1995 1994 1995 1994
$000 $000 $000 $000
- --------------------------------------------------------------------------------
After charging:
Audit fees 56 50 54 50
Depreciation 996 1,147 978 1,147
Director's fees 80 60 80 60
Leasing and rental expenses 997 1,348 971 1,348
After crediting:
Rental income 1,113 1,904 1,113 1,904
Interest received 571 388 570 385
Foreign currency gains 35 * 35 *
Gain on sale of fixed assets 24 (36) 24 (36)
- --------------------------------------------------------------------------------
(4) INCOME TAX
GROUP PARENT
1995 1994 1995 1994
$000 $000 $000 $000
- --------------------------------------------------------------------------------
Net profit before income tax expense 5,320 4,256 4,585 4,256
Add permanent differences 118 151 117 151
- --------------------------------------------------------------------------------
Assessable income 5,438 4,407 4,702 4,407
Income tax at 33% 1,794 1,454 1,552 1,454
Prior year over provision (30) (10) (30) (10)
Tax charge per Profit &
Loss Account 1,764 1,444 1,522 1,444
- --------------------------------------------------------------------------------
The tax charge is represented by:
--Current taxation 1,511 1,320 1,269 1,320
--Deferred taxation 253 124 253 124
- --------------------------------------------------------------------------------
1,764 1,444 1,522 1,444
- --------------------------------------------------------------------------------
IMPUTATION CREDIT ACCOUNT
Balance as at 30 June 1994 949 -
Imputation credits attaching to
dividends paid in the year (695) (251)
Income tax payments during the year 1,845 1,200
- --------------------------------------------------------------------------------
2,099 949
- --------------------------------------------------------------------------------
At balance date, the imputation
credits available to the shareholders
of the parent company were:
Through direct shareholding in the
parent company 2,099 949
Through indirect interests in
subsidiaries 243 -
- --------------------------------------------------------------------------------
2,342 949
- --------------------------------------------------------------------------------
F-124
<PAGE>
(5) DIVIDENDS
1995 1994
$000 $000
- -------------------------------------------------------------------------------
Proposed dividends 1,275 901
Interim dividend paid during the year 510 4,845
- -------------------------------------------------------------------------------
1,785 5,746
- -------------------------------------------------------------------------------
Dividends paid in 1994 includes $4,335,000 paid to Wang Laboratories Inc (WLI)
prior to the company's public flotation.
(6) SHARE CAPITAL (GROUP & PARENT)
1995 1994
$000 $000
- -------------------------------------------------------------------------------
AUTHORISED
17,000,000 ordinary shares of $1 each 17,000 17,000
33,000,000 unclassified shares of $1 each 33,000 33,000
- -------------------------------------------------------------------------------
Total Authorised Capital 50,000 50,000
- -------------------------------------------------------------------------------
ISSUED AND PAID UP
Ordinary shares of $1 each
17,000,000 issued and fully paid shares 17,000 17,000
- -------------------------------------------------------------------------------
Total Issued and Paid Up Capital 17,000 17,000
- -------------------------------------------------------------------------------
(7) FIXED ASSETS (GROUP)
1995 1994
ACCUM BOOK ACCUM BOOK
COST DEPN VALUE COST DEPN VALUE
$000 $000 $000 $000 $000 $000
- -------------------------------------------------------------------------------
Leasehold
improvements 4,339 4,022 317 4,166 3,814 352
Furniture & fittings 686 634 52 646 628 18
Service, demonstration
& office equipment 6,765 4,774 1,991 6,029 4,248 1,781
Motor vehicles 707 397 310 910 398 512
Software 107 12 95 - - -
- -------------------------------------------------------------------------------
12,604 9,839 2,765 11,751 9,088 2,663
- -------------------------------------------------------------------------------
(7) FIXED ASSETS (PARENT)
1995 1994
ACCUM BOOK ACCUM BOOK
COST DEPN VALUE COST DEPN VALUE
$000 $000 $000 $000 $000 $000
- -------------------------------------------------------------------------------
Leasehold
improvements 4,339 4,022 317 4,166 3,814 352
Furniture & fittings 686 631 52 646 628 18
Service, demonstration
& office equipment 6,728 4,764 1,964 6,029 4,248 1,781
Motor vehicles 707 397 310 910 398 312
Software 107 12 95 - - -
- -------------------------------------------------------------------------------
12,567 9,829 2,738 11,751 9,088 2,663
- -------------------------------------------------------------------------------
(8) LEASE RECEIVABLES (GROUP AND PARENT)
1995 1994
DUE WITHIN DUE AFTER DUE WITHIN DUE AFTER
12 MONTHS 12 MONTHS 12 MONTHS 12 MONTHS
$000 $000 $000 $000
- -------------------------------------------------------------------------------
Minimum lease receivables 2,701 1,649 4,048 3,630
Less unearned income 321 204 677 376
- -------------------------------------------------------------------------------
Net lease receivables 2,380 1,445 3,371 3,254
- -------------------------------------------------------------------------------
Generally equipment subject to lease has no material residual value at the end
of the lease period.
Interest rates vary from 11% to 20%.
(9) INVESTMENT IN SUBSIDIARIES (PARENT)
1995 1994
$000 $000
- -------------------------------------------------------------------------------
Shares in subsidiaries (unlisted) 80 80
- -------------------------------------------------------------------------------
Subsidiaries comprise BGD Limited, previously named Priority Computing
Limited, and Wang New Zealand Nominees Limited. Both subsidiaries are 100%
owned, and have 30 June balance dates.
(10) FUTURE TAX BENEFIT (GROUP AND PARENT)
1995 1994
$000 $000
- -------------------------------------------------------------------------------
Balance as at 30 June 1994 1,184 1,060
Transfer to Statement of Profit and Loss 253 124
- -------------------------------------------------------------------------------
1,437 1,184
- -------------------------------------------------------------------------------
F-125
<PAGE>
[11] ACCOUNTS RECEIVABLE AND PREPAYMENTS
<TABLE>
<CAPTION>
GROUP PARENT
1995 1994 1995 1994
For the year ended 30 June 1995 $000 $000 $000 $000
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trade accounts receivable 10,316 8,415 10,094 8,415
Provision for doubtful debts (340) (535) (340) (535)
Other receivables 399 583 388 539
- -------------------------------------------------------------------------------------------------
10,375 8,463 10,142 8,419
Prepayments 197 321 197 321
- --------------------------------------------------------------------------------------------------
10,572 8,784 10,339 8,740
- --------------------------------------------------------------------------------------------------
[12] INVENTORIES
Inventories include the following:
Hardware 1,607 3,037 1,601 3,037
Service parts 2,035 2,269 2,035 2,269
- --------------------------------------------------------------------------------------------------
3,642 5,306 3,636 5,306
- ---------------------------------------------------------------------------------------------------
[13] ACCOUNTS PAYABLE AND ACCRUALS
Trade accounts payable 3,843 4,214 3,768 4,214
Reorganization costs 1,347 1,992 1,347 1,992
Other accrued expenses 2,210 1,809 2,204 1,784
- ----------------------------------------------------------------------------------------------------
7,400 8,015 7,319 7,990
- ----------------------------------------------------------------------------------------------------
[14] LEASE COMMITMENTS [GROUP AND PARENT]
The company has the following commitments on non cancellable operating property
lease agreements:
1995 1994
$000 $000
- ------------------------------------------------------------------------------------------------------
Within one year after balance date 1,779 1,732
Within one to two years after balance date 1,705 1,679
Within two to five years after balance due date 4,519 2,993
Thereafter 2,906 371
- -------------------------------------------------------------------------------------------------------
10,909 6,775
- -------------------------------------------------------------------------------------------------------
</TABLE>
[15] CAPITAL COMMITMENTS
There were no capital commitments at 30 June 1995 [1994:NIL]
[16] CONTINGENT LIABILITIES [GROUP AND PARENT]
As noted in the Offering Memorandum issued on 22 November 1993, related
party accounts receivable of N2$46,730,000 due from Wang Laboratories Inc
[WLI], the company's former parent, were assigned as part of restructuring
the company in anticipation of listing as a public company. A possible
contingent tax liability of up to $8,246,000 was identified in relation
to that receivable. The company has received advice to the effect that
the risk of this liability crystallising is not significant. WLI has
provided an indemnity, secured by way of a lien over the shares of the
company owned by WLI, should this contingent liability ever crystallise.
[17] RELATED PARTY TRANSACTIONS
Wang New Zealand is 30% owned by Wang Laboratories Inc [WLI]. In addition,
Wang Australia Pty Limited [Wang Australia] and BHN Information Systems New
Zealand Limited [BHN] are also related parties, being affiliated companies
to WLI. During the year Wang New Zealand purchased computer hardware and
related products from WLI and Wang Australia. The company also paid
management fees to WLI. and acquired from BHN certain business assets and
liabilities.
<TABLE>
<CAPTION>
GROUP PARENT
1995 1994 1995 1995
$000 $000 $000 $000
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Summary of transactions with the
above related parties were:
Purchases 1,323 3,157 1,323 3,157
Management fees paid 380 452 380 452
Sale of Wang Securities Limited - 61 - 61
Purchase of certain BHN assets
and liabilities 361 - 361 -
Outstanding related party balances are:
Related party accounts receivable - - -
Related party trade accounts payable 152 443 152 443
- -----------------------------------------------------------------------------------------------------
</TABLE>
Related party balances are payable on normal trading terms.
There have been no related party debts written off or forgiven during the
year.
[18] SEGMENTAL INFORMATION
Wang New Zealand operates in one industry segment, information technology,
entirely in New Zealand.
[19] RECONCILIATION OF NET PROFIT AFTER TAXATION WITH CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
GROUP PARENT
1995 1994 1995 1994
$000 $000 $000 $000
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Profit after tax 3,556 2,812 3,063 2,82
Add Non-cash items:
Depreciation 996 1,147 978 1,147
Movement in deferred tax (253) (124) (253) (124)
Gain on sale of fixed assets (24) 36 (24) 36
Foreign currency gains (35) - (35) -
Other 78 78 114 139
Movement in working capital:
Decrease in related party payables (291) (2,870) (291) (2,70)
Decrease in accounts payable (813) 2,259 (869) 2,260
Increase in tax fund (71) 368 (69) 367
Increase in related party receivables - 467 1 406
*Decrease in inventory 1,714 (363) 1,720 (363)
*Increase in receivables (1,633) (386) (1,444) (389)
Decrease in lease receivables 2,800 4,315 2,800 4,315
Increase prepaid exercises 126 (321) 126 (321)
- -----------------------------------------------------------------------------------------------------
Net Cash Flows form Operating
Activities 6,150 7,418 5,817 7,415
- -------------------------------------------------------------------------------------------------------
</TABLE>
*The movement in working capital for these items reflects the exclusion of
the purchase of the business of BHN Information Systems New Zealand Limited
as detailed in Note 22.
F-126
<PAGE>
(20) FINANCIAL INSTRUMENTS
Credit Risk Financial instruments which potentially subject the group to
credit risk principally consist of cash at bank, accounts receivable and
lease receivables. The group performs credit evaluations on all customers
requiring credit and generally does not require collateral for accounts
receivable but takes security over the assets leased from the company by
its customers.
Maximum exposure to credit risk of cash at bank, accounts receivable
and lease receivables is as disclosed on the Balance Sheet in the Financial
Statements. The above maximum exposures are net of any recognised provision
for losses on these financial instruments.
Concentration of Credit Risk The group is not exposed to any
concentration of credit risk with the exception of Cash at Bank.
Fair Values The fair value of each class of financial instruments as
stated in Note 13 is the carrying amount as disclosed in these Financial
Statements.
(21) EMPLOYEE SHARE OWNERSHIP PLAN
On 22 November 1993 the company established an Employee Share Ownership
Plan (ESOP), and issued 70,800 ordinary shares of $1.00 each to the
trustees of the ESOP at the issue price of $1.27 per share. All employees
may participate in the ESOP.
The ESOP meets the requirements of Section 166 of the Income Tax Act 1976.
To finance the plan the ESOP borrowed $89,916 from the company. The advance
is for a 3 year period, interest free. The repayment terms of the advances
are the same as the ESOP offers to the employees who have participated in
acquiring shares under the plan. The shares are held in trust for the
employees by the Trustee during the period of the loan. The ESOP has
no external funding.
As at balance date the ESOP held 70,800 fully paid ordinary shares of
$1.00 in the company (0.41% of the company's issued share capital). Of
these 56,200 shares (1994: 69,800) have been allocated to employees. No
shares are subject to options.
The amount owing by the ESOP to the company at balance date was $54,229
(1994: 75,078) included in Other Receivables.
The Trustees of the ESOP are appointed by the company. A Trustee can be
removed from office by the company giving written notice to the Trustee.
The shares held by the ESOP carry the same voting rights as other issued
ordinary shares and such rights are exercised by the Trustee.
(22) INVESTMENT IN BHN (GROUP AND PARENT)
On the June 1995, the company acquired part of the net assets of BHN
Information Systems New Zealand Limited for a cash consideration of
$361,000.
Details of the acquisition are as follows:
1995
Net Assets Acquired $000
- ------------------------------------------------------------------------
Fixed Assets 228
Accounts Receivable 279
Inventory - Service Parts 50
Prepayments 2
- ------------------------------------------------------------------------
559
Deferred Revenue (198)
- -------------------------------------------------------------------------
Fair Value of Net Tangible Assets 361
- -------------------------------------------------------------------------
(23) SUBSEQUENT EVENTS
There have been no material subsequent events since 30 June 1995.
F-127
<PAGE>
WANG NEW ZEALAND LIMITED INTERIM REPORT 1996
Wang New Zealand Limited and Subsidiaries
--------------------------------------
CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE
Unaudited Unaudited Audited
6 months 6 months 12 months
For the six months ended to 31.12.95 to 31.12.94 to 30.6.95
31 December 1995 $000 $000 $000
- --------------------------------------------------------------------------------
OPERATING REVENUE 38,059 33,417 72,105
- --------------------------------------------------------------------------------
PROFIT BEFORE TAX 2,360 2,334 5,320
Tax expense (804) (794) (1,764)
- --------------------------------------------------------------------------------
PROFIT AFTER TAX 1,556 1,540 3,556
Earnings per share (annualised) 18.31 18.12 20.92
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
Unaudited Unaudited Audited
6 months 6 months 12 months
to 31.12.95 to 31.12.94 to 30.6.95
As at 31 December 1995 $000 $000 $000
- --------------------------------------------------------------------------------
Equity at start of the period 24,978 23,207 23,207
Profit after tax for the period 1,556 1,540 3,556
Provision for dividend and dividend
paid during the period (510) (510) (1,785)
Equity at end of the period 26,024 24,237 24,978
- --------------------------------------------------------------------------------
Accounting policies in the current six months have been applied on bases
consistent with those used in previous periods.
F-128
<PAGE>
Wang New Zealand Limited and Subsidiaries
--------------------------------------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited Unaudited Audited
6 months 6 months 12 months
to 31.12.95 to 31.12.94 to 30.6.95
As at 31 December 1995 $000 $000 $000
- --------------------------------------------------------------------------------
SHAREHOLDERS FUNDS
Issued and paid-up capital
17,000,000 ordinary shares of $1 each 17,000 17,000 17,000
Retained earnings 9,024 7,237 7,978
- --------------------------------------------------------------------------------
Total Shareholders' Funds 26,024 24,237 24,978
- --------------------------------------------------------------------------------
Represented by:
FIXED AND LONG TERM ASSETS
Fixed assets 2,771 2,669 2,765
Lease receivables 767 2,770 1,445
- --------------------------------------------------------------------------------
3,538 5,439 4,210
- --------------------------------------------------------------------------------
FUTURE TAXATION BENEFIT 1,146 1,177 1,437
CURRENT ASSETS
Cash 11,150 6,319 11,504
Accounts receivable and prepayments 13,252 13,477 10,572
Inventories 3,913 4,990 3,642
Lease receivables 1,934 2,713 2,380
Income tax refund due 328 - 75
- --------------------------------------------------------------------------------
30,577 27,499 28,173
- --------------------------------------------------------------------------------
Total Assets 35,261 34,115 33,820
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accruals 8,638 8,851 7,400
Payable to Directors - - 15
Related party accounts 89 356 152
Tax Payable - 161 -
Provision for dividend 510 510 1,275
- --------------------------------------------------------------------------------
Total Liabilities 9,237 9,878 8,842
- --------------------------------------------------------------------------------
Net Assets 26,024 24,237 24,978
- --------------------------------------------------------------------------------
F-129
<PAGE>
Wang New Zealand Limited and Subsidiaries
--------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited Unaudited Audited
6 months 6 months 12 months
to 31.12.95 to 31.12.94 to 30.6.95
As at 31 December 1995 $000 $000 $000
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from:
Receipts from customers 35,980 29,677 72,546
Interest received 547 179 493
- --------------------------------------------------------------------------------
36,527 29,856 73,039
- --------------------------------------------------------------------------------
Cash was applied to:
Suppliers and employees 34,187 29,477 64,801
Taxes paid 777 633 2,088
- --------------------------------------------------------------------------------
34,964 30,110 66,889
- --------------------------------------------------------------------------------
Net cash inflows from operating
activities 1,563 (254) 6,150
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was provided from:
Proceeds from sale of fixed assets 45 16 151
Cash was applied to:
Purchases of fixed assets 687 557 1,040
Purchase of BHN Information Systems
New Zealand Limited net assets - - 361
- --------------------------------------------------------------------------------
Net cash used in investing activities (642) (541) (1,250)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was applied to:
Dividend 1,275 901 1,411
- --------------------------------------------------------------------------------
Net cash used in financing activities (1,275) (901) (1,411)
Net increase / (decrease) in cash held (354) (1,696) 3,489
Add:opening cash brought forward 11,504 8,015 8,015
- --------------------------------------------------------------------------------
Ending cash carried forward 11,150 6,319 11,504
- --------------------------------------------------------------------------------
F-130
<PAGE>
WANG NEW ZEALAND LIMITED CONSOLIDATED
UNAUDITED
6 MONTHS
TO 31.12.95
$000'S
OPERATING PROFIT IS ARRIVED AT AFTER CHARGING
AFTER CHARGING:
Audit Fees 30
Depreciation 608
Director's Fees 40
Leasing and rental expenses 606
Foreign currency loss 3
AFTER CREDITING:
Rental income 426
Interest received 526
Gain on sale of fixed assets 14
F-131
<PAGE>
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE
(unaudited)
(Amounts in $NZ000)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED FOR THE
----------------------- YEAR ENDED
31/12/95 31/12/94 30/06/95
$000 $000 $000
-------- -------- --------
<S> <C> <C> <C>
Revenue 310,584 318,217 603,455
-------- -------- --------
Less:
Operating Expenses (Note 4) 259,702 267,106 509,773
Depreciation of Fixed Assets 6,370 5,903 12,021
Audit Fees 126 130 254
Rental and Lease Expenses 17,521 15,155 33,268
Directors' Fees n/a 15 31
Directors' Remuneration 248 n/a n/a
Goodwill Amortisation 1,426 1,472 2,974
-------- -------- --------
Earnings Before Interest and Taxation 25,191 28,436 45,134
Net Interest Expense 5,749 5,169 11,293
-------- -------- --------
Net Profit Before Taxation 19,442 23,267 33,841
Provision for Taxation (Note 5)
Current 7,128 8,856 15,380
Deferred (1,188) (733) (1,842)
-------- -------- --------
5,940 8,123 13,538
-------- -------- --------
Less Minority Interests 48 62 115
-------- -------- --------
Net Profit After Taxation 13,454 15,082 20,188
-------- -------- --------
-------- -------- --------
</TABLE>
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
(unaudited)
(Amounts in $NZ000)
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR
----------------------- ENDED
31/12/95 31/12/94 30/06/95
$000 $000 $000
-------- -------- --------
<S> <C> <C> <C>
Equity at Start of Period 148,100 140,411 140,411
Net Profit After Taxation 13,454 15,082 20,188
Decrease in Revaluation Reserve - - (547)
Minority Interest Movement 40 62 92
Currency Translation Difference (330) 84 56
Dividends Paid and Proposed (6,050) (4,840) (12,100)
-------- -------- --------
Equity at End of Period (Note 6) 155,214 150,799 148,100
-------- -------- --------
-------- -------- --------
</TABLE>
F-132
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(unaudited)
(Amounts in $NZ000)
<TABLE>
<CAPTION>
AS AT
----------------------- AS AT
3l/12/95 31/12/94 30/06/95
$000 $000 $000
-------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash at Bank and on Deposit 5,208 - -
Accounts Receivable 46,234 48,284 48,783
Inventory 127,401 160,542 123,383
Tax Refund Due - - 1,275
-------- -------- --------
178,843 208,826 173,441
NON CURRENT ASSETS
Fixed Assets 105,203 117,191 111,005
Investments 2,320 2,591 2,519
Deferred Charges 152 428 247
Goodwill 51,265 54,139 52,158
-------- -------- --------
158,940 174,349 165,929
-------- -------- --------
Total Assets 337,783 383,175 339,370
-------- -------- --------
-------- -------- --------
LIABILITIES
CURRENT LIABILITIES
Bank Overdraft - 5,460 11,176
Creditors 88,031 99,769 70,655
Provision for Dividend 6,050 4,840 7,260
Provision for Taxation 1,048 5,413 -
Current Portion of Term Liabilities 21,219 21,547 21,134
-------- -------- --------
116,348 137,029 110,225
DEFERRED TAXATION (1,811) 120 (627)
TERM LIABILITIES
Loans 66,041 94,412 79,882
Finance Lease Liabilities 1,991 815 1,790
-------- -------- --------
68,032 95,227 81,672
-------- -------- --------
TOTAL LIABILITIES 182,569 232,376 191,270
EQUITY 155,214 150,799 148,100
-------- -------- --------
TOTAL EQUITY AND LIABILITIES 337,783 383,175 339,370
-------- -------- --------
-------- -------- --------
</TABLE>
F-133
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(Amounts in $NZ000)
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR
----------------------- ENDED
31/12/95 31/12/94 30/06/95
$000 $000 $000
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was Provided From:
Receipts From Customers 313,708 318,339 600,969
Interest Received 101 28 154
-------- -------- --------
313,809 318,367 601,123
Cash was Disbursed To:
Payments to Employees and Suppliers 265,948 298,514 553,143
Interest Paid 6,070 4,965 11,091
Tax Paid 4,781 2,315 15,593
-------- -------- --------
276,799 305,794 579,827
-------- -------- --------
Net Cash Flows From Operating Activities 37,010 12,573 21,296
Cash Flows From Investing Activities
Cash was Provided From:
Disposal of Fixed Assets 6,158 532 4,149
Net Effect of Resolution of Angus & Robertson
Bookworld dispute (Note 3) 2,891 - -
Proceeds from Sale of Business - - 2,466
-------- -------- --------
9,049 532 6,615
Cash was Applied To:
Purchase of Fixed Assets 6,211 12,703 19,627
Payments Made for Acquisition of Business - 197 -
-------- -------- --------
6,211 12,900 19,627
-------- -------- --------
Net Cash Flows from Investing Activities 2,838 (12,368) (l3,012)
Cash Flows From Financing Activities
Cash was Provided From:
Loans Received 48,757 9,990 19,254
Finance leases Received 990 709 2,081
-------- -------- --------
49,747 10,699 21,335
Cash was Applied To:
loans repaid 64,757 10,145 29,855
Finance Leases Repaid 704 1,149 1,731
Dividends Paid 7,260 4,840 9,680
-------- -------- --------
72,721 16,134 41,266
-------- -------- --------
Net Cash Flows From Financing Activities (22,974) (5,435) (19,931)
-------- -------- --------
Net Cash Received (Disbursed)
During the Period 16,874 (5,230) (11,647)
Cash at Beginning of Period (11,176) 197 197
Exchange Rate Adjustments (490) (427) 274
-------- -------- --------
Cash at End of Period 5,208 (5,460) (11,176)
-------- -------- --------
-------- -------- --------
</TABLE>
F-134
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
RECONCILIATION OF CONSOLIDATED NET PROFIT AFTER TAXATION TO
NET CASH FLOWS FROM OPERATING ACTIVITIES
(unaudited)
(Amounts in $NZ000)
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR
----------------------- ENDED
31/12/95 31/12/94 30/06/95
$000 $000 $000
-------- -------- --------
<S> <C> <C> <C>
NET PROFIT AFTER TAXATION 13,454 15,082 20,188
NON CASH ITEMS
Depreciation 6,370 5,903 12,021
Goodwill 1,426 1,472 2,974
Minority Interests 48 62 115
-------- -------- --------
7,844 7,437 15,110
MOVEMENTS IN WORKING CAPITAL
Current Liabilities: Increase/(Decrease)
Creditors 16,187 15,449 (10,146)
Provision for Taxation 2,322 5,413 (958)
Current Assets: (Increase)/Decrease
Accounts Receivable 6 123 (1,068)
Inventory (1,759) (31,535) (590)
Deferred Charges 96 120 301
-------- -------- --------
16,852 (10,430) (12,461)
OTHER
(Gain)/Loss on Disposal of Fixed Assets 23 89 (443)
(classed as investing activity)
Increase/(Decrease) in Deferred Tax (1,163) 395 (1,098)
-------- -------- --------
(1,140) 484 (1,541)
-------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES 37,010 12,573 21,296
-------- -------- --------
-------- -------- --------
</TABLE>
F-135
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
(unaudited)
1. GENERAL
These unaudited accounts have been prepared using the same accounting policies
as applied in the preparation of the published accounts for the year ended 30
June 1995.
2. SEGMENTAL INFORMATION
The Group operates in two industry sectors, the retailing of books and
stationery and the manufacture and printing of paper-based products.
<TABLE>
<CAPTION>
NEW ZEALAND AUSTRALIA CONSOLIDATED
$NZ000 $NZ000 $NZ000
1995 1994 1995 1994 1995 1994
BY GEOGRAPHIC SEGMENTS $000 $000 $000 $000 $000 $000
<S> <C> <C> <C> <C> <C> <C>
Revenue
Sales Outside the Group 241,924 234,214 68,660 84,003 310,584 318,217
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
A$60,345 A$69,563
Earnings before Interest, Tax
& Amortisation of Goodwill 22,738 26,125 3,879 3,783 26,617 29,908
-------- -------- -------- --------
-------- -------- -------- --------
A$3,410 A$3,132
Amortisation of Goodwill (1,426) (1,472)
-------- --------
Earnings before Interest & Tax 25,191 28,436
-------- --------
-------- --------
Total Assets 281,047 310,172 56,736 73,003 337,783 383,175
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
A$49,865 A$60,330
RETAIL MANUFACTURING CONSOLIDATED
$NZ000 $NZ000 $NZ000
1995 1994 1995 1994 1995 1994
BY ACTIVITY SEGMENT $000 $000 $000 $000 $000 $000
Revenue
Sales Outside the Group 261,296 265,954 49,288 52,263 310,584 318,217
-------- --------
-------- --------
Sales to Group Companies - - 18,355 18,567
-------- -------- -------- --------
261,296 265,954 67,643 70,830
-------- -------- -------- --------
-------- -------- -------- --------
Earnings before Interest, Tax
& Amortisation of Goodwill 18,680 21,156 7,937 8,752 26,617 29,908
-------- -------- -------- --------
Amortisation of Goodwill (1,426) (1,472)
-------- --------
Earnings before Interest & Tax 25,191 28,436
-------- --------
-------- --------
Total Assets 258,352 296,481 79,431 86,694 337,783 383,175
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
F-136
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION MATTERS OUTSTANDING
With respect to Croxley Collins Olympic, the position is as described in Note 19
of the Annual Report for the year ended 30 June 1995. The matter has been set
down for hearing in the High Court in October 1996.
The Angus & Robertson Bookworld dispute is now settled, with the agreement in
principle referred to in Notes 19 and 20 of the Annual Report for the year ended
30 June 1995 having been documented and executed.
4. ABNORMAL
Restructuring and relocation costs of NZ$1,022,000 were incurred by GP Print
Limited during the six month period ended 31 December 1995 and are included
in operating expenses.
5. TAXATION
No taxation expense has been charged for the six month period ended 31
December 1995 against the profit of Angus & Robertson Bookworld Pty Ltd in
view of tax credits held. This has reduced the consolidated tax expense by
NZ$1,058,000.
6. EQUITY
The Company has on issue 121,000,398 ordinary shares.
7. 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 for 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 exchange 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.
A reconciliation of the key components of the financial statements between New
Zealand GAAP and U.S. GAAP are as follows:
<TABLE>
<CAPTION>
SHAREHOLDER FIXED INVESTMENTS GOODWILL DEFERRED DEFERRED PROVISION NET PROFIT
EQUITY ASSETS TAX INCOME FOR AFTER TAX
DIVIDEND
$NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6 MONTHS ENDED 31 DECEMBER
1995
Reported under NZ GAAP 155,214 105,203 2,320 51,265 (1,811) 6,050 13,454
1. Adjustments related to
changes in accounting for
Fixed Assets (21,574) (21,323) (251) 266
2. Adjustments related to
changes in accounting for
Dividends 6,050 (6,050)
3. Adjustment related to
changes in accounting for
sale and leaseback
transactions (803) 803 41
5. Adjustment for differences
between assigned values and tax
basis on acquisitions (70) 333 403 (10)
Restated under U.S GAAP 138,817 83,880 2,069 51,598 (1,408) 803 -- 13,751
<CAPTION>
SHAREHOLDER FIXED INVESTMENTS GOODWILL DEFERRED DEFERRED PROVISION NET PROFIT
EQUITY ASSETS TAX INCOME FOR AFTER TAX
DIVIDEND
$NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6 MONTHS ENDED 31 DECEMBER
1994
REPORTED UNDER NZ GAAP 150,799 117,191 2,591 54,139 120 4,840 15,082
1. Adjustments related to
changes in accounting for
Fixed Assets (22,808) (22,557) (251) 366
2. Adjustments related to
changes in accounting for
Dividends 4,840 (4,840)
3. Adjustment related to
changes in accounting for sale
and leaseback transactions (886) 886 41
5. Adjustment for differences
between assigned values and tax
basis on acquisitions (50) 353 403 (10)
Restated under U.S GAAP 131,895 94,634 2,340 54,492 523 886 -- 15,479
</TABLE>
F-137
<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 1995 and 30 June 1994, 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 1995 and 30 June
1994, 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 1995 and the determination of stockholders' equity and
financial position at 30 June 1995 and 30 June 1994 to the extent
summarised in Note 22. Additional disclosures required under
US GAAP are summarised in Note 22.
DELOITTE TOUCHE TOHMATSU
7 September 1995
Auckland, New Zealand
F-138
<PAGE>
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30 JUNE
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
1995 1994 1995 1994
NOTE $000 $000 $000 $000
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUE 2 603,455 526,832 12,089 13,959
------- ------- ------- -------
LESS:
Operating Expenses 509,773 447,265 251 557
Depreciation of Fixed Assets 12,021 9,321 23 19
Audit Fees 254 230 - 18
Rental and Lease Expenses 33,268 25,561 - -
Directors' Fees 31 28 21 19
Goodwill Amortization 2,974 2,164 8 -
------- ------- ------- -------
EARNINGS BEFORE INTEREST AND TAXATION 45,134 42,263 11,786 13,346
Net Interest Expense 2 11,293 6,836 (943) (288)
------- ------- ------- -------
NET PROFIT BEFORE TAXATION 33,841 35,427 12,729 13,634
Provision for Taxation 3 13,538 11,291 250 (103)
Minority Interests 115 74 - -
------- ------- ------- -------
NET PROFIT AFTER TAXATION 20,188 24,062 12,479 13,737
Plus Retained Earnings Brought Forward 59,401 42,628 9,021 3,754
Transfer from Reserves 14 65 1,181 - -
Dividends Paid and Proposed 4 (12,100) (8,470) (12,100) (8,470)
------- ------- ------- -------
Retained Earnings Carried Forward 67,554 59,401 9,400 9,021
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to the financial statements.
- --------------------------------------------------------------------------------
F-139
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
BALANCE SHEET
AS AT 30 JUNE
($NZ000's)
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
1995 1994 1995 1994
NOTE $000 $000 $000 $000
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash at Bank and on Deposit 5 - 197 - 578
Accounts Receivable 6 48,783 48,526 32 90
Inventory 7 123,383 129,007 - -
Income Tax Receivable 1,275 317 536 357
------- ------- ------- -------
173,441 178,047 568 1,025
NON CURRENT ASSETS
Fixed Assets 8 111,005 111,012 42 51
Amount Due from Subsidiaries - - 162,833 112,832
Investments 9 2,519 2,471 68,365 68,383
Deferred Charges 10 247 548 247 440
Goodwill 52,158 55,414 158 -
------- ------- ------- -------
165,929 169,445 231,645 181,706
------- ------- ------- -------
TOTAL ASSETS 339,370 347,492 232,213 182,731
------- ------- ------- -------
------- ------- ------- -------
LIABILITIES
CURRENT LIABILITIES
Bank Overdraft 5 11,176 - 1,769 -
Accounts Payable 70,655 84,320 6,448 6,803
Provision for Dividend 4 7,260 4,840 7,260 4,840
Current Portion of Term Liabilities 11, 12 21,134 21,754 20,000 20,298
------- ------- ------- -------
110,225 110,914 35,477 31,941
DEFERRED TAXATION LIABILITY/(ASSET) 3 (627) 42 56 103
TERM LIABILITIES
Loans 11 79,882 95,007 46,981 59,354
Amounts Due to Subsidiaries - - 84,504 26,517
Finance Lease Liabilities 12 1,790 1,118 - -
------- ------- ------- -------
81,672 96,125 131,485 85,871
------- ------- ------- -------
TOTAL LIABILITIES 191,270 207,081 167,018 117,915
MINORITY INTERESTS 600 508 - -
SHAREHOLDERS' FUNDS
Issued and Paid Up Capital 13 12,100 12,100 12,100 12,100
Reserves 14 67,846 68,402 43,695 43,695
Retained Earnings 67,554 59,401 9,400 9,021
------- ------- ------- -------
TOTAL SHAREHOLDERS' FUNDS 147,500 139,903 65,195 64,816
------- ------- ------- -------
TOTAL SHAREHOLDERS' FUNDS AND LIABILITIES 339,370 347,492 232,213 182,731
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to the financial statements.
- --------------------------------------------------------------------------------
F-140
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 JUNE
($NZ000's)
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
1995 1994 1995 1994
$000 $000 $000 $000
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was Provided From:
Receipts From Customers 600,969 532,202 - 184
Interest Received 154 337 62 770
------- ------- ------ -------
601,123 532,539 62 954
Cash was Disbursed To:
Payments to Employees and Suppliers 553,143 482,319 87 521
Interest Paid 11,091 6,998 7,247 5,299
Tax Paid 15,593 13,151 624 208
------- ------- ------ -------
579,827 502,468 7,958 6,028
------- ------- ------ -------
Net Cash Flows From Operating Activities 21,296 30,071 (7,896) (5,074)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was Provided From:
Disposal of Fixed Assets 4,149 2,491 - 645
Proceeds from Sale of Businesses 2,466 - - -
Proceeds from Sale of Investment Properties - 1,700 - -
------- ------- ------ -------
6,615 4,191 - 645
Cash was Applied To:
Purchase of Fixed Assets 19,627 9,457 10 29
Payments Made for Acquisition of Business - 134,773 - 94,256
------- ------- ------ -------
19,627 144,230 10 94,285
------- ------- ------ -------
Net Cash Flows from Investing Activities (13,012) (140,039) (10) (93,640)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was Provided From:
Loans Received 19,254 126,012 14,000 90,359
Advances from Subsidiaries - - 62,673 38,814
Finance Leases Received 2,081 1,636 - -
Share Capital Paid Up - 44,967 - 44,967
------- ------- ------ -------
21,335 172,615 76,673 174,140
Cash was Applied To:
Loans Repaid 29,855 68,676 26,672 69,286
Advances to Subsidiaries - - 34,762 -
Finance Leases Repaid 1,731 1,163 - -
Dividends Paid 9,680 5,748 9,680 5,748
------- ------- ------ -------
41,266 75,587 71,114 75,034
Net Cash Flows From Financing Activities (19,931) 97,028 5,559 99,106
------- ------- ------ -------
NET CASH RECEIVED (DISBURSED) DURING
THE PERIOD (11,647) (12,940) (2,347) 392
CASH AT BEGINNING OF PERIOD 197 13,137 578 186
Impact of Foreign Exchange 274 - - -
------- ------- ------ -------
Cash at End of Period (11,176) 197 (1,769) 578
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
See accompanying notes to the financial statements.
- --------------------------------------------------------------------------------
F-141
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
RECONCILIATION OF NET CASH FLOWS FROM OPERATING
ACTIVITIES TO NET PROFIT AFTER TAXATION
($NZ000's)
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
1995 1994 1995 1994
$000 $000 $000 $000
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET PROFIT AFTER TAXATION 20,188 24,062 12,479 13,737
NON CASH ITEMS
Depreciation 12,021 9,321 23 19
Goodwill 2,974 2,164 8 -
Minority Interests 115 74 - -
Other Non-cash Expenses - - 14 1
------ ------ ------ -------
15,110 11,559 45 20
MOVEMENTS IN WORKING CAPITAL
Current Liabilities: Increase/(Decrease)
Accounts Payable (10,146) (455) (355) 633
Amounts Due to Subsidiaries - - 24,846 -
Provision for Taxation (958) (2,327) (179) (357)
Current Assets: (Increase)/Decrease
Accounts Receivable (1,068) 5,560 58 623
Income Tax Receivable - (317) - -
Amounts Due from Subsidiaries - - (44,935) (19,934)
Inventory (590) (7,675) - -
Deferred Charges 301 (376) 192 (268)
------ ------ ------ -------
(12,461) (5,590) (20,373) (19,303)
OTHER
(Gain)/Loss on Disposal of Assets (443) 173 - (645)
(classed as investing activity)
Increase/(Decrease) in Deferred Tax (1,098) (133) (47) 1,117
------- ------ ------ -------
(1,541) 40 (47) 472
------- ------ ------ -------
Net Cash Flows From Operating Activities 21,296 30,071 (7,896) (5,074)
------- ------ ------ -------
------- ------ ------ -------
</TABLE>
See accompanying notes to the financial statements.
- --------------------------------------------------------------------------------
F-142
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
(1) STATEMENT OF ACCOUNTING POLICIES
These financial statements are presented in accordance with the Companies Act
1955 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.
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 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.
Fixed assets are depreciated on a straight line basis at rates which will write
off the cost or valuation of those assets over their estimated useful lives.
- --------------------------------------------------------------------------------
F-143
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
The following estimated useful lives have been applied:
Motor Vehicles 5 years
Furniture and Fittings 5 to 10 years
Plant and Machinery 5 to 15 years
Office and EDP Equipment 3 to 5 years
Buildings 30 to 80 years
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 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.
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 POLICIES
There have been no changes in accounting policies.
All policies have been applied on a basis consistent with those used in the
previous year.
- --------------------------------------------------------------------------------
F-144
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
1995 1994 1995 1994
(2) PROFIT AND LOSS ACCOUNT $NZ000 $NZ000 $NZ000 $NZ000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Included in the Profit and Loss account are:
Interest Income (154) (337) (8,605) (5,819)
Interest Expense on Finance Leases 251 257 - -
Interest Expense on Term Loans 10,994 6,916 7,466 5,427
Other Interest Expense 202 - 196 104
-------- -------- -------- --------
Net Interest Expense/(Income) 11,293 6,836 (943) (288)
Sales 603,451 526,575 - -
Dividend Income - 58 12,000 13,214
Share of Associates After Tax Profit 4 199 - -
Gains/(Losses) on Sale of Fixed Assets (479) (173) - -
Gains/(Losses) on Sale of Business 922 - - -
(3) TAXATION
Provision for Taxation
The current taxation charge is calculated as follows:
Net Profit Before Taxation 33,841 35,427 12,729 13,634
Taxation at 33% 11,167 11,691 4,201 4,499
Adjusted for the effect of:
Permanent Differences 707 (400) (3,951) (4,602)
Timing Differences not Recognised 1,664 - - -
-------- -------- -------- --------
Net Taxation Charge 13,538 11,291 250 (103)
-------- -------- -------- --------
-------- -------- -------- --------
Accounted for as follows;
Current 15,380 11,424 297 (149)
Deferred (1,842) (133) (47) 46
-------- -------- -------- --------
13,538 11,291 250 (103)
-------- -------- -------- --------
-------- -------- -------- --------
Deferred Taxation
Opening Balance (Asset)/Liability 42 719 103 (1,014)
Charge to P&L (1,842) (133) (47) 46
Adjustments:
Transfers 1,173 (544) - 1,071
-------- -------- -------- --------
Closing Balance (Asset)/Liability (627) 42 56 103
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Future income tax benefits of NZ$1,872,000 arising from tax losses and other
timing differences in Angus & 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 Standard Accounting Practice
12. The effect on this year's tax charge in the Profit and Loss Account is to
increase the charge by NZ$1,664,000.
- --------------------------------------------------------------------------------
F-145
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
1995 1994 1995 1994
$NZ000 $NZ000 $NZ000 $NZ000
---- ---- ---- ----
<S> <C> <C> <C> <C>
IMPUTATION CREDIT ACCOUNT
Opening Balance 16,437 6,155 5,498 2.498
Income Tax Paid/(Refunded) 15,384 13,151 477 141
Transfers - - - (141)
Imputation Credits on Dividends Received 35 26 5,910 5,895
Less: Credits Attributed to Dividends Paid (4,768) (2,895) (4,768) (2,895)
-------- -------- -------- --------
27,088 16,437 7,117 5,498
-------- -------- -------- --------
-------- -------- -------- --------
(4) DIVIDENDS AND BONUS ISSUE
INTERIM DIVIDEND 4,840 3,630 4,840 3,630
Interim dividend of 4 cents per share
(1994: 3 cents per share)
FINAL DIVIDEND 7,260 4,840 7,260 4,840
A proposed final dividend of 6 cents
per share (1994: 4 cents per share)
-------- -------- -------- --------
12,100 8,470 12,100 8,470
-------- -------- -------- --------
-------- -------- -------- --------
(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.
Bank Overdraft Prior to Set-Off (18,095) (2,915) (1,769) -
Deposits on Hand 6,919 3,112 - 578
-------- -------- -------- --------
Bank Overdraft after Set-Off (11,176) 197 (1,769) 578
-------- -------- -------- --------
-------- -------- -------- --------
(6) ACCOUNTS RECEIVABLE
Accounts Receivable are recorded net of a
provision for doubtful debts.
Provision for Doubtful Debts 480 355 - -
-------- -------- -------- --------
(7) INVENTORY
Finished Goods 110,491 118,112 - -
Work in Progress 2,845 2,340 - -
Raw Materials 10,047 8,555 - -
-------- -------- -------- --------
123,383 129,007 - -
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Certain inventories are subject to restrictions of title. ie. Romalpa clauses.
- --------------------------------------------------------------------------------
F-146
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATION COMPANY
COST VALUATION ACCUM NET COST ACCUM NET
DEPN BOOK DEPN BOOK
VALUE VALUE
$NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
<S> <C> <C> <C> <C> <C> <C> <C>
(8) FIXED ASSETS
30 JUNE 1995
Motor Vehicles 697 - 232 465 - - -
Capitalised Leased
Motor Vehicles 4,755 - 1,752 3,003 - - -
Plant & Machinery 36,110 - 12,413 23,697 - - -
Office Equipment/
Furniture & Fittings 36,914 - 17,957 18,957 104 62 42
Leasehold Improvements 3,932 - 1,689 2,243 - - -
Buildings - 28,255 - 28,255 - - -
Land - 34,385 - 34,385 - - -
------ ------ ------ ------- ----- ----- -----
82,408 62,640 34,043 111,005 104 62 42
------ ------ ------ ------- ----- ----- -----
------ ------ ------ ------- ----- ----- -----
30 JUNE 1994
Motor Vehicles 622 - 148 474 - - -
Capitalised Leased
Motor Vehicles 4,053 - 1,277 2,776 - - -
Plant & Machinery 32,772 - 8,791 23,981 - - -
Office Equipment/
Furniture & Fittings 32,022 - 14,132 17,890 90 39 51
Leasehold Improvements 2,714 - 1,377 1,337 - - -
Buildings - 29,237 - 29,237 - - -
Land - 35,317 - 35,317 - - -
------ ------ ------ ------- ----- ----- -----
72,183 64,554 25,725 111,012 90 39 51
------ ------ ------ ------- ----- ----- -----
------ ------ ------ ------- ----- ----- -----
</TABLE>
Land and buildings are restated to valuation in accordance with valuation
reports of registered independent valuers, with the exception of Croxley
Stationery Limited's Avondale property which is valued at market value based on
an unconditional agreement to sell this property in October 1995.
Valuations were prepared by Jones Lang Wootten Ltd (report dated 30 June 1995),
Colliers Jardine New Zealand Limited (report dated 30 June 1995) and Lockwood &
Associates Limited (report dated 30 June 1995). The telephone directory press is
stated at valuation (recognised as deemed cost) as at 30 June 1991 less
depreciation.
- --------------------------------------------------------------------------------
F-147
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
1995 1994 1995 1994
$NZ000 $NZ000 $NZ000 $NZ000
---- ---- ---- ----
<S> <C> <C> <C> <C>
(9) INVESTMENTS
Other Investments 116 76 5 5
Investment in Subsidiaries - - 68,360 68,378
Associate Companies
Shares at Cost 1,045 1,045 - -
Share of
-- Retained Profits 452 506 - -
-- Revaluations 252 252 - -
Advances to Associates 654 592 - -
------- ------- ------- -------
2,403 2,395 - -
------- ------- ------- -------
2,519 2,471 68,365 68,383
------- ------- ------- -------
------- ------- ------- -------
(10) DEFERRED CHARGES
Deferred charges include costs incurred on raising
term loans. Such costs are capitalised and written
off over the term of the loans.
(11) LOANS
Loans--Secured 99,882 115,305 66,981 79,652
Less: Included in Current Liabilities 20,000 20,298 20,000 20,298
------- ------- ------- -------
79,882 95,007 46,981 59,354
------- ------- ------- -------
------- ------- ------- -------
Repayable as follows:
Between 1 and 2 years 79,882 20,298 46,981 20,298
Between 2 and 5 years - 74,709 - 39,056
------- ------- ------- -------
79,882 95,007 46,981 59,354
------- ------- ------- -------
------- ------- ------- -------
</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 6.93% to 10.2%.
- --------------------------------------------------------------------------------
F-148
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
1995 1994 1995 1994
$NZ000 $NZ000 $NZ000 $NZ000
---- ---- ---- ----
<S> <C> <C> <C> <C>
(12) FINANCE LEASE LIABILITIES
The consolidated future lease rental payments under
finance leases are:
Not later than 1 year 1,388 1,669 - -
1 - 2 years 1,060 816 - -
2 - 5 years 936 393 - -
------- ------- ------- -------
3,384 2,878 - -
Less future interest expense 460 304 - -
------- ------- ------- -------
2,924 2,574 - -
------- ------- ------- -------
------- ------- ------- -------
Representing:
Current Liability 1,134 1,456 - -
Term Liability 1,790 1,118 - -
------- ------- ------- -------
2,924 2,574 - -
------- ------- ------- -------
------- ------- ------- -------
(13) SHARE CAPITAL
Authorised Share Capital
500,000,000 (1994: 500,000,000) Ordinary
Shares of NZ$0.10 (1994: NZ$0.10) Each 50,000 50,000 50,000 50,000
------- ------- ------- -------
------- ------- ------- -------
ISSUED AND FULLY PAID CAPITAL
121,000,398 (1994: 121,000,398) Ordinary
Shares of NZ$0.10 (1994: NZ$0.10) Each 12,100 12,100 12,100 12,100
------- ------- ------- -------
------- ------- ------- -------
(14) RESERVES
SHARE PREMIUM RESERVE
Opening Balance 43,695 240 43,695 240
Movements - 43,455 - 43,455
------- ------- ------- -------
Closing Balance 43,695 43,695 43,695 43,695
ASSET REVALUATION RESERVE
Opening Balance 24,597 10,653 - -
Revaluation (548) 15,125 - -
Adjustment for Assets Sold (65) (1,181) - -
------- ------- ------- -------
Closing Balance 23,984 24,597 - -
CURRENCY TRANSLATION RESERVE
Opening Balance 110 - - -
Movements 57 110 - -
------- ------- ------- -------
Closing Balance 167 110 - -
------- ------- ------- -------
TOTAL RESERVES 67,846 68,402 43,695 43,695
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
- --------------------------------------------------------------------------------
F-149
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY
1995 1994 1995 1994
$NZ000 $NZ000 $NZ000 $NZ000
---- ---- ---- ----
<S> <C> <C> <C> <C>
(15) OPERATING LEASE COMMITMENTS
Commitments under operating leases are due as follows:
Not later than 1 year 31,272 30,878 - -
1-2 years 28,911 25,378 - -
2-5 years 44,607 33,125 - -
Over 5 years 13,701 16,477 - -
------- ------- ------- -------
118,491 105,858 - -
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
NEW ZEALAND AUSTRALIA CONSOLIDATED
1995 1994 1995 1994 1995 1994
BY GEOGRAPHIC SEGMENTS $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
(16) SEGMENTAL REPORTING
REVENUE
Sales Outside the Group 472,718 432,403 130,737 94,429 603,455 526,832
------- ------- ------- ------ ------- -------
------- ------- ------- ------ ------- -------
EARNINGS BEFORE INTEREST, TAX
AND AMORTISATION OF GOODWILL 48,271 43,973 (163) 454 48,108 44,427
------- ------- ------- ------
------- ------- ------- ------
Amortisation of Goodwill (2,974) (2,164)
------- -------
EARNINGS BEFORE INTEREST AND TAX 45,134 42,263
------- -------
------- -------
TOTAL ASSETS 287,767 285,122 51,603 62,370 339,370 347,492
------- ------- ------- ------ ------- -------
------- ------- ------- ------ ------- -------
<CAPTION>
RETAIL MANUFACTURING CONSOLIDATED
1995 1994 1995 1994 1995 1994
BY ACTIVITY SEGMENT $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
------- ------- ------- ------- ------- -------
REVENUE
Sales Outside the Group 502,208 426,619 101,247 100,213 603,455 526,832
------- -------
------- -------
Sales to Group Companies - - 32,969 24,983
------- ------- ------- -------
502,208 426,619 134,216 125,196
------- ------- ------- -------
------- ------- ------- -------
EARNINGS BEFORE INTEREST, TAX
AND AMORTISATION OF GOODWILL 31,409 30,374 16,699 14,053 48,108 44,427
------- ------- ------- -------
------- ------- ------- -------
Amortisation of Goodwill (2,974) (2,164)
------- -------
EARNINGS BEFORE INTEREST AND TAX 45,134 42,263
------- -------
------- -------
TOTAL ASSETS 258,957 260,860 80,413 86,632 339,370 347,492
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
- --------------------------------------------------------------------------------
F-150
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
(17) RELATED PARTIES
The ultimate parent company is Rank Commercial Limited. (This company is not
consolidated in these Financial Statements.)
Significant subsidiaries consolidated at 30 June 1995 (and 30 June 1994) 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 Group Limited 100 Holding Company
Whitcoulls Group Services Limited 100 Management Services
</TABLE>
Significant Associate Companies equity accounted at 30 June 1995 are:
University Bookshop (Auckland) Limited 50 Tertiary Book Retailing
University Bookshop (Canterbury) Limited 50 Tertiary Book Retailing
University Book Shop (Otago) Limited 50 Tertiary Book Retailing
Whitcoulls Group Limited has entered into the following related party
transactions with its subsidiaries.
COMPANY
1995 1994
$NZ000 $NZ000
Interest Charged to Subsidiaries 8,605 5,819
Management Fees from Subsidiaries 89 -
The outstanding balances at year end are disclosed in the Balance Sheet, and
financing cash flows are disclosed in the Statement of Cash Flows.
- --------------------------------------------------------------------------------
F-151
<PAGE>
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 interest rate maturity dates of 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:
CONSOLIDATED COMPANY
1995 1994 1995 1994
$NZ000 $NZ000 $NZ000 $NZ000
------ ---- ------ ----
Interest Rate Swaps 91,000 - 70,000 -
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 8.67% 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 to debtors
is limited due to the large number 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
approximately equal to their carrying value. This value was calculated based on
the variance between the floating and fixed rates in effect 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.
- --------------------------------------------------------------------------------
F-152
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
(19) ACQUISITION MATTERS OUTSTANDING
CROXLEY COLLINS OLYMPIC
Croxley Collins Olympic was acquired on 29 November 1993.
The purchase price of the business was finalised at NZ$51.5 million which after
a payment of NZ$46.0 million left a final balance due of NZ$5.5 million.
Upon taking over the business Whitcoulls Group Limited formed the opinion that
certain breaches of the Sale and Purchase Agreement by the vendors had occured
and retained the final payment pending resolution of these matters.
The vendor sued for summary judgement. Whitcoulls Group Limited counterclaimed
for NZ$11.2 million for breach of contract.
The hearing took place in August 1994 and the High Court dismissed the summary
judgement proceedings and found Whitcoulls Group Limited had an arguable case
regarding the alleged breach of contract. The vendor appealed this decision to
the Court of Appeal but withdrew this appeal prior to the hearing.
Pending resolution of this matter the final balance due to the vendor of NZ$5.5
million has been accrued as a liability in the balance sheet and is included in
accounts payable. Legal costs have been expensed as incurred and no provision
has been made for any interest liability.
ANGUS & ROBERTSON BOOKWORLD
Angus & Robertson Bookworld was acquired on 29 November 1993. The purchase price
was provisionally assessed and paid, subject to the estimated retention of $8.7
million. The final purchase price was to be determined upon the provision by the
vendor of an audited statement of net assets. This statement has not been
received.
In May 1994 two of the vendors, Bibury Limited (formerly Brash Holdings Limited)
and Brashs Pty Limited were placed into Administration.
At the date of issue of the 1994 Annual report, Whitcoulls Group Limited
believed that the final purchase price would not exceed the amount paid to that
date, with the difference relating primarily to the overvaluation of inventories
in the provisional assessment of the purchase price.
Subsequently Whitcoulls Group Limited concluded that the business had been
misrepresented and sued for damages.
An agreement in principle has been reached with the Administrator, subject to
final legal documentation. No further monies were paid to, or are owing to, the
Administrator in respect of this acquisition.
These accounts have been prepared incorporating the terms of the agreement
reached.
(20) CONTINGENT LIABILITIES/ASSETS
There were no contingent liabilities.
Angus and Robertson Bookworld Pty Ltd has been admitted as an unsecured creditor
of Bibury 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.
(21) CAPITAL COMMITMENTS
There were no material capital commitments at year end. (1994:NIL)
- --------------------------------------------------------------------------------
F-153
<PAGE>
(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 for 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 exchange 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.
A reconciliation of the key components of the financial statements between New
Zealand GAAP and U.S. GAAP are as follows:
<TABLE>
<CAPTION>
SHAREHOLDER FIXED INVESTMENTS GOODWILL DEFERRED DEFERRED PROVISION NET PROFIT
EQUITY ASSETS TAX INCOME FOR AFTER TAX
DIVIDEND
AUDITED INFORMATION
$NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED 30 JUNE 1995
Reported under NZ GAAP 147,500 111,005 2,519 52,158 (627) 7,260 20,188
1. Adjustments related to
changes in accounting for Fixed
Assets (21,837) (21,586) (251) 789
2. Adjustments related to
changes in accounting for
Dividends 7,260 (7,260)
3. Adjustments related to
changes in the accounting for
sale and lease back transactions (844) 844 82
4. Adjustment related to using
weighted average exchange rate
rather than year end exchange
rate for earnings of foreign
subsidiary 332
5. Adjustment for differences
between assigned values and tax
basis on acquisitions (60) 343 403 (20)
Restated under U.S GAAP 132,019 89,419 2,268 52,501 (224) 844 -- 21,371
<CAPTION>
Shareholder Fixed Investments Goodwill Deferred Deferred Provision Net Profit
Equity Assets Tax Income for After Tax
Dividend
AUDITED INFORMATION
$NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED 30 JUNE 1994
Reported under NZ GAAP 139,903 111,012 2,471 55,414 42 4,840 24,062
1. Adjustments related to
changes in accounting for
Fixed Assets (23,174) (22,923) (251) 1,720
2. Adjustments related to
changes in accounting for
Dividends 4,840 (4,840)
3. Adjustment related to
changes in accounting for
sale and leaseback
transactions (927) 927 41
5. Adjustment for differences
between assigned values and tax
basis on acquisitions (40) 363 403 (20)
Restated under U.S GAAP 120,602 88,089 2,220 55,777 445 927 - 25,803
</TABLE>
F-154
<PAGE>
ADDITIONAL DISCLOSURES REQUIRED UNDER US GAAP
YEARS ENDED 30 JUNE 1995 AND 1994
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 74 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 87 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,
Wallington and Christchurch.
Whitcoulls Office Products Ltd is New Zealand's second largest commercial
stationer, operating 17 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 Stationary 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 product 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.
F-155
<PAGE>
2. PROFIT AND LOSS STATEMENT
Operating expenses in the Profit and Loss Account comprise;
1995 1994
NZ$000 NZ$000
Cost of Product sold 392,557 342,401
Selling, General, Administrative
and Other Expenses 117,216 104,864
-----------------------
Total Operating Expenses $509,773 $447,265
-----------------------
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. There is no effect to respect of
the 1994 or 1993 years.
The restated cash flow in summary form is as follows:
1995 1994
NZ$000 NZ$000
Net Cash flows from Operating Activities 21,296 30,071
Cash Flows from Investing Activities (13,012) (140,039)
Cash Flows from Financing Activities (8,755) 97,028
Net Cash (Disbursements) during period (471) (12,940)
Cash at beginning of period 197 13,137
Impact of Foreign Exchange 274
------------------------
Cash at end of Period Nil 197
------------------------
4. IMPUTATION CREDIT BALANCE
Imputation credit disclosed in Note 3 relates to taxation credits available
to be attached to dividend distributions to shareholders. These credits are
lost on significant changes in shareholders.
F-156
<PAGE>
5. LOANS
The term position of loans disclosed in Note 11 comprise:
1995 1994
NZ$000 NZ$000
Repayable
1 & 2 years 79,882 20,298
2 & 3 years -- 74,709
--------------------------
79,882 95,007
--------------------------
6. FINANCE LEASE LIABILITIES
Finance lease commitments disclosed in Note 12 comprises:
1995 1994
NZ$000 NZ$000
Repayable:
Current 1,388 1,669
1 & 2 years 1,060 816
2 & 3 years 936 393
--------------------------
3,384 2,878
--------------------------
Less
Future interest 460 304
expenses
--------------------------
2,924 2,574
--------------------------
7. EARNINGS PER SHARE
1995 1994
NZ$ NZ$
Earnings per share (cents) 17.7 22.7
8. MATERIAL ACQUISITIONS
1995 1994
NZ$000 NZ$000
Net assets acquired - $140,290
--------------------------
Payments made per -
Statement of Cash Flows 134,773
Included in Creditors - 5,517
--------------------------
- $140,290
--------------------------
F-157
<PAGE>
9. LOANS
Included in loans (part of net liabilities of foreign subsidiaries) is
Australian denominated debt of NZ$32.9 million for the year ended 30 June 1995,
and NZ$35.6 million for the year ended 30 June 1994.
10. 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 and share premium 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 Related
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.
11. FOREIGN SUBSIDIARIES
Net liabilities of foreign subsidiaries which are denominated in Australian
dollars amount to NZ$4,884,000 as at 30 June 1995 and NZ$1,248,000 as at 30
June 1994.
12. UNUSED LETTERS OF CREDIT
1995 1994
NZ$000 NZ$000
Total as at 30 June 588 1,524
13. OPERATING LEASE EXPENSE
Operating lease expense comprise:
1995 1994
NZ$000 NZ$000
Base 35,339 27,004
Contingent 450 395
Less sub-lease (2,511) (1,838)
------------------------------
$33,268 $25,561
------------------------------
F-158
<PAGE>
14. BUSINESS COMBINATION:
PURCHASE METHOD
In year ending 30 June 1994, the Company made 8 acquisitions accounted
for under the purchase method for an aggregate purchase price which was
initially the sum of NZ$140.3 million, but which was subsequently reduced to
NZ$137.7 million as a result of adjustments to the purchase price of Angus &
Robertson Bookworld. Payment for the acquisitions was financed entirely by
cash, apart from NZ$5.5 million which is under dispute and still remains to be
paid. The total assets related to these 8 acquisitions were NZ$182.0 million
including goodwill of NZ$46.6 million. The results of these acquisitions have
been included in the Company's results from their respective dates of
acquisitions.
The following presents the unaudited pro forma results of operations of
the Company for the fiscal year ended 30 June 1994 as if the purchase
acquisitions described above had been consummated as of the beginning of the
financial year ended 30 June 1994. The results presented below include
certain pro forma adjustments to reflect the amortization of intangible
assets, the cost of funding, adjustments in executive compensation and the
inclusion of an income tax provision:
FOR THE
FISCAL
YEAR ENDED
JUNE 30 1994
($NZ000, except
per share amount)
Revenues.............................. 607,453
Net income............................ 18,288
Net income per share.................. 15.11 cents
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 the financial year
ending 30 June 1994 or the results which may occur in the future.
F-159
<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 1994 and 30 June 1993, 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 1994 and 30 June
1993, 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 1994 and the determination of stockholders' equity and
financial position at 30 June 1994 and 30 June 1993 to the extent
summarised in Note 22. Additional disclosures required under
US GAAP are summarised in Note 22.
DELOITTE TOUCHE TOHMATSU
16 September 1994
Auckland, New Zealand
F-160
<PAGE>
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 30 JUNE
<TABLE>
<CAPTION>
1994 1993
NOTE $000 $000
-------- --------
<S> <C> <C> <C>
Revenue 2 526,832 302,355
-------- --------
Less:
Operating Expenses 447,265 254,287
Depreciation of Fixed Assets 9,321 5,377
Audit Fees 230 106
Rental and Lease Expenses 25,561 11,425
Directors' Fees 28 11
Goodwill Amortisation 2,164 612
-------- --------
Total Expenses 484,569 271,818
-------- --------
Earnings Before Interest and Taxation 42,263 30,537
Net Interest Expense 2 6,836 4,172
-------- --------
Net Profit Before Taxation 35,427 26,365
Provision for Taxation 3 11,291 7,852
Minority Interests 74 -
-------- --------
Net Profit After Taxation 24,062 18,513
Retained Earnings Brought Forward 42,628 27,683
Transfer from Reserves 13 1,181 571
Dividends and Bonus Issue 4 (8,470) (4,139)
-------- --------
Retained Earnings Carried Forward 59,401 42,628
-------- --------
-------- --------
</TABLE>
See accompanying notes to the financial statements.
F-161
<PAGE>
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
CONSOLIDATED BALANCE SHEET
AS AT 30 JUNE
<TABLE>
<CAPTION>
1994 1993
NOTE $000 $000
-------- --------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash at Bank and on Deposit 197 13,137
Accounts Receivable 5 48,526 30,621
Inventory 6 129,007 48,909
Tax Refund Due 317 -
-------- --------
178,047 92,667
Non Current Assets
Fixed Assets 7 111,012 60,627
Investments 8 2,471 2,272
Deferred Charges 9 548 172
Goodwill 55,414 11,020
-------- --------
169,445 74,091
-------- --------
Total Assets 347,492 166,758
-------- --------
-------- --------
LIABILITIES
Current Liabilities
Creditors 84,320 38,808
Provision for Dividend 4 4,840 2,117
Provision for Taxation - 2,327
Current Portion of Term Liabilities 10, 11 21,754 13,065
-------- --------
110,914 56,317
Deferred Taxation 3 42 719
Term Liabilities
Loans 10 95,007 44,325
Finance Lease Liabilities 11 1,118 1,288
-------- --------
96,125 45,613
-------- --------
Total Liabilities 207,081 102,649
Minority Interests 508 -
SHAREHOLDERS' FUNDS
Issued and Paid Up Capital 12 12,100 10,588
Reserves 13 68,402 10,893
Retained Earnings 59,401 42,628
-------- --------
Total Shareholders' Funds 139,903 64,109
-------- --------
Total Shareholders' Funds and Liabilities 347,492 166,758
-------- --------
-------- --------
</TABLE>
See accompanying notes to the financial statements.
F-162
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 JUNE
<TABLE>
<CAPTION>
1994 1993
$000 $000
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Cash was Provided From:
Receipts from Customers 532,202 295,057
Interest Received 337 1,011
Dividends Received - 27
-------- --------
532,539 296,095
Cash was Applied to:
Payments to Employees and Suppliers 482,319 268,796
Interest Paid 6,998 4,898
Tax Paid 13,151 6,658
502,468 280,352
-------- --------
Net Cash Flows from Operating Activities 30,071 15,743
Cash Flows From Investing Activities
Cash was Provided From:
Disposal of Fixed Assets 2,491 6,231
Proceeds from Sale of Investment Properties 1,700 2,750
-------- --------
4,191 8,981
Cash was Applied to:
Purchase of Fixed Assets 9,457 17,880
Payments Made for Acquisition of Business 134,773 -
-------- --------
144,230 17,880
-------- --------
Net Cash Flows from Investing Activities (140,039) (8,899)
Cash Flows from Financing Activities
Cash was Provided From:
Loans Received 126,012 7,700
Finance Leases Received 1,636 2,746
Rights Issue 44,967 -
-------- --------
172,615 10,446
Cash was Applied To:
Loans Repaid 68,676 11,122
Finance Leases Repaid 1,163 856
Dividends Paid 5,748 2,503
-------- --------
75,587 14,481
Net Cash Flows from Financing Activities 97,028 (4,035)
-------- --------
Net Cash Received (Disbursed) During the Year (12,940) 2,809
-------- --------
Cash at Beginning of Year 13,137 10,328
-------- --------
Cash at End of Year 197 13,137
-------- --------
-------- --------
</TABLE>
See accompanying notes to the financial statements.
F-163
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
RECONCILIATION OF CONSOLIDATED NET CASH FLOWS FROM OPERATING
ACTIVITIES TO NET PROFIT AFTER TAXATION
<TABLE>
<CAPTION>
1994 1993
$000 $000
-------- --------
<S> <C> <C>
Net Profit After Taxation 24,062 18,513
Non Cash Items
Depreciation 9,321 5,377
Goodwill 2,164 612
Minority Interests 74 -
Other Non-cash Expenses - 143
-------- --------
11,559 6,132
Movements in Working Capital
Current Liabilities: Increase/(Decrease)
Creditors (455) 3,571
Provision for Taxation (2,327) 322
Current Assets: (Increase)/Decrease
Accounts Receivable 5,560 (7,180)
Tax Refund Due (317) -
Amount Due from Associates - (132)
Inventory (7,675) (6,183)
Deferred Charges (376) 57
-------- --------
(5,590) (9,545)
Other
(Gain)/Loss on Disposal of Fixed Assets 173 (204)
(classed as investing activity)
Increase/(Decrease) in Deferred Taxation (133) 847
-------- --------
40 643
-------- --------
Net Cash Flows From Operating Activities 30,071 15,743
-------- --------
-------- --------
</TABLE>
See accompanying notes to the financial statements.
F-164
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1 STATEMENT OF ACCOUNTING POLICIES
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 by the group with the exception that certain land, buildings and
plant are recorded at valuation.
Accrual accounting is used to match expenses and revenues. Reliance is placed on
the fact that the group 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 labor 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
Fixed assets are depreciated on a straight-line basis at rates which will write-
off the cost or valuation of those assets over their estimated useful lives.
The following lives have been estimated:
Motor Vehicles 5 years
Furniture and Fittings 5 to 10 years
Plant and Machinery 5 to 15 years
Office and EDP Equipment 3 to 5 years
Buildings 30 to 80 years
Land and buildings are revalued to net current value on an annual basis. The
valuations are carried out by independent registered valuers.
Changes in valuations 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.
F-165
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
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.
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.
GOODWILL
Goodwill represents the excess of purchase consideration and associated costs
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.
CHANGES IN ACCOUNTING POLICIES
There have been no changes in accounting policies.
2 PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
CONSOLIDATED
1994 1993
$000 $000
-------- --------
<S> <C> <C>
Included in the Consolidated Profit and Loss Account are:
Interest Income 337 1,052
Interest Expense on Finance Leases (257) (204)
Other Interest Expense (6,916) (5,020)
-------- --------
Net Interest Expense (6,836) (4,172)
-------- --------
Gain (Loss) on Sale of Fixed Assets (173) 204
Share of Associates' After Tax Profit 199 132
The Parent's profit after taxation was $13,737,000
(1993:$7,420,000).
</TABLE>
F-166
<PAGE>
<TABLE>
<CAPTION>
3 TAXATION
CONSOLIDATED
1994 1993
$000 $000
-------- --------
<S> <C> <C>
Provision for Taxation
The current taxation charge is calculated as follows:
Net Profit Before Taxation 35,427 26,365
Permanent Differences (1,212) (2,573)
-------- --------
34,215 23,792
Taxation at 33% 11,291 7,852
-------- --------
-------- --------
Accounted for as follows:
Current 11,424 7,005
Deferred (133) 847
-------- --------
11,291 7,852
-------- --------
-------- --------
DEFERRED TAXATION
The balance comprises:
Future Income Taxation Benefit (1,170) -
Deferred Taxation 1,212 719
-------- --------
42 719
-------- --------
-------- --------
</TABLE>
The future income taxation benefit relates to taxation losses and other timing
differences arising in Angus and Robertson Bookworld which is based in the
Australian taxation jurisdiction.
<TABLE>
<CAPTION>
<S> <C> <C>
Imputation Credit Account
Opening Balance 6,189 24
Income Tax Paid 13,151 6,658
Imputation Credits on Dividends Received 26 28
Less: Credits Attributed to Dividends Paid (2,895) (521)
-------- --------
16,471 6,189
-------- --------
-------- --------
4 DIVIDENDS AND BONUS ISSUE
COMPANY AND CONSOLIDATED
1994 1993
$000 $000
-------- --------
Interim Dividend
An interim dividend of 3 cents per share
(1993: 1 cent per share) 3,630 1,059
Final Dividend
A proposed final dividend of 4 cents per share
(1993: 2 cents per share) 4,840 2,117
-------- --------
8,470 3,176
Bonus Issue
A bonus issue of fully paid ordinary shares in
the ratio of 1 for 10 - 963
-------- --------
8,470 4,139
-------- --------
-------- --------
</TABLE>
F-167
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
5 ACCOUNTS RECEIVABLE
Accounts Receivable are recorded net of a provision for doubtful debts. The
consolidated provision for doubtful debts is $355,000 (1993:$278,000).
6 INVENTORY
An analysis of inventories is as follows:
<TABLE>
<CAPTION>
CONSOLIDATED
1994 1993
$000 $000
-------- --------
<S> <C> <C>
Finished Goods 118,112 43,335
Work in Progress 2,340 1,342
Raw Materials 8,555 4,232
-------- --------
129,007 48,909
-------- --------
-------- --------
</TABLE>
7 FIXED ASSETS
<TABLE>
<CAPTION>
COMPANY CONSOLIDATED
COST ACCUM NET COST VALN ACCUM NET
DEPN BOOK DEPN BOOK
VALUE VALUE
$000 $000 $000 $000 $000 $000 $000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
30 JUNE 1994
Motor Vehicles - - - 350 - 91 259
Capitalised Leased
Motor Vehicles - - - 4,053 - 1,277 2,776
Plant & Machinery - - - 54,089 - 17,758 36,331
Office Equipment 90 39 51 10,248 - 4,735 5,513
Leasehold Improvements - - - 3,443 - 1,864 1,579
Buildings - - - - 29,237 - 29,237
Land - - - - 35,317 - 35,317
-------- -------- -------- -------- -------- -------- --------
90 39 51 72,183 64,554 25,725 111,012
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
30 JUNE 1993
Motor Vehicles - - - 117 - 78 39
Capitalised Leased
Motor Vehicles - - - 2,250 - 476 1,774
Plant & Machinery - - - 24,373 3,673 14,236 13,810
Office Equipment 61 21 40 5,042 - 3,077 1,965
Leasehold Improvements - - - 4,035 - 1,996 2,039
Buildings - - - - 17,255 - 17,255
Land - - - - 23,745 - 23,745
-------- -------- -------- -------- -------- -------- --------
61 21 40 35,817 44,673 19,863 60,627
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
Land and buildings are restated to valuation at 30 June 1994 in accordance with
valuation reports of registered independent valuers at that date. The valuers
used were Jones Lang Wootten, Colliers Jardine and Lockwood and Associates. The
telephone directory press is stated at valuation (recognized as deemed cost) as
at 30 June 1991 less depreciation.
F-168
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
8 INVESTMENTS
<TABLE>
<CAPTION>
CONSOLIDATED
1994 1993
$000 $000
-------- --------
<S> <C> <C>
Other Investments 76 76
Associate Companies
Shares at Cost 1,045 1,045
Share of:
--Retained Profits 506 307
--Revaluations 252 252
Advances to Associates 592 592
-------- --------
2,395 2,196
-------- --------
2,471 2,272
-------- --------
-------- --------
</TABLE>
9 DEFERRED CHARGES
Deferred charges include costs incurred on raising term loans. Such costs are
capitalised and written off over the term of the loans.
10 LOANS
<TABLE>
<CAPTION>
COMPANY CONSOLIDATED
1994 1993 1994 1993
$000 $000 $000 $000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Loans--Secured 79,652 50,578 115,305 56,578
Less: Included in Current Liabilities 20,298 10,253 20,298 12,253
-------- -------- -------- --------
59,354 40,325 95,007 44,325
-------- -------- -------- --------
-------- -------- -------- --------
Repayable as follows:
Between 1 and 2 years 20,298 10,253 20,298 12,253
Between 2 and 5 years 39,056 30,072 74,709 32,072
-------- -------- -------- --------
59,354 40,325 95,007 44,325
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The loans are secured by mortgages over all properties owned and by debentures
over the assets and undertakings of the parent and its subsidiaries.
Interest rates charged during the year ranged from 5.15% to 9.02%.
F-169
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
11 FINANCE LEASE LIABILITIES
<TABLE>
<CAPTION>
CONSOLIDATED
1994 1993
$000 $000
-------- --------
<S> <C> <C>
The consolidated future lease rental payments
under finance leases are:
Not later than 1 year 1,669 1,000
1-2 years 816 891
2 -5 years 393 549
-------- --------
2,878 2,440
Less future interest expense 304 340
-------- --------
2,574 2,100
-------- --------
-------- --------
Representing: Current Liability 1,456 812
Term Liability 1,118 1,288
-------- --------
2,574 2,100
-------- --------
-------- --------
12 SHARE CAPITAL
COMPANY AND CONSOLIDATED
1994 1993
$000 $000
-------- --------
Authorized Share Capital
500,000,000 (1993:500,000,000) Ordinary Shares of
$0.10 (1993:$0.10) Each 50,000 50,000
-------- --------
-------- --------
Issued and Fully Paid Shares
121,000,398 (1993:105,876,210) Ordinary Shares 12,100 10,588
-------- --------
-------- --------
</TABLE>
A one for seven renounceable cash issue of ordinary shares of 10 cents each at a
price of $3.00 per share was effective on 31 December 1993.
13 RESERVES
<TABLE>
<CAPTION>
COMPANY CONSOLIDATED
1994 1993 1994 1993
$000 $000 $000 $000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Share Premium Reserve
Opening Balance 240 240 240 240
Movements 43,455 - 43,455 -
-------- -------- -------- --------
Closing Balance 43,695 240 43,695 240
Asset Revaluation Reserve
Opening Balance - - 10,653 9,485
Revaluation - - 15,125 1,739
Adjustment for Assets Sold - - (1,181) (571)
-------- -------- -------- --------
Closing Balance - - 24,597 10,653
Currency Translation Reserve
Opening Balance - - - -
Movements - - 110 -
-------- -------- -------- --------
Closing Balance - - 110 -
-------- -------- -------- --------
Total Reserves 43,695 240 68,402 10,893
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
F-170
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
The Adjustment for Assets sold of $1,181,000 (1993 $571,000) relates to the sale
of a non core property and represents the realisation of the revaluation amount
above original cost. This has been transferred to retained earnings.
14 SEGMENT INFORMATION
The Group operates predominantly in the industry of printing and supplying
paper-based products. Operations are carried out in two geographical segments--
New Zealand and Australia.
<TABLE>
<CAPTION>
1994 1993
$000 $000
-------- --------
<S> <C> <C>
Revenue
New Zealand 432,403 302,355
Australia 94,429 -
-------- --------
526,832 302,355
-------- --------
-------- --------
Earnings Before Interest, Taxation and Amortization
of Goodwill
New Zealand 43,973 31,149
Australia 454 -
-------- --------
44,427 31,149
-------- --------
-------- --------
Total Assets
New Zealand 285,122 166,758
Australia 62,370 -
-------- --------
347,492 166,758
-------- --------
-------- --------
</TABLE>
15 RELATED PARTIES
Related party transactions are limited to those companies which are included
within the consolidation.
Significant subsidiaries consolidated at 30 June 1994 are:
<TABLE>
<CAPTION>
<S> <C> <C>
% OWNED PRINCIPAL ACTIVITY
Whitcoulls Limited 100 Book & Stationery Retailing
London Bookshops Limited 100 Book & Stationery Retailing
Angus & Robertson Bookworld Pty Limited 100 Book & Stationery Retailing
G H 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 Group Limited 100 Holding Company
Whitcoulls Group Services Limited 100 Management Services
</TABLE>
F-171
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Significant Associate Companies equity accounted at 30 June 1994 are:
<S> <C> <C>
% OWNED PRINCIPAL ACTIVITY
University Bookshop (Auckland) Limited 50 Tertiary Book Retailing
University Bookshop (Canterbury) Limited 50 Tertiary Book Retailing
University Book Shop (Otago) Limited 50 Tertiary Book Retailing
</TABLE>
16 MATERIAL ACQUISITIONS
During the year the Group acquired the following businesses and subsidiaries:
BUSINESS/COMPANY NAME ACQUISITION DATE
Wiljef Stationery 1 July 1993
Inca Products 1 July 1993
Microtronix Computer Supplies 1 July 1993
Bob Atley 1 October 1993
London Bookshops Limited 1 October 1993
Hollands 1 November 1993
AllenBank Office Products 1 November 1993
Croxley Collins Olympic 29 November 1993
Armidale Industries Limited 29 November 1993
Angus & Robertson Bookworld 29 November 1993
Philip King Booksellers 1 December 1993
These acquisitions contributed $5,127,000 of net profit before tax and intra-
group profit elimination.
Assets and liabilities acquired at acquisition date were as follows:
$000
Current Assets 100,039
Fixed Assets 35,369
Goodwill 46,558
-------
Total Assets 181,966
Current Liabilities (41,676)
-------
Net Assets 140,290
-------
-------
17 ACQUISITION MATTERS OUTSTANDING
CROXLEY COLLINS OLYMPIC
Croxley Collins Olympic was acquired on 29 November 1993.
The purchase price of the business was finalised at $51.5 million which after a
payment of $46.0 million left a final balance due of $5.5 million.
Upon taking over the business Whitcoulls Group Limited formed the opinion that
certain breaches of the Sale and Purchase Agreement by the vendors had occurred
and retained the final payment pending resolution of these matters.
The vendor sued for summary judgement. Whitcoulls Group Limited counterclaimed
for $11.2 million for breach of contract.
The hearing took place in August 1994 and the High Court dismissed the summary
judgement proceedings and found Whitcoulls Group Limited had an arguable case
regarding the alleged breach of contract. The court established procedures for
the conduct of a full hearing.
F-172
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
Pending resolution of this matter the final balance due to the vendor of $5.5
million has been accrued as a liability in the balance sheet and is included in
the creditors.
ANGUS & ROBERTSON BOOKWORLD
Angus & Robertson Bookworld was acquired on 29 November 1993. The purchase price
was provisionally assessed and paid, subject to the estimated retention of $8.7
million. The final purchase price is to be determined upon the provision by the
vendor of an audited statement of net assets. This statement has not yet been
received.
Whitcoulls Group Limited believes that the final purchase price will not exceed
the amount paid to date with the difference relating primarily to the
overvaluation of inventories in the provisional assessment of the purchase
price. The inventories to which the overvaluation applies were held "in
quarantine" at 30 June 1994. An independent person is to be appointed to value
such inventories in accordance with the Sale and Purchase Agreement.
Should the independent assessment of inventories result in the net assets being
reduced by less than $8.7 million there will be a further liability to recognize
which will be offset by a corresponding increase in the net realisable value of
inventories held.
Should the independent assessment of inventories result in the net assets being
reduced by more than $8.7 million, Whitcoulls Group Limited would become an
unsecured creditor of Brash Pty Limited (in Administration) and some loss would
result.
Pending resolution of this matter, no amount is included as owing to the vendor.
The Directors believe that the ultimate outcome will not have a material effect
on these financial statements.
18 FINANCIAL INSTRUMENT DISCLOSURE
The nature of activities and management policies with respect to financial
instruments are:
CREDIT
In the normal course of business the company incurs credit risk from debtors and
financial institutions. The company has a credit policy to manage this exposure
to credit risk. Credit risk in respect to debtors is limited due to the large
number of customers included in the Group's customer base. The company does not
require any collateral from debtors.
FAIR VALUES
The Directors are of the opinion that the fair value of the company's financial
assets and liabilities approximate their carrying value stated in the accounts.
FOREIGN EXCHANGE
Investment Risk
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 funded fully in Australian currency loans and therefore is
fully hedged.
F-173
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
TRADING RISK
The company undertakes transactions denominated in foreign currencies from time
to time and these activities result in foreign currency exposures. It is the
company's policy to hedge significant foreign currency exposures as they arise.
The company uses forward exchange contracts to manage these exposures.
INTEREST RATE
The company monitors its interest rate exposure on a continual basis. At balance
date the interest rate maturity profile of debt was less than three months.
19 OPERATING LEASE COMMITMENTS
<TABLE>
<CAPTION>
CONSOLIDATED
1994 1993
$000 $000
-------- --------
<S> <C> <C>
Commitments under operating leases are due as follows:
Not later than 1 year 30,878 9,770
1-2 years 25,378 8,538
2 -5 years 33,125 19,338
Over 5 years 16,477 6,861
-------- --------
105,858 44,507
-------- --------
-------- --------
</TABLE>
20 CONTINGENT LIABILITIES
There were no contingent liabilities other than those referred to in relation to
Angus & Robertson Bookworld (Note 17). (1993:nil).
21 CAPITAL COMMITMENTS
There were no material capital commitments at year end. (1993: $16 million).
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 for 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 exchange 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.
A reconciliation of the key components of the financial statements between New
Zealand GAAP and U.S. GAAP are as follows:
F-174
<PAGE>
<TABLE>
<CAPTION>
Shareholder Fixed Investments Goodwill Deferred Deferred Provision Net Profit
Equity Assets Tax Income for After Tax
Dividend
AUDITED INFORMATION
$NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED 30 JUNE 1994
Reported under NZ GAAP 139,903 111,012 2,471 55,414 42 4,840 24,062
1. Adjustments related to
changes in accounting for
Fixed Assets (23,174) (22,923) (251) 1,720
2. Adjustments related to
changes in accounting for
Dividends 4,840 (4,840)
3. Adjustment related to
changes in accounting for
sale and leaseback
transactions (927) 927 41
5. Adjustment for differences
between assigned values and tax
basis on acquisitions (40) 363 403 (20)
Restated under U.S GAAP 120,602 88,089 2,220 55,777 445 927 - 25,803
<CAPTION>
Shareholder Fixed Investments Goodwill Deferred Provision for Net Profit
AUDITED INFORMATION Equity Assets Tax Dividend After Tax
$NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000 $NZ000
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED
30 JUNE 1993
Reported under NZ GAAP 64,109 60,627 2,272 11,020 719 2,117 18,513
1. Adjustments related to
changes in accounting for
Fixed Assets (9,769) (9,518) (251) 1,007
2. Adjustments related to
changes in accounting for
Dividends. 2,117 (2,117)
5. Adjustments for differences
between assigned values and tax
basis on acqisitions. (20) 383 403 (20)
Restated under U.S GAAP 56,437 51,109 2,021 11,403 1,122 - 19,500
</TABLE>
F-175
<PAGE>
ADDITIONAL DISCLOSURES REQUIRED UNDER U.S. GAAP FOR THE
YEARS ENDED 30 JUNE 1994 AND 1993
1. NATURE OF BUSINESS
Whitcoulls Group Ltd operates nine main subsidiary companies.
Summarized below are the activities for each of the main subsidiaries:
Whitcoulls Ltd operates 71 stores throughout New Zealand, retailing books,
paperbacks, magazines, commercial and household stationery, greeting cards,
videos, and other complementary products.
London Bookshops Ltd operates 24 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 92 company owned and 85 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 20 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 Stationary Ltd is a manufacturer and wholesaler of stationery,
including filing products, diaries, scholastic products, pads, envelopes,
writing instruments and recycled laser cartridges.
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.
F-176
<PAGE>
2. PROFIT AND LOSS STATEMENT
Operating expenses in the Profit and Loss Account comprise:
1994 1993
NZ$000 NZ$000
Cost of Product sold 342,401 198,715
Selling, General, Administrative
and Other Expenses 104,864 55,572
-----------------------
Total Operating Expenses $447,265 $254,287
-----------------------
-----------------------
3. IMPUTATION CREDIT BALANCE
Imputation credit disclosed in Note 3 relates to taxation credits available
to be attached to dividend distributions to shareholders. These credits are
lost on significant changes in shareholders.
4. LOANS
The term position of loans disclosed in Note 11 comprise:
1994 1993
NZ$000 NZ$000
Repayable
1 & 2 years 20,298 10,253
2 & 3 years 74,709 10,000
3 & 4 years 10,000
4 & 5 years 10,072
------------------------------
$95,007 $40,325
------------------------------
------------------------------
5. FINANCE LEASE LIABILITIES
Finance loans commitments disclosed in Note 12 comprise:
1994 1993
NZ$000 NZ$000
Repayable:
Current 1,669 1,000
1 & 2 years 816 891
2 & 3 years 393 549
-----------------------------
2,878 2,440
Loss
Future interest 364 340
expenses
-----------------------------
$2,574 $2,100
-----------------------------
-----------------------------
F-177
<PAGE>
6. EARNINGS PER SHARE
1994 1993
Earnings per share (cents) 22.7 18.4
7. MATERIAL ACQUISITIONS
1994 1993
NZ$000 NZ$000
Net assets acquired $140,290 -
note 16 -----------------------------
Payments made per
Statement of Cash Flows 134,773 -
Included in Creditors 5,517 -
-----------------------------
$140,290 -
-----------------------------
-----------------------------
8. LOANS
Included in loans (part of net liabilities of foreign subsidiaries) is
Australian denominated debt of $35.6 million for the year ended 30 June 1994
and for 30 June 1993 Nil, which was a hedge by the company's Australian
denominated assets.
9. NON-CASH FINANCING ACTIVITIES
New Zealand GAAP requires that bonus shares (stock dividends) are recorded at
par value. US GAP 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 and share premium 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
$22,138,000, which under US GAAP would have been transferred from Related
Earnings to Capital Reserves. Under NZ GAAP the par value of shares $963,000
was transferred. This adjustment has no effect on total reported
shareholders' equity.
10. FOREIGN SUBSIDIARIES
Net liabilities of foreign subsidiaries which are denominated in Australian
dollars amount to $1,248,000 as at 30 June 1994 and 30 June 1993 Nil.
11. UNUSED LETTERS OF CREDIT
1994 1993
NZ$000 NZ$000
Total as at 30 June 1,524 -
F-178
<PAGE>
12. OPERATING LEASE EXPENSE
Operating lease expense comprise:
1994 1993
NZ$000 NZ$000
Base 27,004 11,944
Contingent 395 105
Less sub-lease (1,838) (624)
------------------------------
$25,561 $11,425
------------------------------
F-179
<PAGE>
13. BUSINESS COMBINATION:
PURCHASE METHOD
In year ending 30 June 1994, the Company made 8 acquisitions accounted
for under the purchase method for an aggregate purchase price which was
initially the sum of $140.3 million, but which was subsequently reduced to
$137.7 million as a result of adjustments to the purchase price of Angus &
Robertson Bookworld. Payment for the acquisitions was financed entirely by
cash apart from $5.5 million which is under dispute and still remains to be
paid. The total assets related to these 8 acquisitions were $182.0 million
including goodwill of $46.6 million. The results of these acquisitions have
been included in the Company's results from their respective dates of
acquisitions.
The following presents the unaudited pro forma results of operations of
the Company for the fiscal years ended 30 June 1994 and 1993 as if the
purchase acquisitions described above had been consummated as of the
beginning of the financial year ended 30 June 1993. The results presented
below include certain pro forma adjustments to reflect the amortization of
intangible assets, the cost of funding, adjustments in executive compensation
and the inclusion of an income tax provision:
FOR THE FISCAL
YEAR ENDED JUNE 30
1994 1993
($NZ000's except per
share amounts)
Revenues.............................. 607,453 572,075
Net income............................ 18,288 11,840
Net income per share.................. 15.11cents 9.79cents
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 the financial year
ending 30 June 1993 or the results which may occur in the future.
F-180
<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
F-181
<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>
F-182
<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.
F-183
<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.
F-184
<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
F-185
<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.
F-186
<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.
F-187
<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>
F-188
<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
F-189
<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>
F-190
<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>
F-191
<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).
F-192
<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>
F-193
<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>
F-194
<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.
F-195
<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.
F-196
<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.
F-197
<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)
F-198
<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>
F-199
<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>
F-200
<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>
F-201
<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>
F-202
<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>
F-203
<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
F-204
<PAGE>
Report of Independent Accountants
To the Stockholders of
The Office Furniture Store, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, of changes in stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of The Office Furniture
Store, Inc. (the Company) at 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. 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 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 1 to the financial statements, on May 23, 1996 the Company
entered into a letter of intent to sell all of its issued and outstanding shares
of common stock to the U.S. Office Products Company.
Price Waterhouse LLP
Cincinnati, Ohio
August 16, 1996
F-205
<PAGE>
THE OFFICE FURNITURE STORE, INC.
BALANCE SHEET
- --------------------------------------------------------------------------------
December 31, June 30,
1995 1996
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash $ 75,961 $ 176,362
Investments 35,700 -
Accounts receivable - trade 661,854 490,700
Accounts receivable - other 105,535 113,069
Inventory 476,110 489,438
Other current assets 26,737 29,981
------------- ------------
Total current assets 1,381,897 1,299,550
Plant and equipment, net 285,308 320,516
Other assets 16,385 21,385
------------- ------------
Total assets $ 1,683,590 $ 1,641,451
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 442,510 $ 333,725
Accrued compensation 299,117 81,768
Sales and other taxes payable 101,108 145,922
Customer deposits 83,067 80,614
Current portion of notes payable 11,714 8,542
------------- ------------
Total current liabilities 937,516 650,571
------------- ------------
Notes payable 8,596 33,037
------------- ------------
Contingencies (Note 8)
Stockholders' equity:
Common stock, no par; 750 shares authorized,
100 shares issued and outstanding 500 500
Retained earnings 723,561 957,343
Unrealized gain on investments 13,417 -
------------- ------------
Total stockholders' equity 737,478 957,843
------------- ------------
Total liabilities and stockholders' equity $ 1,683,590 $ 1,641,451
------------- ------------
------------- ------------
The accompanying notes are an integral
part of these financial statements.
F-206
<PAGE>
THE OFFICE FURNITURE STORE, INC.
STATEMENT OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six months ended
December 31, June 30, June 30,
1995 1995 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Revenues $ 7,442,059 $ 3,688,212 $ 4,304,822
Cost of sales 5,169,085 2,562,202 2,975,283
------------- ------------ ------------
Gross margin 2,272,974 1,126,010 1,329,539
Selling, general and administrative expenses 1,955,340 793,477 985,393
------------- ------------ ------------
Operating income 317,634 332,533 344,146
Other (income) expense:
Interest expense 8,509 5,881 2,356
Other income, net (25,918) (8,635) (23,510)
------------- ------------ ------------
Income before taxes 335,043 335,287 365,300
Income taxes 139,930 137,471 131,518
------------- ------------ ------------
Net income $ 195,113 $ 197,816 $ 233,782
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-207
<PAGE>
THE OFFICE FURNITURE STORE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Retained Gain/(Loss) on
Shares Amount Earnings Investments Total
------ ------ -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 100 $ 500 $ 533,448 $ (16,422) $ 517,526
Net income 195,113 195,113
Stockholder distributions (5,000) (5,000)
Net unrealized gain on investments 29,839 29,839
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 100 500 723,561 13,417 737,478
Net income (unaudited) 233,782 233,782
Reversal of unrealized gain on investments
(unaudited) (13,417) (13,417)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996 (unaudited) 100 $ 500 $ 957,343 $ - $ 957,843
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-208
<PAGE>
THE OFFICE FURNITURE STORE, INC.
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
year ended For the six months ended
December 31, June 30, June 30,
1995 1995 1996
------------ ---- ----
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 195,113 $ 197,816 $ 233,782
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 51,716 21,580 21,732
Gain on sale of investments (11,901) (1,872) (31,772)
Changes in assets and liabilities:
Accounts receivable - trade 10,156 (43,067) 171,154
Accounts receivable - other (6,070) (19,871) (7,534)
Inventory (115,904) (93,323) (13,328)
Other assets (2,957) (118,333) (8,244)
Accounts payable 79,432 (16,091) (108,785)
Other liabilities (79,683) (32,791) (174,988)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 119,902 (105,952) 82,017
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (41,617) (32,646) (56,940)
Proceeds from sale of investments 85,465 56,960 54,055
----------- ----------- -----------
Net cash provided by (used in)
investing activities 43,848 24,314 (2,885)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - - 30,045
Payments on notes payable (313,118) (262,137) (8,776)
Net borrowings on bank line of credit - 120,000 -
Distributions to stockholders (5,000) - -
----------- ----------- -----------
Net cash provided by (used in)
financing activities (318,118) (142,137) 21,269
----------- ----------- -----------
Net change in cash (154,368) (223,775) 100,401
Cash at beginning of period 230,329 230,329 75,961
----------- ----------- -----------
Cash at end of period $ 75,961 $ 6,554 $ 176,362
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure:
Taxes paid $ 123,948 $ 66,134 $ 52,522
----------- ----------- -----------
----------- ----------- -----------
Interest paid $ 8,509 $ 5,881 $ 2,356
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-209
<PAGE>
THE OFFICE FURNITURE STORE, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS ORGANIZATION AND ACQUISITION
The Office Furniture Store, Inc. (OFS or the Company) is a distributor of
office furniture and accessories in the Cincinnati, Ohio metropolitan area.
On May 23, 1996, the Company entered into a letter of intent with U.S.
Office Products Company (U.S. Office Products) whereby the Company agreed
to merge with U.S. Office Products. Pursuant to the letter of intent, the
Company's stockholders will exchange all of the outstanding shares of the
Company's common stock for 171,034 shares of U.S. Office Products' common
stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION AND CREDIT RISK
Revenues are recognized upon shipment when all risks and rewards of
ownership have passed to the customer. The Company sells its products to a
wide group of industries in the Cincinnati area and its credit risks are
well distributed. The Company monitors its credit risk by establishing
credit limits and monitoring its outstanding accounts receivable.
Management has not provided an allowance for doubtful accounts as all
receivables are considered to be collectible.
Other receivables represent rebates and credits due from the Company's
suppliers.
INVESTMENTS
The Company has investments in certain equity securities which it has
classified as available for sale. Unrealized gains and losses on
investments held for sale are included in a separate component of equity.
Realized gains and losses are determined based on the specific
identification method.
INVENTORY
Inventory consists solely of finished goods and is stated at the lower of
cost or market. Cost is determined utilizing the average cost basis.
PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation expense is computed
using the straight-line method over the estimated useful lives of the
assets, as follows: leasehold improvements - 20 years, furniture and
fixtures - seven years, computer equipment - five years and vehicles - five
years. Maintenance and repair costs which do not enhance efficiency or
increase the useful life of the asset are expensed as incurred.
F-210
<PAGE>
THE OFFICE FURNITURE STORE, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed," which is required
to be adopted by the Company in 1996. The implementation of this Statement
is not anticipated to have a material impact on the Company's financial
statements.
FINANCIAL INSTRUMENTS
The carrying amount of the Company's monetary assets and liabilities is a
reasonable estimate of fair value because of the liquid, short-term and
variable nature of these financial instruments.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this statement, deferred income taxes
are provided, to the extent considered realizable by management, for the
basis differences of assets and liabilities for financial reporting and
income tax purposes. Gross deferred income tax assets and liabilities are
not significant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
SOURCES OF SUPPLY
In order to receive volume discounts the Company currently purchases
approximately 60% of its inventory from one vendor. Management believes
that other suppliers could provide similar products at comparable prices.
UNAUDITED FINANCIAL INFORMATION
In the opinion of management, the unaudited financial information as of and
for the six months ended June 30, 1996 and comparable information for the
six months ended June 30, 1995 contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the results for
the periods presented.
F-211
<PAGE>
THE OFFICE FURNITURE STORE, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. PLANT AND EQUIPMENT
Plant and equipment consist of the following at December 31, 1995:
Leasehold improvements $ 220,641
Furniture and fixtures 111,142
Computer equipment 67,972
Vehicles 117,342
------------
517,097
Less: Accumulated depreciation 231,789
------------
$ 285,308
------------
------------
4. NOTES PAYABLE
At December 31, 1995, the Company had two variable interest rate notes
payable outstanding with an average borrowing rate of 6.45%. The notes
payable, which are secured by delivery trucks with a net book value of
$36,423 at December 31, 1995, require monthly principal and interest
payments. Principal payments due on borrowings for 1996 and 1997 are
$11,714 and $8,596, respectively.
The Company has a bank line of credit of $600,000 which is secured by the
personal guarantees of the stockholders and expires in February 1997.
5. RELATED PARTY TRANSACTIONS
The Company leases its office building and warehouse from the Company's
stockholders under an operating lease which expires in 2009. The lease
requires monthly payments of $15,000. The Company has guaranteed the
stockholders' debt related to the purchase of the office building and
warehouse. The future minimum payments under noncancelable leases as of
December 31, 1995 are as follows:
Year Ending December 31,
------------------------
1996 $ 180,000
1997 180,000
1998 180,000
1999 180,000
2000-2009 1,680,000
------------
Total $ 2,400,000
F-212
<PAGE>
Included in 1995 other income is consulting fee revenue totalling $12,000
for services provided by the Company's stockholder and president to another
company in which the stockholder maintains an equity interest.
6. EMPLOYEE BENEFITS
The Company sponsors a defined contribution savings and profit sharing plan
(the Plan) for Company employees who meet certain age and service
requirements. The Plan allows participants to make contributions up to the
maximum allowable percentages of their earnings by salary reduction
pursuant to Section 401(k) of the Internal Revenue Code. The Plan provides
for discretionary employer contributions which totalled $90,000 in 1995.
7. INCOME TAXES
Income taxes, which consist primarily of taxes currently payable, were as
follows for the year ended December 31, 1995:
Provision for income taxes:
Federal $ 111,366
State and local 28,564
------------
$ 139,930
------------
------------
OFS's effective tax rate for 1995 differs from the statutory income tax
rate as follows:
Statutory U.S. federal income tax rate 34.0%
State and local taxes, net of federal benefit 5.6
Non-deductible stockholder compensation 2.3
Other (0.1)
------------
Effective income tax rate 41.8%
------------
------------
8. CONTINGENCIES
The Company may, from time to time, be subjected to claims or other legal
actions in the normal course of business. Management does not believe that
these matters would have a material impact on the Company's operations or
financial condition.
F-213
<PAGE>
AUSDOC OFFICE PTY LTD
ACN 001 844 819
DIRECTORS' REPORT
- --------------------------------------------------------------------------------
The Directors of AUSDOC Office Pty Ltd resolved to make the following report
with respect to the profit and loss and the state of affairs of the Company as
at 30 June, 1996.
1. The names of the Directors of the Company in office at the date of this
report are:
PETER T. REILLY
JAMES E. WALSH
2. The principal activity of the Company during the year was the sale of
commercial office products.
3. The loss of the Company for the year after providing for income tax was
$121,135. (1995 - Profit of $136,316)
4. No dividends were paid during the year.
5. On 5 February 1996 the Company purchased the business and assets of
Complete Office Supplies (W.A.) No other significant change in the state
of affairs of the Company occurred during the year.
6. The company has contracted to sells its entire office products business to
Blue Star Group Pty Ltd effective 30 September 1996. The company will
receive $25.6 million for goodwill plus the book value of operating assets.
A profit after tax on sale of approximately $10 million will be realised on
the transaction. No other matters or circumstances have arisen since the
end of the financial year which significantly affected, or may
significantly affect, the operations of the Company, the results of those
operations or the state of affairs of the Company in financial years
subsequent to the financial year ended 30 June, 1996.
7. No information is included on the likely developments in the operations of
the Company and the expected results of those operations, as it is the
opinion of the Directors of the Company, that this information would
prejudice the interests of the Company if included in this report.
8. No Director, since 30 June, 1995 has received or become entitled to receive
a benefit (other than a benefit included in the aggregate amount of
emoluments received or due and receivable by Directors shown in Note 19
of the Accounts, or the fixed salary of a full time employee of the
Company) by reason of a contract made by the Company or related
corporation with any Director or with a firm of which a Director is a
member or with a company in which a Director is a member or with a company
in which a Director has a substantial financial interest.
SIGNED in accordance with a resolution of the Directors of AUSDOC
Office Pty Ltd
DATED this 23rd day of September 1996.
PETER T. REILLY JAMES E. WALSH
DIRECTOR DIRECTOR
F-214
<PAGE>
AUSDOC OFFICE PTY LTD
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
Operating revenue 2 21,633,507 11,541,659
----------- -----------
----------- -----------
Operating profit/(loss) before income tax 3 (3,345) 149,953
Abnormal items 4 (75,000) -
Income tax attributable
to operating profit 5 (42,790) (13,637)
----------- -----------
Operating profit after income tax (121,135) 136,316
Dividends paid 17 - (170,000)
Retained profits at the beginning
of the financial year 12,801 46,485
----------- -----------
Retained profits at the end
of the financial year (108,334) 12,801
----------- -----------
----------- -----------
The accompanying notes form an integral part of these accounts.
F-215
<PAGE>
AUSDOC OFFICE PTY LTD
BALANCE SHEET AS OF 30 JUNE 1996
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
CURRENT ASSETS
Cash 246,709 324,724
Receivables 6 3,817,263 2,700,869
Inventories 7 3,099,976 2,507,284
----------- -----------
Total Current Assets 7,163,948 5,532,877
----------- -----------
NON CURRENT ASSETS
Receivables 6 - 47,838
Property, plant and equipment 8 1,229,305 1,125,847
Intangibles 9 3,659,890 3,569,496
Other 10 157,137 126,048
----------- -----------
Total Non Current Assets 5,046,332 4,869,229
----------- -----------
TOTAL ASSETS 12,210,280 10,402,106
----------- -----------
CURRENT LIABILITIES
Creditors and borrowings 11 4,076,146 2,860,398
Provisions 12 389,205 317,835
----------- -----------
Total Current Liabilities 4,465,351 3,178,233
----------- -----------
NON CURRENT LIABILITIES
Creditors and borrowings 11 7,877,133 7,221,569
Provisions 12 81,628 95,001
----------- -----------
Total Non Current Liabilities 7,958,761 7,316,570
----------- -----------
TOTAL LIABILITIES 12,424,112 10,494,803
----------- -----------
NET ASSETS/(LIABILITIES) (213,832) (92,697)
----------- -----------
----------- -----------
SHAREHOLDERS' EQUITY/(DEFICIENCY)
Share capital 13 2 2
Reserves 14 (105,500) (105,500)
Retained profits (108,334) 12,801
----------- -----------
TOTAL SHAREHOLDERS' EQUITY/(DEFICIENCY) (213,832) (92,697)
----------- -----------
----------- -----------
The accompanying notes form an integral part of these accounts.
F-216
<PAGE>
AUSDOC OFFICE PTY LTD
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
Cash flows from operating activities
Receipts from customers 20,424,362 9,641,440
Interest received 5,627 4,743
Payments to suppliers (20,059,632) (10,000,921)
Interest paid (427,028) (101,389)
Income taxes paid (66,076) (102,798)
----------- -----------
Net cash provided by operating activities 21 (122,747) (558,925)
----------- -----------
Cash flows from investing activities
Proceeds from sale of property, plant
and equipment 56,296 85,450
Payments for property, plant and equipment (328,320) (108,258)
Payments for business acquisitions (377,000) (4,703,474)
----------- -----------
Net cash provided by investing activities (649,024) (4,726,282)
----------- -----------
Cash flows from financing activities
Dividends paid - (170,000)
Finance lease payments (9,646) (1,498)
Loan from related companies 703,402 5,766,212
----------- -----------
Net cash provided by financing activities 693,756 5,594,714
----------- -----------
Net increase in cash held (78,015) 309,507
Cash at beginning of the financial year 324,724 15,217
----------- -----------
Cash at end of the financial year 246,709 324,724
----------- -----------
----------- -----------
The accompanying notes form an integral part of these accounts.
F-217
<PAGE>
AUSDOC OFFICE PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1. STATEMENT OF ACCOUNTING POLICIES
The accounts are a general purpose financial report prepared in accordance with
Accounting Standards, Urgent Issues Group Consensus Views and the requirements
in Schedule 5 to the Corporations Regulations. The accounts have been prepared
on the basis of historical costs and do not take into account changing money
values or, except where stated, current valuations of non-current assets. The
accounting policies have been consistently applied, unless otherwise stated.
The following is a summary of the significant accounting policies adopted by the
Company in the preparation of the accounts.
(a) Receivables
A provision is raised for any doubtful debts based on a review of all
outstanding amounts at year end. Bad debts are written off during the
period in which they are identified.
(b) Inventories
Inventories are valued at the lower of cost and net realisable value.
Costs have been assigned to inventory quantities on hand at balance date
using the first-in-first-out and weighted average cost basis.
(c) Property, Plant and Equipment
Property, plant and equipment are included at cost. All property, plant
and equipment other than land are depreciated over their estimated useful
lives commencing from the time the asset is held ready for use.
(d) Comparative Figures
Where necessary, comparative figures have been adjusted to conform with
changes in presentation in the current year.
(e) Goodwill
Goodwill, representing the excess of purchase consideration over the fair
value of identifiable net assets acquired arising upon the acquisition of
a business entity is shown as an intangible asset. Goodwill is amortised
on a straight line basis over the period of expected benefit, that period
not exceeding 20 years. For the years ended June 1988 and 1989, acquired
goodwill was written off in full via the profit and loss account. An
offsetting entry was posted from the "Acquired goodwill written off
reserve."
F-218
<PAGE>
AUSDOC OFFICE PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 2. OPERATING REVENUE
1996 1995
$ $
Sales revenue 20,606,082 11,303,126
Other revenue
Licence fee and other charges from related
corporations 515,826 87,437
Interest received 5,627 4,743
Gross proceeds on sale of property,
plant and equipment 56,296 85,450
Sundries 449,676 60,903
----------- -----------
Total operating revenue 21,633,507 11,541,659
----------- -----------
----------- -----------
NOTE 3. OPERATING PROFIT
Operating profit before tax has been
determined after:
(a) Charging as expenses:
Amortisation of goodwill 184,514 45,694
Amortisation of leased assets 8,000 1,624
Auditors' remuneration:
For auditing the accounts of
the company 28,300 16,900
Bad debts written off 10,851 746
Depreciation of fixed assets 285,037 115,114
Interest paid - related corporation 416,000 95,000
Interest paid - other 5,405 1,047
Finance lease charges 5,623 2,996
Loss on disposal of non-current assets - 1,470
Management charges 200,000 135,000
Operating lease rentals 717,036 495,036
Contributions to superannuation fund 162,956 85,726
Transfers to provisions for:
employee benefits 50,194 31,953
doubtful benefits 19,977 8,000
(b) Crediting as revenue:
Interest received 5,627 4,743
Profit on sale of non current assets 22,419 10,079
F-219
<PAGE>
AUSDOC OFFICE PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 4. ABNORMAL ITEMS
1996 1995
$ $
Business rationalisation costs
(Tax credit applicable $27,000) 75,000 -
----------- -----------
----------- -----------
NOTE 5. INCOME TAX
Operating profit/(loss) (78,345) 149,953
----------- -----------
----------- -----------
Prima facie income tax expense
calculated at 36% (1995: 33%) (28,204) 49,485
Tax effect of permanent differences 70,994 (29,270)
Under provision from prior year - -
Increase/(decrease) in net deferred tax
liability due to increase in tax rate - (6,578)
----------- -----------
42,790 13,637
----------- -----------
----------- -----------
Comprising:
Increase in income tax provision 72,603 69,308
Increase in future income tax benefits (31,089) (71,380)
Increase in provision for deferred
income tax 1,276 15,709
----------- -----------
42,790 13,637
----------- -----------
----------- -----------
NOTE 6. RECEIVABLES
Current:
Trade debtors 3,361,733 2,572,905
Less provision for doubtful debts 40,127 20,150
----------- -----------
3,321,606 2,552,755
Other debtors and prepayments 495,657 148,114
----------- -----------
3,817,263 2,700,869
----------- -----------
----------- -----------
Non current:
Loan to related company - 47,838
----------- -----------
----------- -----------
NOTE 7. INVENTORIES
Finished goods 3,099,976 2,507,284
----------- -----------
----------- -----------
F-220
<PAGE>
AUSDOC OFFICE PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
1996 1995
$ $
Plant and equipment:
At cost 931,551 244,720
Less accumulated depreciation 306,195 22,574
----------- -----------
625,356 222,146
----------- -----------
Office furniture, equipment and machines:
At cost 558,896 632,674
Less accumulated depreciation 305,694 177,151
----------- -----------
253,202 455,523
----------- -----------
Fixtures and fittings:
At cost - 233,986
Less accumulated depreciation - 194,310
----------- -----------
- 39,676
----------- -----------
Motor vehicles:
At cost 464,289 454,562
Less accumulated depreciation 154,494 95,012
----------- -----------
309,795 359,550
----------- -----------
Leased assets:
At cost 64,948 64,948
Less accumulated amortisation 23,996 15,996
----------- -----------
40,952 48,952
----------- -----------
Total property, plant and equipment 1,229,304 1,125,847
----------- -----------
----------- -----------
NOTE 9. INTANGIBLES
Goodwill acquired 3,890,138 3,615,190
Less accumulated amortisation 230,248 45,694
----------- -----------
3,659,890 3,569,496
----------- -----------
----------- -----------
NOTE 10. OTHER NON CURRENT ASSETS
Future income tax benefit 157,137 126,048
----------- -----------
----------- -----------
F-221
<PAGE>
AUSDOC OFFICE PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 11. CREDITORS AND BORROWINGS
NOTE 1996 1995
$ $
Current:
Trade creditors 3,770,381 2,181,433
Other creditors 294,891 669,319
Lease liability 10,874 9,646
----------- -----------
4,076,146 2,860,398
----------- -----------
----------- -----------
Non current:
Amount payable to related corporation 7,845,349 7,178,911
Lease liability 31,784 42,658
----------- -----------
7,877,133 7,221,569
----------- -----------
----------- -----------
NOTE 12. PROVISIONS
Current:
Income tax 55,276 48,749
Employee benefits 333,929 269,086
----------- -----------
389,205 317,835
----------- -----------
----------- -----------
Non current:
Employee benefits 33,248 47,897
Provision for deferred income tax 48,380 47,104
----------- -----------
81,628 95,001
----------- -----------
----------- -----------
F-222
<PAGE>
AUSDOC OFFICE PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 13. SHARE CAPITAL
NOTE 1996 1995
$ $
Authorised capital:
10,000 ordinary shares of
$1.00 each 10,000 10,000
----------- -----------
----------- -----------
Issued and paid up capital:
2 ordinary shares of
$1.00 each fully paid 2 2
----------- -----------
----------- -----------
NOTE 14. RESERVES
Acquired goodwill written off reserve (105,500) (105,500)
----------- -----------
----------- -----------
NOTE 15. CAPITAL AND LEASING COMMITMENTS
Finance lease commitments:
Payable not later than one year 15,269 15,269
Payable between one and two years 33,035 15,269
Payable between two and five years - 33,035
----------- -----------
48,304 63,573
Deduct future finance charges 5,646 11,269
----------- -----------
Total lease liability 42,658 52,304
----------- -----------
----------- -----------
Representing lease liabilities:
Current 11 10,874 9,646
Non current 11 31,784 42,658
----------- -----------
42,658 52,304
----------- -----------
----------- -----------
Operating lease commitments:
Payable not later than one year 601,083 382,997
Payable between one and two years 352,850 321,734
Payable between two and five years 129,855 194,917
----------- -----------
Operating lease liability 1,083,788 899,648
----------- -----------
----------- -----------
There are no capital commitments as at 30 June 1996.
F-223
<PAGE>
AUSDOC OFFICE PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 16. CONTINGENT LIABILITIES
At balance date the Company is a cross guarantor for a $40.5m loan facility
available to the ultimate chief entity.
NOTE 17. DIVIDENDS
1996 1995
$ $
Ordinary dividends paid
Interim - fully franked - 100,000
Final - fully franked - 70,000
----------- -----------
Total dividend paid - 170,000
----------- -----------
----------- -----------
NOTE 18. RELATED PARTY INFORMATION
(a) Directors
P.T. Reilly and J.E. Walsh held office as a director of the Company
throughout the year ended 30 June, 1996.
(b) Controlling Entities
The immediate chief entity is Australian Document Exchange Pty Ltd The
ultimate chief entity is AUSDOC Group Limited, a company incorporated in
Australia.
(c) Other related corporations in the AUSDOC Group Limited group are:
H & P Stationery Pty Ltd
Mullaly & Byrne Pty Ltd
Canberra Wholesale Stationers Pty Ltd
Data Security Services Pty Ltd
Dart Couriers (Aust.) Pty Ltd
Stronghold Security Services Pty Ltd
AUSDOC Funds Management Pty Ltd
AUSDOC Employee Share Plan Pty Ltd
Electronic Document Exchange Pty Ltd
Perth Stationery Supplies Pty Ltd
During the year the Company received licensing fees from Perth Stationery
Supplies Pty Ltd. These fees totalled $310,000. The Company provides
equipment to Perth Stationery Supplies Pty Ltd. Equipment rentals are
charged via an intercompany loan account. The Company performs
administrative duties for H & P Stationery Pty Ltd by providing employees,
debtor collection and creditor payment services. These services are
reimbursed via an intercompany loan account.
There are no other material intercompany transactions or balances between
related parties other than as disclosed within these accounts.
F-224
<PAGE>
AUSDOC OFFICE PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 19. DIRECTORS' REMUNERATION
Amounts received or due and receivable
by the Directors of the Company:
1996 1995
$ $
From the Company - -
From related bodies corporate 335,000 295,000
The numbers of Directors whose income
from the Company or related bodies
corporate was within the specified bands
are as follows:
$000 $000
110 - 120 - 1
130 - 140 1 -
170 - 180 - 1
190 - 200 1 -
The above information is presented in accordance with the requirements of clause
25 of Schedule 5 to the Corporations Regulations. The company has been relieved
from compliance with the corresponding requirements of Accounting Standard AASB
1017 "Related Party Disclosures" by a class order issued by the Australian
Securities Commission dated 13 October 1994.
NOTE 20. SUBSEQUENT EVENTS
The company has contracted to sells its entire office products business to Blue
Star Group Pty Ltd effective 30 September 1996. The company will receive $25.6
million for goodwill plus the book value of operating assets. A profit after
tax on sale of approximately $10 million will be realised on the transaction.
No other matters or circumstances have arisen since the end of the financial
year which significantly affected, or may significantly affect, the operations
of the Company, the results of those operations or the state of affairs of the
Company in financial years subsequent to the financial year ended 30 June, 1996.
F-225
<PAGE>
AUSDOC OFFICE PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 21. CASH FLOW INFORMATION
1996 1995
$ $
Reconciliation of net cash provided by operating
activities to operating profit after income tax
Operating profit after income tax (121,135) 136,316
Depreciation and amortisation 477,591 162,432
Loss on sale of property, plant and equipment - 1,470
Profit on sale of property, plant and equipment (22,419) (10,079)
Increase/(decrease) in taxes payable (23,286) (89,161)
Bad debts 10,851 746
Doubtful debts 19,977 8,000
Increase in employee provisions 50,194 34,793
Increase in receivables (1,147,222) (1,908,417)
Increase in inventory (592,692) (1,022,365)
Increase in creditors and borrowings 1,225,393 2,127,340
----------- -----------
Net cash provided by operating activities (122,748) (558,925)
----------- -----------
----------- -----------
During the year the Company acquired the
business of Complete Office Supplies (W.A.)
Details are as follows:
Consideration
Plant and equipment 102,052 954,862
Inventory - 282,000
Employee entitlements - (113,000)
Goodwill on acquisition 274,948 3,615,190
Future income tax benefit - 18,224
Lease liability - (53,802)
----------- -----------
Cash consideration 377,000 4,703,474
----------- -----------
Outflow of cash to acquire entities
net of cash acquired:
Cash consideration 377,000 4,703,474
Less balances acquired - -
----------- -----------
Outflow of cash 377,000 4,703,474
----------- -----------
F-226
<PAGE>
AUSDOC OFFICE PTY LTD
STATEMENT BY DIRECTORS
- --------------------------------------------------------------------------------
In accordance with a resolution of the Board of Directors of AUSDOC Office Pty
Ltd in the opinion of the Directors:
(a) the accounts of the Company are drawn up so as to give a true and fair
view of the result of the Company for the year ended 30 June 1996 and the
state of affairs of the Company as at 30 June 1996.
(b) at the date of this statement there are reasonable grounds to believe that
the Company will be able to pay its debts as and when they fall due.
(c) the accounts of the Company have been made out in accordance with
Divisions 4, 4A and 4B of Part 3.6 of the Corporations Law, applicable
accounting standards and Urgent Issues Group Consensus Views.
For and on behalf of the Board by:
This 23rd day of September 1996.
PETER T. REILLY
DIRECTOR
JAMES E. WALSH
DIRECTOR
F-227
<PAGE>
AUDITORS' REPORT
TO THE MEMBERS OF AUSDOC OFFICE PTY LTD
- --------------------------------------------------------------------------------
SCOPE
We have audited the accounts of AUSDOC Office Pty Ltd for the year ended 30
June, 1996 as set out on pages 2 to 14. The Company's Directors are responsible
for the preparation and presentation of the accounts and the information they
contain. We have conducted an independent audit of these accounts in order to
express an opinion on them to the members of the Company.
Our audit has been conducted in accordance with Australian Auditing Standards to
provide reasonable assurance as to whether the accounts are free of material
misstatement. Our procedures included examination, on a test basis, of evidence
supporting the amounts and other disclosures in the accounts, and the evaluation
of accounting policies and significant accounting estimates. These procedures
have been undertaken to form an opinion as to whether, in all material respects,
the accounts are presented fairly in accordance with Australian accounting
standards, other mandatory professional reporting requirements, being Urgent
Issues Group Consensus Views and the Corporations Law so as to present a view of
the Company which is consistent with our understanding of its state of affairs,
results of operations and cashflows.
The audit opinion expressed in this report has been formed on the above basis.
AUDIT OPINION
In our opinion, the accounts of AUSDOC Office Pty Ltd are properly drawn up:
(a) so as to give a true and fair view of:
(i) the Company's state of affairs as at 30 June, 1996 and of its result
for the year ended on that date; and
(ii) the other matters required by Divisions 4, 4A and 4B of Part 3.6 of
the Corporations Law to be dealt with in the accounts;
(b) in accordance with the provisions of the Corporations Law; and
(c) in accordance with applicable accounting standards and other mandatory
professional reporting requirements.
Signed at Melbourne,
This 23rd day of September 1996.
DAY NEILSON
Chartered Accountants
J.J. GAVENS,
Partner
F-228
<PAGE>
H & P STATIONERY PTY LTD
ACN 004 103 262
DIRECTORS' REPORT
- --------------------------------------------------------------------------------
The Directors of H & P Stationery Pty. Ltd. formally resolved to submit the
following report with respect to the profit and loss and the state of affairs
of the Company as at 30 June, 1996.
1. The names of the Directors of the Company in office at the date of this
report are:
PETER T. REILLY
JAMES E. WALSH
2. The principal activities of the Company during the year were that of
stationers.
3. The profit of the Company for the year after providing for income tax and
abnormal items was $620,480 (1995: $319,113 profit).
4. Dividends of $626,993 were paid during the year.
5. No significant change in the state of affairs of the Company occurred
during the year.
6. The company has contracted to sells its entire office products business to
Blue Star Group Pty Ltd as of 30 September 1996. The company will receive
consideration of $2.8 million for goodwill plus the book value of operating
assets. A profit after tax of approximately $1.8 million will be realised
on the transaction. No other matters or circumstances have arisen since
the end of the financial year which significantly affected, or may
significantly affect, the operations of the Company, the results of those
operations or the state of affairs of the Company in financial years
subsequent to the financial year ended 30 June, 1996.
7. No information is included on the likely developments in the operations of
the Company and the expected results of those operations, as it is the
opinion of the Directors of the Company, that this information would
prejudice the interests of the Company if included in this report.
8. No Director, since 30 June, 1995 has received or become entitled to receive
a benefit (other than a benefit included in the aggregate amount of
emoluments received or due and receivable by Directors shown in Note 18 in
the Accounts, or the fixed salary of a full time employee of the Company)
by reason of a contract made by the Company or related corporation with
any Director or with a firm of which a Director is a member or with a
company in which a Director is a member or with a company in which a
Director has a substantial financial interest.
SIGNED in accordance with a resolution of the Directors of H & P
Stationery Pty. Ltd.
DATED this 23rd day of September 1996.
PETER T. REILLY JAMES E. WALSH
DIRECTOR DIRECTOR
F-229
<PAGE>
H & P STATIONERY PTY LTD
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
Operating revenue 2 3,876,317 8,157,565
----------- -----------
----------- -----------
Operating profit before abnormals
and income tax 3 260,414 160,482
Abnormal items 4 169,581 238,958
----------- -----------
Operating profit before income tax 429,995 399,440
Income tax attributable
to operating profit 5 190,485 (80,327)
----------- -----------
Operating profit after income tax 620,480 319,113
Dividends paid 16 (626,993) (150,000)
Transfer from Reserves 13 219,595 -
Retained profits at the beginning of
the financial year 177,237 8,124
----------- -----------
Retained profits at the end
of the financial year 390,319 177,237
----------- -----------
----------- -----------
The accompanying notes form an integral part of these accounts.
F-230
<PAGE>
H & P STATIONERY PTY LTD
BALANCE SHEET AS AT 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
CURRENT ASSETS
Cash 8,283 108,008
Receivables 6 122,207 966,431
Inventories 7 458,428 426,581
----------- -----------
Total Current Assets 588,918 1,501,020
----------- -----------
NON CURRENT ASSETS
Receivables 6 1,094,960 953,310
Property, plant and equipment 8 60,088 372,949
Other 9 279,393 30,381
----------- -----------
Total Non Current Assets 1,434,441 1,356,640
----------- -----------
TOTAL ASSETS 2,023,359 2,857,660
----------- -----------
CURRENT LIABILITIES
Creditors and borrowings 10 11,941 466,811
Provisions 11 57,549 49,549
----------- -----------
Total Current Liabilities 69,490 516,360
----------- -----------
NON CURRENT LIABILITIES
Creditors and borrowings 10 1,142,090 1,516,839
Provisions 11 4,770 10,939
----------- -----------
Total Non Current Liabilities 1,146,860 1,527,778
----------- -----------
TOTAL LIABILITIES 1,216,350 2,044,138
----------- -----------
NET ASSETS 807,009 813,522
----------- -----------
----------- -----------
SHAREHOLDERS' EQUITY
Share capital 12 42,200 42,200
Reserves 13 374,490 594,085
Retained profits 390,319 177,237
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 807,009 813,522
----------- -----------
----------- -----------
The accompanying notes form an integral part of these accounts.
F-231
<PAGE>
H & P STATIONERY PTY LTD
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
Inflows Inflows
(Outflows) (Outflows)
Cash flows from operating activities
Receipts from customers 3,692,002 7,909,668
Interest received 18,571 4,917
Payments to suppliers (3,580,014) (7,227,966)
Interest paid and finance costs - (6,924)
Income taxes paid (19,305) (65,485)
----------- -----------
Net cash provided by operating activities 20 111,254 614,210
----------- -----------
Cash flows from investing activities
Proceeds from sale of business 543,960 25,000
Proceeds from sale of non current assets 576,129 45,500
Payments for non current assets (49,832) (29,053)
----------- -----------
Net cash provided by investing activities 1,070,257 41,447
----------- -----------
Cash flows from financing activities
Dividends paid (626,993) (150,000)
Advance to related companies (628,096) (538,866)
Loan from related company - 159,794
Repayment of finance lease and hire
purchase liabilities (26,147) (84,830)
----------- -----------
Net cash provided by financing activities (1,281,236) (613,902)
----------- -----------
Net increase/(decrease) in cash held (99,725) 41,755
Cash at beginning of the financial year 108,008 66,253
----------- -----------
Cash at end of the financial year 8,283 108,008
----------- -----------
----------- -----------
The accompanying notes form an integral part of the accounts.
F-232
<PAGE>
H & P STATIONERY PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1. STATEMENT OF ACCOUNTING POLICIES
The accounts are a general purpose financial report prepared in accordance with
Accounting Standards, Urgent Issues Group Consensus Views and the requirements
in Schedule 5 to the Corporations Regulations. The accounts have been prepared
on the basis of historical costs and do not take into account changing money
values or, except where stated, current valuations of non current assets. The
accounting policies have been consistently applied, unless otherwise stated.
The following is a summary of the significant accounting policies adopted by the
Company in the preparation of the accounts.
(a) Goodwill
Goodwill, representing the excess of purchase consideration over the fair
value of identifiable net assets acquired arising upon the acquisition of a
business entity is shown as an intangible asset. Goodwill is amortised on
a straight line basis over the period of expected benefit, that period not
exceeding 20 years. For the years ended June 1988 and 1989, acquired
goodwill was written off in full via the profit and loss account. An
offsetting entry was posted from the "Acquired goodwill written off
reserve."
(b) Receivables
A provision is raised for any doubtful debts based on a review of all
outstanding amounts at year end. Bad debts are written off during the
period in which they are identified.
(c) Inventories
Inventories are valued at the lower of cost and net realisable value. Costs
have been assigned to inventory quantities on hand at balance date using
the first-in-first-out and weighted average cost basis or under the retail
inventory method.
(d) Property, plant and equipment
Property, plant and equipment are included at cost. All property, plant and
equipment, other than land are depreciated over their estimated useful
lives using the straight line method commencing from the time the asset is
held ready for use.
(e) Comparatives
Where necessary, comparative figures have been adjusted to conform with
changes in presentation in the current year.
F-233
<PAGE>
H & P STATIONERY PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 2. OPERATING REVENUE:
1996 1995
$ $
Sales revenue 3,261,680 7,346,926
Other revenue:-
Interest 18,571 4,917
Discounts - 1,840
Rent 2,500 -
Proceeds on sale of business, property,
plant and equipment 576,129 778,899
Sundry income 17,437 24,983
----------- -----------
3,876,317 8,157,565
----------- -----------
----------- -----------
NOTE 3. OPERATING PROFIT
The operating profit before income
tax has been determined after:
Charging as expenses:
Bad debts written off 1,576 9,927
Transfers to/(from) provisions for:-
Employee benefits (37,391) (34,194)
Doubtful debts - 3,554
Stock obsolescence - (12,000)
Depreciation of plant and equipment 40,675 75,782
Auditors' remuneration:
For auditing the accounts of
the company 700 10,000
For other services - 200
Amortisation of leased assets 6,673 34,260
Finance lease charges - 6,924
Hire purchase charges - -
Operating lease rentals - 348,199
Management charges 200,000 30,000
Loss on sale of property, plant
and equipment 7,506 -
Contributions to superannuation fund - 78,940
Crediting as revenue:
Interest received 18,571 4,917
Profit on sale of property, plant
and equipment 30,709 273,123
F-234
<PAGE>
H & P STATIONERY PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 4. ABNORMAL ITEMS
1996 1995
$ $
Profit on sale of property
(Tax expense applicable $Nil) 212,581 -
Profit on sale of business
(Tax expense applicable $Nil) 25,000 238,958
Business closure costs
(Tax credit applicable $24,480) (68,000) -
----------- -----------
169,581 238,958
----------- -----------
----------- -----------
NOTE 5. INCOME TAX
Operating profit 429,993 399,440
----------- -----------
Prima facie income tax expense
calculated at 36% (1995: 33%) 154,797 131,815
Add: permanent differences (79,888) (49,845)
Recognition of capital losses carried forward (266,073) -
Increase/(decrease) in net deferred tax
liability due to increase in tax rate - (1,620)
Over provision of tax in prior year 679 (23)
----------- -----------
Income tax expense (190,485) 80,327
----------- -----------
----------- -----------
Comprising
Increase in income tax
provisions 64,696 25,255
Increase/(decrease) in provision
for deferred tax (6,169) (14,936)
(Increase)/decrease in future income
tax benefits (249,012) 70,008
----------- -----------
(190,485) 80,327
----------- -----------
----------- -----------
F-235
<PAGE>
H & P STATIONERY PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 6. RECEIVABLES
1996 1995
$ $
Current:
Trade debtors 22,510 419,712
Less provision for doubtful debts 22,510 12,000
----------- -----------
0 407,712
Other debtors and prepayments 133,697 558,719
Less provision for diminution in loan 14,490 -
----------- -----------
122,207 966,431
----------- -----------
----------- -----------
Non current:
Unsecured loans to holding company 1,094,960 841,613
Loan to Nowton Pty Ltd - 136,697
Less provision for diminution in loan - 25,000
----------- -----------
- 111,697
----------- -----------
1,094,960 953,310
----------- -----------
----------- -----------
NOTE 7. INVENTORIES
Raw material - -
Work in progress - -
Finished goods 458,428 426,581
----------- -----------
458,428 426,581
----------- -----------
----------- -----------
F-236
<PAGE>
H & P STATIONERY PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
1996 1995
$ $
Land and buildings:
Freehold land (at Directors' valuation 1986) - 180,000
Freehold buildings (at Directors' valuation 1986) - 100,000
Less accumulated depreciation - 17,167
----------- -----------
- 82,833
----------- -----------
- 262,833
----------- -----------
Plant and machinery (at cost) - -
Less accumulated depreciation - -
----------- -----------
- -
----------- -----------
Furniture, fittings and office equipment (at cost) - -
Less accumulated depreciation - -
----------- -----------
- -
----------- -----------
Shop fittings (at cost) 334,555 279,254
Less accumulated depreciation 274,467 206,070
----------- -----------
60,088 73,184
----------- -----------
Staff amenities (at cost) - -
Less accumulated depreciation - -
----------- -----------
- -
----------- -----------
Motor vehicles (at cost) - -
Less accumulated depreciation - -
----------- -----------
- -
----------- -----------
Leased assets (at cost) - 74,480
Less accumulated amortisation - 37,548
----------- -----------
- 36,932
----------- -----------
Total property, plant and equipment 60,088 372,949
----------- -----------
----------- -----------
F-237
<PAGE>
H & P STATIONERY PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 9. OTHER NON-CURRENT ASSETS
NOTE 1996 1995
$ $
Future income tax benefit 279,393 30,381
----------- -----------
----------- -----------
NOTE 10. CREDITORS AND BORROWINGS
Current:
Trade creditors and accrued expenses 11,941 440,664
Lease liabilities 14 - 26,147
----------- -----------
11,941 466,811
----------- -----------
----------- -----------
Non current:
Lease liabilities 14 - -
Unsecured loans from related companies 1,142,090 1,516,839
----------- -----------
1,142,090 1,516,839
----------- -----------
----------- -----------
NOTE 11. PROVISIONS
Current:
Income tax 57,549 12,158
Employee benefits - 37,391
----------- -----------
57,549 49,549
----------- -----------
----------- -----------
Non current:
Employee benefits - -
Provision for deferred tax 4,770 10,939
----------- -----------
4,770 10,939
----------- -----------
----------- -----------
Aggregate employee entitlements:
Current - 37,391
Non current - -
----------- -----------
- 37,391
----------- -----------
----------- -----------
NOTE 12. SHARE CAPITAL
Authorised capital:
100,000 ordinary shares of $2.00 each 200,000 200,000
----------- -----------
----------- -----------
Issued and paid up capital:
21,100 ordinary shares of $2.00 each fully paid 42,200 42,200
----------- -----------
----------- -----------
F-238
<PAGE>
H & P STATIONERY PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 13. RESERVES
NOTE 1996 1995
$ $
Capital profit reserve 10,186 10,186
General reserve 1,378,499 1,378,499
Asset revaluation reserve - 219,595
Acquired goodwill written off reserve (1,014,195) (1,014,195)
----------- -----------
374,490 594,085
----------- -----------
----------- -----------
Movement in Reserves
Asset Revaluation Reserve
Opening Balance 219,595 219,595
Transfer to Retained Earnings (219,595) -
----------- -----------
Closing Balance - 219,595
----------- -----------
----------- -----------
NOTE 14. CAPITAL AND LEASING COMMITMENTS
Operating lease commitments:
Payable not later than one year 219,444 230,587
Payable between one and two years 39,879 154,900
Payable between two and five years - 13,150
----------- -----------
Operating lease liability 259,323 398,637
----------- -----------
----------- -----------
Finance lease commitments:
Payable not later than one year - 27,242
Payable between one and two years - -
----------- -----------
- 27,242
Deduct future finance charges - 1,095
----------- -----------
Provided for as a liability - 26,147
----------- -----------
----------- -----------
Representing lease liabilities
Current 10 - 26,147
Non current 10 - -
----------- -----------
- 26,147
----------- -----------
----------- -----------
F-239
<PAGE>
H & P STATIONERY PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 15. CONTINGENT LIABILITIES
At balance date the Company is a cross guarantor for a $44.55m loan facility
available to the ultimate chief entity.
1996 1995
$ $
NOTE 16. DIVIDENDS
Ordinary dividends paid
Interim 100,000 50,000
Final 526,993 100,000
----------- -----------
Total dividends paid 626,993 150,000
----------- -----------
----------- -----------
NOTE 17. RELATED PARTY INFORMATION
a) Directors
P.T. Reilly and J.E. Walsh each held office as a director of the Company
throughout the year ended 30 June, 1996.
b) Controlling Entities
The immediate chief entity is Australian Document Exchange Pty Ltd. The
ultimate chief entity is AUSDOC Group Limited, a company incorporated in
Australia.
c) Other related and associated corporations
AUSDOC Office Pty Ltd
Canberra Wholesale Stationers Pty Ltd
Data Security Services Pty Ltd
Dart Couriers (Aust.) Pty Ltd
Mullaly and Byrne Pty Ltd
Stronghold Security Services Pty Ltd
AUSDOC Employee Share Plan Pty Ltd
AUSDOC Funds Management Pty Ltd
Electronic Document Exchange Pty Ltd
Perth Stationery Supplies Pty Ltd
F-240
<PAGE>
H & P STATIONERY PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 17. RELATED PARTY INFORMATION (CON'TD)
d) Related party transactions and balances
There are no material intercompany transactions or balances between related
parties other than as disclosed within these accounts.
1996 1995
$ $
NOTE 18. DIRECTORS' REMUNERATION
Amounts received or due and receivable
by the Directors of the Company:
From the Company - -
From related bodies corporate 335,000 295,000
The numbers of Directors whose income
from the Company or related bodies
corporate was within the specified bands
are as follows:
$000 $000
110 - 120 - 1
130 - 140 1 -
170 - 180 - 1
190 - 200 1 -
The above information is presented in accordance with the requirements of clause
25 of Schedule 5 to the Corporations Regulations. The company has been relieved
from compliance with the corresponding requirements of Accounting Standard AASB
1017 "Related Party Disclosures" by a class order issued by the Australian
Securities Commission dated 13 October 1994.
NOTE 19. SUBSEQUENT EVENTS
The company has contracted to sells its entire office products business to Blue
Star Group Pty Ltd as of 30 September 1996. The company will receive
consideration of $2.8 million for goodwill plus the book value of operating
assets. A profit after tax of approximately $1.8 million will be realised on
the transaction. No other matters or circumstances have arisen since the end of
the financial year which significantly affected, or may significantly affect,
the operations of the Company, the results of those operations or the state of
affairs of the Company in financial years subsequent to the financial year ended
30 June, 1996.
F-241
<PAGE>
H & P STATIONERY PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 20. CASHFLOW INFORMATION
1996 1995
$ $
Reconciliation of operating profit after
income tax to net cash provided by operating
activities
Operating profit after income tax 620,480 319,113
Depreciation and amortisation 47,348 110,042
Bad debts 1,576 9,927
Cost of sales writeback - (21,375)
Doubtful debts provision - 3,554
Stock obsolescence provision - (12,000)
Loss on sale of non current assets 7,506 -
Profit on sale of non current assets (268,290) (273,123)
Increase/(Decrease) in taxes payable (209,790) 14,842
Increase/(Decrease) in employee provisions (37,391) (34,194)
Decrease/(Increase) in receivables 410,385 445,919
Decrease/(Increase) in inventory (31,847) 387,048
Increase/(Decrease) in creditors & borrowings (428,723) (335,543)
----------- -----------
Net cash provided by operating activities 111,254 614,210
----------- -----------
----------- -----------
F-242
<PAGE>
H & P STATIONERY PTY LTD
STATEMENT BY DIRECTORS
- --------------------------------------------------------------------------------
In accordance with a resolution of the Board of Directors of H & P Stationery
Pty. Ltd. in the opinion of the Directors:
(a) the accounts of the Company are drawn up so as to give a true and fair view
of the result of the Company for the year ended 30 June 1996 and the state
of affairs of the Company as at 30 June 1996.
(b) at the date of this statement there are reasonable grounds to believe that
the Company will be able to pay its debts as and when they fall due.
(c) the accounts of the Company have been made out in accordance with Divisions
4, 4A and 4B of Part 3.6 of the Corporations Law, applicable accounting
standards and Urgent Issues Group Consensus Views.
For and on behalf of the Board by:-
Dated this 23rd day of September 1996.
PETER T. REILLY
DIRECTOR
JAMES E. WALSH
DIRECTOR
F-243
<PAGE>
AUDITORS' REPORT
TO THE MEMBERS OF H & P STATIONERY PTY. LTD.
- --------------------------------------------------------------------------------
SCOPE
We have audited the accounts of H & P Stationery Pty. Ltd. for the year ended 30
June, 1996 as set out on pages 2 to 15. The Company's Directors are responsible
for the preparation and presentation of the accounts and the information they
contain. We have conducted an independent audit of these accounts in order to
express an opinion on them to the members of the Company.
Our audit has been conducted in accordance with Australian Auditing Standards to
provide reasonable assurance as to whether the accounts are free of material
misstatement. Our procedures included examination, on a test basis, of evidence
supporting the amounts and other disclosures in the accounts, and the evaluation
of accounting policies and significant accounting estimates. These procedures
have been undertaken to form an opinion as to whether, in all material respects,
the accounts are presented fairly in accordance with Australian accounting
standards, other mandatory professional reporting requirements, being Urgent
Issues Group Consensus Views and the Corporations Law so as to present a view of
the Company which is consistent with our understanding of its state of affairs,
results of operations and cashflows.
The audit opinion expressed in this report has been formed on the above basis.
AUDIT OPINION
In our opinion, the accounts of H & P Stationery Pty. Ltd. are properly drawn
up:
(a) so as to give a true and fair view of:
(i) the Company's state of affairs as at 30 June, 1996 and of its
result for the year ended on that date; and
(ii) the other matters required by Divisions 4, 4A and 4B of Part 3.6
of the Corporations Law to be dealt with in the accounts;
(b) in accordance with the provisions of the Corporations Law; and
(c) in accordance with applicable accounting standards and other mandatory
professional reporting requirements.
Signed at Melbourne,
This 23rd day of September 1996.
DAY NEILSON
Chartered Accountants
J.J. GAVENS
Partner
F-244
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
ACN 008 606 559
DIRECTORS' REPORT
- --------------------------------------------------------------------------------
The Directors of Canberra Wholesale Stationers Pty Ltd resolved to make the
following report with respect to the profit and loss and the state of affairs
of the Company as at 30 June, 1996.
1. The names of the Directors of the Company in office at the date of this
report are:
PETER T. REILLY
JAMES E. WALSH
2. The principal activity of the Company during the year was the sale of
commercial office products.
3. The profit of the Company for the year after providing for income tax was
$539,849 (1995 - $541,762 profit).
4. Dividends of $651,260 were paid during the year.
5. No significant change in the state of affairs of the Company occurred
during the year.
6. The company has contracted to sells its entire office products business to
Blue Star Group Pty Ltd as of 30 September 1996. The company will receive
consideration of $4.62 million for goodwill plus the book value of
operating assets. A profit after tax of approximately $2.9 million will be
realised on the transaction. No other matter or circumstances have arisen
since the end of the financial year which significantly affected, or may
significantly affect, the operations of the Company, the results of those
operations or the state of affairs of the Company in financial years
subsequent to the financial year ended 30 June, 1996.
7. No information is included on the likely developments in the operations of
the Company and the expected results of those operations, as it is the
opinion of the Directors of the Company, that this information would
prejudice the interests of the Company if included in this report.
8. No Director, since 30 June, 1995 has received or become entitled to receive
a benefit (other than a benefit included in the aggregate amount of
emoluments received or due and receivable by Directors shown in Note 15 of
the Accounts, or the fixed salary of a full time employee of the Company)
by reason of a contract made by the Company or related corporation with
any Director or with a firm of which a Director is a member or with a
company in which a Director is a member or with a company in which a
Director has a substantial financial interest, except as disclosed in Note
17 of the accounts.
SIGNED in accordance with a resolution of the Directors of Canberra
Wholesale Stationers Pty Ltd.
DATED this 23rd day of September 1996.
PETER T. REILLY JAMES E. WALSH
DIRECTOR DIRECTOR
F-245
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
Operating revenue 2 12,302,663 11,449,024
----------- -----------
----------- -----------
Operating profit before income tax 3 848,440 805,257
Income tax attributable
to operating profit 4 (308,591) (263,495)
----------- -----------
Operating profit after income tax 539,849 541,762
Dividends paid 12 (651,260) (370,000)
Retained profits/(losses) at the
beginning of the financial year 241,272 69,510
----------- -----------
Retained profits at the end
of the financial year 129,861 241,272
----------- -----------
----------- -----------
The accompanying notes form an integral part of these accounts.
F-246
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
BALANCE SHEET AS AT 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
CURRENT ASSETS
Cash 15,264 61,615
Receivables 5 1,077,011 942,966
Inventories 6 1,039,393 1,226,938
----------- -----------
Total Current Assets 2,131,668 2,231,519
----------- -----------
NON CURRENT ASSETS
Receivables 5 581,303 122,020
Property, plant and equipment 7 336,084 363,978
Other 8 65,508 57,307
----------- -----------
Total Non Current Assets 982,895 543,305
----------- -----------
TOTAL ASSETS 3,114,563 2,774,824
----------- -----------
CURRENT LIABILITIES
Creditors and borrowings 9 1,564,212 1,807,437
Provisions 10 361,865 319,806
----------- -----------
Total Current Liabilities 1,926,077 2,127,243
----------- -----------
NON CURRENT LIABILITIES
Creditors and borrowings 9 1,021,260 370,000
Provisions 10 37,353 36,297
----------- -----------
Total Non Current Liabilities 1,058,613 406,297
----------- -----------
TOTAL LIABILITIES 2,984,690 2,533,540
----------- -----------
NET ASSETS 129,873 241,284
----------- -----------
----------- -----------
SHAREHOLDERS' EQUITY
Share capital 11 12 12
Retained profits 129,861 241,272
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 129,873 241,284
----------- -----------
----------- -----------
The accompanying notes form an integral part of these accounts.
F-247
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
Cash flows from operating activities
Receipts from customers 12,144,702 11,252,342
Interest received 9,236 21,596
Payments to suppliers
(purchases/expenses) (11,352,937) (10,855,949)
Interest and finance charges paid (15,701) (14,592)
Income taxes paid (305,489) (229,090)
----------- -----------
Net cash provided by operating activities 18 479,811 174,307
----------- -----------
Cash flows from investing activities
Proceeds from sale of property, plant
and equipment 14,680 37,375
Payments for property, plant and equipment (68,182) (165,943)
----------- -----------
Net cash provided by investing activities (53,502) (128,568)
----------- -----------
Cash flows from financing activities
Dividends paid (651,260) (370,000)
Lease finance and hire purchase
principal repayments (13,377) (14,271)
Repayment and advance of
loan to holding company 191,977 394,712
----------- -----------
Net cash provided by financing activities (472,660) 10,441
----------- -----------
Net increase/(decrease) in cash held (46,351) 56,180
Cash at beginning of the financial year 61,615 5,435
----------- -----------
Cash at end of the financial year 15,264 61,615
----------- -----------
----------- -----------
The accompanying notes form an integral part of these accounts.
F-248
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1. STATEMENT OF ACCOUNTING POLICIES
The accounts are a general purpose financial report prepared in accordance with
Accounting Standards, Urgent Issues Group Consensus Views and the requirements
in Schedule 5 to the Corporations Regulations. The accounts have been prepared
on the basis of historical costs and do not take into account changing money
values or, except where stated, current valuations of non-current assets. The
accounting policies have been consistently applied, unless otherwise stated.
The following is a summary of the significant accounting policies adopted by the
Company in the preparation of the accounts.
(a) Receivables
A provision is raised for any doubtful debts based on a review of all
outstanding amounts at year end. Bad debts are written off during the
period in which they are identified.
(b) Inventories
Inventories are valued at the lower of cost and net realisable value. Costs
are assigned on a first in first out basis; and include an appropriate
share of both variable and fixed costs.
(c) Property, Plant and Equipment
Property, plant and equipment are included at cost. All property, plant
and equipment other than land are depreciated over their estimated useful
lives using the straight line method commencing from the time the asset is
held ready for use.
(d) Comparative Figures
Where necessary comparative figures in the notes to the accounts have been
altered to conform with the current year's presentation and to give more
meaningful comparisons. The comparatives in the accounts remain unaltered.
F-249
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 2. OPERATING REVENUE
1996 1995
$ $
Sales revenue 12,278,747 11,357,708
Other revenue
Interest received from related party 404 15,260
Interest received from other corporations 8,832 6,336
Sundries - 32,345
Proceeds from sale of non current assets 14,680 37,375
----------- -----------
Total operating revenue 12,302,663 11,449,024
----------- -----------
----------- -----------
NOTE 3. OPERATING PROFIT
Operating profit before tax has been
determined after:
Charging as expenses:
Auditors' remuneration:
- For auditing the accounts of
the Company 9,000 9,000
- For other services 200 200
Amortisation of leased assets 2,432 9,904
Depreciation of fixed assets 92,526 98,591
Interest paid:
Related corporations 14,323 11,217
Other 291 172
Operating lease rentals 120,706 124,808
Loss on disposal of property, plant
and equipment - 740
Finance charges re finance leases 1,087 3,203
Transfers to provisions for:
Employee benefits 31,812 22,356
Management charges 100,000 50,000
Contributions to superannuation fund 72,191 45,786
Crediting as revenue:
Interest received - related party 404 15,260
Interest received - other 8,832 6,336
Profit on disposal of property, plant
and equipment 13,562 1,780
F-250
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 4. INCOME TAX
1996 1995
$ $
Operating profit 848,440 805,257
----------- -----------
----------- -----------
Prima facie income tax expense
calculated at 36% (1995: 33%) 305,438 265,735
Tax effect of permanent differences 3,153 2,536
Increase/(decrease) in net deferred tax
liability due to increase in tax rate - (4,776)
----------- -----------
Income tax expense on operating profit 308,591 263,495
----------- -----------
----------- -----------
Comprising
Current tax provision increase 315,457 281,046
Provision for deferred tax increase 1,335 -
Future income tax benefit increase (8,201) (17,551)
----------- -----------
308,591 263,495
----------- -----------
----------- -----------
NOTE 5. RECEIVABLES
Current:
Trade debtors 1,024,578 933,304
Less provision for doubtful debts 5,000 5,000
----------- -----------
1,019,578 928,304
Other debtors and prepayments 57,433 14,662
----------- -----------
1,077,011 942,966
----------- -----------
----------- -----------
Non current:
Loan to related company 581,303 122,020
----------- -----------
----------- -----------
NOTE 6. INVENTORIES
Finished goods 1,039,393 1,226,938
----------- -----------
----------- -----------
F-251
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
NOTE 1996 1995
$ $
Plant and machinery:
At cost 84,127 83,227
Less accumulated depreciation 56,313 50,536
----------- -----------
27,814 32,691
----------- -----------
Furniture, fixtures and equipment:
At cost 446,347 420,952
Less accumulated depreciation 287,864 247,578
----------- -----------
158,483 173,374
----------- -----------
Motor vehicles:
At cost 295,968 257,580
Less accumulated depreciation 146,181 102,099
----------- -----------
149,787 155,481
----------- -----------
Leased assets:
At cost - 29,200
Less accumulated amortisation - 26,768
----------- -----------
- 2,432
----------- -----------
Total property, plant and equipment 336,084 363,978
----------- -----------
----------- -----------
NOTE 8. OTHER NON CURRENT ASSETS
Future income tax benefit 65,508 57,307
----------- -----------
----------- -----------
NOTE 9. CREDITORS AND BORROWINGS
Current:
Trade creditors 1,307,443 1,509,905
Other creditors and accruals 256,769 284,155
Lease liability 13 - 13,377
----------- -----------
1,564,212 1,807,437
----------- -----------
----------- -----------
Non current:
Lease liability 13 - -
Unsecured loan - related company 1,021,260 370,000
----------- -----------
1,021,260 370,000
----------- -----------
----------- -----------
F-252
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 10. PROVISIONS
1996 1995
$ $
Current:
Income tax 245,196 235,228
Employee benefits 116,669 84,578
----------- -----------
361,865 319,806
----------- -----------
----------- -----------
Non current:
Employee benefits 36,018 36,297
Provision for deferred income tax 1,335 -
----------- -----------
37,353 36,297
----------- -----------
----------- -----------
Aggregate employee entitlements:
Current 116,669 84,578
Non current 36,018 36,297
----------- -----------
152,687 120,875
----------- -----------
----------- -----------
NOTE 11. SHARE CAPITAL
Authorised capital:
500,000 ordinary "A"
class shares of $1.00 each 500,000 500,000
500,000 ordinary "B"
class shares of $1.00 each 500,000 500,000
----------- -----------
1,000,000 1,000,000
----------- -----------
----------- -----------
Issued and paid up capital:
8 ordinary "A" class
shares of $1.00 each fully paid 8 8
4 ordinary "B" class
shares of $1.00 each fully paid 4 4
----------- -----------
12 12
----------- -----------
----------- -----------
NOTE 12. DIVIDENDS
Ordinary dividends paid 651,260 370,000
----------- -----------
----------- -----------
F-253
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 13. CAPITAL AND LEASING COMMITMENTS
NOTE 1996 1995
$ $
Operating lease commitments:
Payable not later than one year 115,126 119,253
Payable later than one, not later
than two years 115,126 119,253
Payable later than two, not later
than five years 98,509 191,509
Payable later than five years - 24,253
----------- -----------
328,761 454,268
----------- -----------
----------- -----------
Finance lease commitments:
Payable not later than one year - 14,082
Payable later than one, not later
than two years - -
Payable later than two, not later
than five years - -
Payable later than five years - -
----------- -----------
- 14,082
Less future finance charges - 705
----------- -----------
Provided for as a liability - 13,377
----------- -----------
----------- -----------
Representing lease liabilities
Current 9 - 13,377
Non-current 9 - -
----------- -----------
- 13,377
----------- -----------
----------- -----------
NOTE 14. CONTINGENT LIABILITIES
At balance date the company is a cross guarantor for a $44.55m loan facility
available to the ultimate chief entity.
F-254
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 15. DIRECTORS' REMUNERATION
1996 1995
$ $
Amounts received or due and receivable
by the Directors of the Company:
From the Company - -
From related bodies corporate 335,000 295,000
The numbers of Directors whose income
from the Company or related bodies
corporate was within the specified bands
are as follows:
$000 $000
110 - 120 - 1
130 - 140 1 -
170 - 180 - 1
190 - 200 1 -
The above information is presented in accordance with the requirements of clause
25 of Schedule 5 to the Corporations Regulations. The company has been relieved
from compliance with the corresponding requirements of Accounting Standard AASB
1017 "Related Party Disclosures" by a class order issued by the Australian
Securities Commission dated 13 October 1994.
NOTE 16. SUBSEQUENT EVENTS
The company has contracted to sells its entire office products business to Blue
Star Group Pty Ltd as of 30 September 1996. The company will receive
consideration of $4.62 million for goodwill plus the book value of operating
assets. A profit after tax of approximately $2.9 million will be realised on
the transaction. No other matter or circumstances have arisen since the end of
the financial year which significantly affected, or may significantly affect,
the operations of the Company, the results of those operations or the state of
affairs of the Company in financial years subsequent to the financial year ended
30 June, 1996.
NOTE 17. RELATED PARTY INFORMATION
a) Directors
P.T. Reilly and J.E. Walsh each held office as a Director of the Company
throughout the year ended 30 June, 1996.
F-255
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (CONT'D)
- --------------------------------------------------------------------------------
NOTE 17. RELATED PARTY INFORMATION (CONT'D)
b) Controlling Entities
The immediate chief entity is Australian Document Exchange Pty Ltd. The
ultimate chief entity is AUSDOC Group Limited, a company incorporated in
Australia.
Other related companies are:
AUSDOC Office Pty Ltd
H & P Stationery Pty Ltd
Data Security Services Pty Ltd
Dart Couriers (Aust.) Pty Ltd
Mullaly and Byrne Pty Ltd
Stronghold Security Services Pty Ltd
AUSDOC Employee Share Plan Pty Ltd
AUSDOC Funds Management Pty Ltd
Electronic Document Exchange Pty Ltd
Perth Stationery Supplies Pty Ltd
c) Related party transactions and balances
There are no material intercompany transactions or balances between related
parties other than as disclosed within these accounts.
NOTE 18. CASHFLOW INFORMATION
1996 1995
$ $
Reconciliation of operating profit after
income tax to net cash provided by operating
activities.
Operating profit after income tax 539,849 541,762
Depreciation and amortisation 94,958 108,495
Gain on disposal of property,
plant and equipment (13,562) (1,780)
Loss on disposal of property,
plant and equipment - 740
Increase/(decrease) in taxes payable 3,102 34,405
Increase in employee provisions 31,812 22,356
Increase in receivables (134,045) (137,711)
Decrease/(Increase) in inventory 187,545 (599,695)
(Decrease)/Increase in creditors and borrowings (229,848) 205,735
----------- -----------
Net cash provided by operating activities 479,811 174,307
----------- -----------
----------- -----------
F-256
<PAGE>
CANBERRA WHOLESALE STATIONERS PTY LTD
STATEMENT BY DIRECTORS
- --------------------------------------------------------------------------------
In accordance with a resolution of the Board of Directors of Canberra Wholesale
Stationers Pty Ltd, in the opinion of the Directors:
(a) the accounts of the Company are drawn up so as to give a true and fair
view of the result of the Company for the year ended 30 June 1996 and the
state of affairs of the Company as at 30 June 1996.
(b) at the date of this statement there are reasonable grounds to believe that
the Company will be able to pay its debts as and when they fall due.
(c) the accounts of the Company have been made out in accordance with
Divisions 4, 4A and 4B of Part 3.6 of the Corporations Law, applicable
accounting standards and Urgent Issues Group Consensus Views.
For and on behalf of the board by:
This 23rd day of September 1996.
PETER T. REILLY
DIRECTOR
JAMES E. WALSH
DIRECTOR
F-257
<PAGE>
AUDITORS' REPORT
TO THE MEMBERS OF CANBERRA WHOLESALE STATIONERS PTY LTD
- --------------------------------------------------------------------------------
SCOPE
We have audited the accounts of Canberra Wholesale Stationers Pty Ltd for the
year ended 30 June, 1996 as set out on pages 2 to 13. The Company's Directors
are responsible for the preparation and presentation of the accounts and the
information they contain. We have conducted an independent audit of these
accounts in order to express an opinion on them to the members of the Company.
Our audit has been conducted in accordance with Australian Auditing Standards to
provide reasonable assurance as to whether the accounts are free of material
misstatement. Our procedures included examination, on a test basis, of evidence
supporting the amounts and other disclosures in the accounts, and the evaluation
of accounting policies and significant accounting estimates. These procedures
have been undertaken to form an opinion as to whether, in all material respects,
the accounts are presented fairly in accordance with Australian accounting
standards, other mandatory professional reporting requirements, being Urgent
Issues Group Consensus Views and the Corporations Law so as to present a view
of the Company which is consistent with our understanding of its state of
affairs, results of operations and cashflows.
The audit opinion expressed in this report has been formed on the above basis.
AUDIT OPINION
In our opinion, the accounts of Canberra Wholesale Stationers Pty Ltd are
properly drawn up:
(a) so as to give a true and fair view of:
(i) the Company's state of affairs as at 30 June, 1996 and of its result
for the year ended on that date; and
(ii) the other matters required by Divisions 4, 4A and 4B of Part 3.6 of
the Corporations Law to be dealt with in the accounts;
(b) in accordance with the provisions of the Corporations Law; and
(c) in accordance with applicable accounting standards and other mandatory
professional reporting requirements.
Signed at Melbourne,
This 23rd day of September 1996.
DAY NEILSON
Chartered Accountants
J.J. GAVENS,
Partner
F-258
<PAGE>
PERTH STATIONERY SUPPLIES PTY LTD
ACN 068 217 630
DIRECTORS' REPORT
- --------------------------------------------------------------------------------
The Directors of Perth Stationery Supplies Pty Ltd resolved to submit the
following report with respect to the profit and loss and the state of affairs
of the Company as at 30 June, 1996.
1. The names of the Directors of the Company in office at the date of this
report are:
PETER T. REILLY
JAMES E. WALSH
2. The principal activity of the Company since incorporation was that of
commercial stationers.
3. The loss of the Company for the period after providing for income tax was
$46,781. (1995: $18,962 profit)
4. No dividends were paid during the period.
5. No significant change in the state of affairs of the Company occurred
during the period.
6. The Company has contracted to sell its business and operating assets at
book value to Blue Star Group Pty Ltd effective from 30 September 1996. No
other matters or circumstances have arisen since the end of the financial
year which significantly affected, or may significantly affect, the
operations of the Company, the results of those operations or the state of
affairs of the Company in financial years subsequent to the financial
period ended 30 June, 1996.
7. No information is included on the likely developments in the operations of
the Company and the expected results of those operations, as it is the
opinion of the Directors of the Company, that this information would
prejudice the interests of the Company if included in this report.
8. No Director, since incorporation has received or become entitled to receive
a benefit (other than a benefit included in the aggregate amount of
emoluments received or due and receivable by Directors shown in Note 15 in
the Accounts, or the fixed salary of a full time employee of the Company)
by reason of a contract made by the Company or related corporation with
any Director or with a firm of which a Director is a member or with a
company in which a Director is a member or with a company in which a
Director has a substantial financial interest.
SIGNED in accordance with a resolution of the Directors of Perth
Stationery Supplies Pty Ltd.
DATED this 23rd day of September 1996.
PETER T. REILLY JAMES E. WALSH
DIRECTOR DIRECTOR
F-259
<PAGE>
PERTH STATIONERY SUPPLIES PTY LTD
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 JUNE, 1996 (14/02/95-30/06/95
PRIOR YEAR)
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
Operating revenue 2 6,248,439 983,728
----------- -----------
----------- -----------
Operating profit/(loss) before income tax 3 (71,396) 10,574
Income tax benefit attributable
to operating profit/(loss) 4 24,615 8,388
----------- -----------
Operating profit/(loss) after income tax (46,781) 18,962
Retained profits at the beginning of the
financial year 18,962 -
----------- -----------
Retained profits/(losses) at the end
of the financial year (27,819) 18,962
----------- -----------
----------- -----------
The accompanying notes form an integral part of these accounts.
F-260
<PAGE>
PERTH STATIONERY SUPPLIES PTY LTD
BALANCE SHEET AS AT 30 JUNE, 1996
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
CURRENT ASSETS
Cash 253,876 90,602
Receivables 5 1,151,796 791,056
Inventories 6 538,589 417,751
----------- -----------
Total Current Assets 1,944,261 1,299,409
----------- -----------
NON CURRENT ASSETS
Other 7 38,552 13,759
----------- -----------
Total Non Current Assets 38,552 13,759
----------- -----------
TOTAL ASSETS 1,982,813 1,313,168
----------- -----------
CURRENT LIABILITIES
Creditors and borrowings 8 1,137,510 740,363
Provisions 9 42,801 21,579
----------- -----------
Total Current Liabilities 1,180,311 761,942
----------- -----------
NON CURRENT LIABILITIES
Creditors and borrowings 8 803,167 510,252
Provisions 9 27,152 22,010
----------- -----------
Total Non Current Liabilities 830,319 532,262
----------- -----------
TOTAL LIABILITIES 2,010,630 1,294,204
----------- -----------
NET ASSETS (27,817) 18,964
----------- -----------
----------- -----------
SHAREHOLDERS' EQUITY
Share capital 10 2 2
Retained profits (27,819) 18,962
----------- -----------
TOTAL SHAREHOLDERS' EQUITY (27,817) 18,964
----------- -----------
----------- -----------
The accompanying notes form an integral part of these accounts.
F-261
<PAGE>
PERTH STATIONERY SUPPLIES PTY LTD
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 JUNE, 1996 (14/02/95-30/06/95 PRIOR YEAR)
- --------------------------------------------------------------------------------
NOTE 1996 1995
$ $
Inflows Inflows
(Outflows) (Outflows)
Cash flows from operating activities
Receipts from customers 5,874,536 230,485
Interest received 8,214 582
Payments to suppliers (purchases/expenses) (5,942,318) (323,096)
Interest paid and finance costs - -
Income taxes paid (330) -
----------- -----------
Net cash provided by operating activities 16 (59,898) (92,029)
----------- -----------
Cash flows from financing activities
Loan from holding company 223,172 182,631
----------- -----------
Net cash provided by financing activities 223,172 182,631
----------- -----------
Net increase in cash held 163,274 90,602
Cash at beginning of the financial year 90,602 -
----------- -----------
Cash at end of the financial year 253,876 90,602
----------- -----------
----------- -----------
The accompanying notes form an integral part of the accounts.
F-262
<PAGE>
PERTH STATIONERY SUPPLIES PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (14/02/95-30/06/95 PRIOR YEAR)
- --------------------------------------------------------------------------------
NOTE 1. STATEMENT OF ACCOUNTING POLICIES
The accounts are a general purpose financial report prepared in accordance with
Accounting Standards, Urgent Issues Group Consensus Views and the requirements
in Schedule 5 to the Corporations Regulations. The accounts have been prepared
on the basis of historical costs and do not take into account changing money
values or, except where stated, current valuations of non-current assets. The
accounting policies have been consistently applied, unless otherwise stated.
The following is a summary of the significant accounting policies adopted by the
Company in the preparation of the accounts.
(a) Inventories
Inventories are valued at the lower of cost and net realisable value. Costs
have been assigned to inventory quantities on hand at balance date using
the first-in-first-out and weighted average cost basis and under the retail
inventory method.
(b) Receivables
A provision is raised for any doubtful debts based on a review of all
outstanding amounts at year end. Bad debts are written off during the
period in which they are identified.
(c) Comparative Figures
Where necessary, comparative figures have been adjusted to conform with
changes in presentations in the current year.
F-263
<PAGE>
PERTH STATIONERY SUPPLIES PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (14/02/95-30/06/95 PRIOR YEAR)
- --------------------------------------------------------------------------------
NOTE 2. OPERATING REVENUE
1996 1995
$ $
Sales revenue 6,192,434 983,146
Other revenue:-
Discount 4,668 -
Interest 8,214 582
Sundry 43,123 -
----------- -----------
6,248,439 983,728
----------- -----------
----------- -----------
NOTE 3. OPERATING PROFIT
The operating profit/(loss) before income
tax has been determined after:
Charging as expenses:
Transfers to/(from) provisions for:-
Employee benefits 11,258 3,841
Operating lease rentals 103,426 24,553
Licence fees 310,000 80,000
Contributions to superannuation fund 140,069 10,087
Bad Debts 4,949 -
Auditors renumeration 5,500 -
Crediting as revenue:
Interest received 8,214 582
F-264
<PAGE>
PERTH STATIONERY SUPPLIES PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (14/02/95-30/06/95 PRIOR YEAR)
- --------------------------------------------------------------------------------
NOTE 4. INCOME TAX
1996 1995
$ $
Operating profit/(loss) (71,396) 10,574
----------- -----------
Prima facie income tax expense
calculated at 36% (1995: 33%) (25,702) 3,489
Permanent differences 1,087 (11,150)
Increase/(decrease) in net deferred tax
liability due to increase in tax rate - (727)
----------- -----------
Income tax expense/(credit) (24,615) (8,388)
----------- -----------
----------- -----------
Comprising
Increase in income tax provisions - 330
Increase in provision for deferred tax 179 5,041
Increase in future income tax benefits (24,794) (13,759)
----------- -----------
(24,615) (8,388)
----------- -----------
----------- -----------
NOTE 5. RECEIVABLES
Current:
Trade debtors 1,111,500 752,661
Less provision for doubtful debts - -
----------- -----------
1,111,500 752,661
Other debtors and prepayments 40,296 38,395
----------- -----------
1,151,796 791,056
----------- -----------
----------- -----------
NOTE 6. INVENTORIES
Finished goods 538,589 417,751
----------- -----------
----------- -----------
NOTE 7. OTHER NON CURRENT ASSETS
Future income tax benefit 38,552 13,759
----------- -----------
----------- -----------
F-265
<PAGE>
PERTH STATIONERY SUPPLIES PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (14/02/95-30/06/95 PRIOR YEAR)
- --------------------------------------------------------------------------------
NOTE 8. CREDITORS AND BORROWINGS
1996 1995
$ $
Current:
Trade creditors 1,108,772 363,550
Other creditors and accruals 28,738 376,813
----------- -----------
1,137,510 740,363
----------- -----------
----------- -----------
Non current:
Unsecured loans from
related companies 803,167 510,252
----------- -----------
803,167 510,252
----------- -----------
----------- -----------
NOTE 9. PROVISIONS
Current:
Income tax - 330
Employee benefits 42,801 21,249
----------- -----------
42,801 21,579
----------- -----------
----------- -----------
Non current:
Employee benefits 21,932 16,969
Provision for deferred tax 5,220 5,041
----------- -----------
27,152 22,010
----------- -----------
----------- -----------
Aggregate employee entitlements:
Current 42,801 21,249
Non current 21,932 16,969
----------- -----------
64,733 38,218
----------- -----------
----------- -----------
NOTE 10. SHARE CAPITAL
Authorised capital:
1,000,000 ordinary shares of
$1.00 each 1,000,000 1,000,000
----------- -----------
----------- -----------
Issued and paid up capital:
2 ordinary shares of
$1.00 each fully paid 2 2
----------- -----------
----------- -----------
F-266
<PAGE>
PERTH STATIONERY SUPPLIES PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (14/02/95-30/06/95 PRIOR YEAR)
- --------------------------------------------------------------------------------
NOTE 11. CAPITAL AND LEASING COMMITMENTS
1996 1995
$ $
Operating lease commitments:
Payable not later than one year 160,000 70,000
Payable between one and two years 136,180 70,000
Payable between two and five years 41,895 58,333
Payable later than five years - -
----------- -----------
Operating lease liability 338,075 198,333
----------- -----------
----------- -----------
NOTE 12. CAPITAL COMMITMENTS
There were no capital commitments at 30 June 1996.
NOTE 13. RELATED PARTY INFORMATION
a) Directors
P.T. Reilly and J.E. Walsh each held office as a Director of the Company
throughout the year ended 30 June, 1996.
b) Controlling Entities
The immediate chief entity is Australian Document Exchange Pty Ltd. The
ultimate chief entity is AUSDOC Group Limited, a company incorporated in
Australia.
c) Other related and associated corporations
AUSDOC Office Pty Ltd
Canberra Wholesale Stationers Pty Ltd
Data Security Services Pty Ltd
Dart Couriers (Aust.) Pty Ltd
Mullaly and Byrne Pty Ltd
Stronghold Security Services Pty Ltd
AUSDOC Employee Share Plan Pty Ltd
AUSDOC Funds Management Pty Ltd
Electronic Document Exchange Pty Ltd
H & P Stationery Pty Ltd
d) Related party transactions and balances
There are no other material intercompany transactions or balances between
related parties other than as disclosed within these accounts.
F-267
<PAGE>
PERTH STATIONERY SUPPLIES PTY LTD
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED 30 JUNE, 1996 (14/02/95-30/06/95 PRIOR YEAR)
- --------------------------------------------------------------------------------
NOTE 14. SUBSEQUENT EVENTS
The Company has contracted to sell its business and operating assets at book
value to Blue Star Group Pty Ltd effective from 30 September 1996. No other
matters or circumstances have arisen since the end of the financial year which
significantly affected, or may significantly affect, the operations of the
Company, the results of those operations or the state of affairs of the Company
in financial years subsequent to the financial period ended 30 June, 1996.
NOTE 15. DIRECTORS' REMUNERATION
Amounts received or due and receivable
by the Directors of the Company:
1996 1995
$ $
From the Company - -
From related bodies corporate 335,000 295,000
The numbers of Directors whose income
from the Company or related bodies
corporate was within the specified bands
are as follows:
$000 - $000
110 - 120 - 1
130 - 140 1 -
170 - 180 - 1
190 - 200 1 -
The above information is presented in accordance with the requirements of clause
25 of Schedule 5 to the Corporations Regulations. The company has been relieved
from compliance with the corresponding requirements of Accounting Standard AASB
1017 "Related Party Disclosures" by a class order issued by the Australian
Securities Commission dated 13 October 1994.
NOTE 16. CASHFLOW INFORMATION
Reconciliation of net cash provided by operating
activities to operating profit/(loss) after income tax
Operating profit/(loss) after income tax (46,781) 18,962
Bad debts 4,949 -
Increase/(Decrease) in taxes payable (24,945) (8,388)
Increase/(Decrease) in employee provisions 11,258 3,841
Increase in receivables (365,689) (791,056)
Increase in inventory (35,838) (55,751)
Increase in creditors and borrowings 397,148 740,363
----------- -----------
Net cash provided by operating activities (59,898) (92,029)
----------- -----------
----------- -----------
F-268
<PAGE>
PERTH STATIONERY SUPPLIES PTY LTD
STATEMENT BY DIRECTORS
- --------------------------------------------------------------------------------
In accordance with a resolution of the Board of Directors of Perth Stationery
Supplies Pty Ltd, in the opinion of the Directors:
(a) the accounts of the Company are drawn up so as to give a true and fair
view of the result of the Company for the year ended 30 June, 1996 and the
state of affairs of the Company as at 30 June 1996.
(b) at the date of this statement there are reasonable grounds to believe that
the Company will be able to pay its debts as and when they fall due.
(c) the accounts of the Company have been made out in accordance with
Divisions 4, 4A and 4B of Part 3.6 of the Corporations Law, applicable
accounting standards and Urgent Issues Group Consensus Views.
For and on behalf of the Board by:-
Dated this 23rd day of September 1996.
PETER T. REILLY
DIRECTOR
JAMES E. WALSH
DIRECTOR
F-269
<PAGE>
AUDITORS' REPORT
TO THE MEMBERS OF PERTH STATIONERY SUPPLIES PTY LTD
- --------------------------------------------------------------------------------
SCOPE
We have audited the accounts of Perth Stationery Supplies Pty Ltd for the year
ended 30 June, 1996 as set out on pages 2 to 11. The Company's Directors are
responsible for the preparation and presentation of the accounts and the
information they contain. We have conducted an independent audit of these
accounts in order to express an opinion on them to the members of the Company.
Our audit has been conducted in accordance with Australian Auditing Standards to
provide reasonable assurance as to whether the accounts are free of material
misstatement. Our procedures included examination, on a test basis, of evidence
supporting the amounts and other disclosures in the accounts, and the evaluation
of accounting policies and significant accounting estimates. These procedures
have been undertaken to form an opinion as to whether, in all material respects,
the accounts are presented fairly in accordance with Australian accounting
standards, other mandatory professional reporting requirements, being Urgent
Issues Group Consensus Views and the Corporations Law so as to present a view of
the Company which is consistent with our understanding of its state of affairs,
results of operations and cashflows.
The audit opinion expressed in this report has been formed on the above basis.
AUDIT OPINION
In our opinion, the accounts of Perth Stationery Supplies Pty Ltd are properly
drawn up:
(a) so as to give a true and fair view of:
(i) the Company's state of affairs as at 30 June, 1996 and of its
result for the period ended on that date; and
(ii) the other matters required by Divisions 4, 4A and 4B of Part 3.6
of the Corporations Law to be dealt with in the accounts;
(b) in accordance with the provisions of the Corporations Law; and
(c) in accordance with applicable accounting standards and other
mandatory professional reporting requirements.
Signed at Melbourne,
This 23rd day of September 1996.
DAY NEILSON
Chartered Accountants
J.J. GAVENS
Partner
F-270
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
June 25, 1996
To the Boards of Directors of
U.S. Office Products Company
Mark's Office Furniture
In our opinion, the accompanying balance sheet and the related statements of
operations, changes in owner's equity and of cash flows present fairly, in all
material respects, the financial position of Mark's Office Furniture (the
"Company"), at March 31, 1996, and the results of their operations and their
cash flows for the twelve month period ended March 31, 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 audit. We conducted our
audit 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
audit provides a reasonable basis for the opinion expressed above.
As discussed in Note 10, management of the Company has entered into a letter of
intent to sell the assets of the Company.
Price Waterhouse LLP
Minneapolis, Minnesota
F-271
<PAGE>
MARK'S OFFICE FURNITURE
BALANCE SHEET
MARCH 31, 1996
----------------------------------------------------------
ASSETS
Current assets:
Cash $ 9,516
Accounts receivable, net of allowance of $43,000 650,247
Rebates receivable 141,899
Inventories 459,116
Prepaid expenses 23,200
---------
Total current assets 1,283,978
Property and equipment, net 185,904
---------
Total assets $1,469,882
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $341,123
Accrued liabilities 58,385
Customer deposits 25,872
Notes payable to related parties 240,000
Distributions payable to owner 252,721
Current portion of long-term debt 34,304
---------
Total current liabilities 952,405
Long-term debt, net of current portion 39,454
---------
Total liabilities 991,859
---------
Owner's equity 478,023
---------
Total liabilities and owner's equity $ 1,469,882
---------
F-272
<PAGE>
MARK'S OFFICE FURNITURE
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------------------
Net sales $10,694,501
Cost of goods sold 7,614,713
---------
3,079,788
Selling, general and administrative expenses 2,223,696
Depreciation and amortization expense 39,995
---------
Operating income 816,097
Interest expense 26,460
---------
Net income $ 789,637
---------
Pro forma net income (see Note 11) $473,782
---------
F-273
<PAGE>
MARK'S OFFICE FURNITURE
STATEMENT OF CHANGES IN OWNER'S EQUITY
FOR THE TWELVE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------------------
Balance at March 31, 1995 $ 344,257
Distributions to owner (884,507)
Contributions from owner 228,636
Net income 789,637
---------
Balance at March 31, 1996 $478,023
---------
F-274
<PAGE>
MARK'S OFFICE FURNITURE
STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $789,637
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 39,995
Changes in assets and liabilities:
Increase in accounts receivable (132,768)
Increase in rebates receivable (48,392)
Increase in inventories 5,064
Increase in prepaid expenses (5,234)
Decrease in accounts payable (104,420)
Decrease in accrued expenses (5,028)
Decrease in customer deposits (17,881)
---------
Cash provided by operating activities 520,973
---------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Acquisition of property, plant and equipment, net (61,207)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party notes 25,000
Payments of notes payable (33,309)
Distributions to owner (714,977)
Contributions from owner 228,636
---------
Cash used for financing activities (494,650)
---------
Decrease in cash (34,884)
Cash at beginning of year 44,400
---------
F-275
<PAGE>
Cash at end of year $9,516
---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest $26,000
---------
F-276
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION
Mark's Office Furniture is a discount retailer of office furniture
with stores in operation in Tampa, Sarasota and Ft. Myers, Florida.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost or market value with cost
determined on the first-in, first-out (FIFO) method and consists
primarily of office furniture held for sale.
REVENUES AND RECEIVABLES
Revenues are recognized upon delivery of office furniture to
customers.
Trade receivables are primarily concentrated with various commercial
customers located in the three principal markets in which the Company
operates. The Company performs on-going credit evaluations of its
customers and believes that trade receivables are well diversified,
thereby reducing potential credit risk. At March 31, 1996, the
allowance for doubtful accounts was $43,000. For the twelve month
period ended March 31, 1996, the Company had two customers which
represented in the aggregate approximately 20% of Company revenues.
Rebates receivable represent group and annual wholesaler rebates
earned by the company as of March 31, 1996.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over
estimated useful lives ranging from three to twelve years using
accelerated cost recovery methods. Expenditures which substantially
increase asset value or extend useful life are capitalized.
Expenditures for maintenance and repairs are charged against income as
incurred. When items of property are sold or otherwise disposed of,
the cost and related accumulated depreciation are eliminated from the
accounts, and any gain or loss is reflected in income.
INCOME TAXES
F-277
<PAGE>
The Company is a sole proprietorship and, accordingly, any income tax
liabilities are the responsibility of the owner. Therefore, these
statements do not include any provision for income taxes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for cash, accounts
receivable, accounts payable, customer deposits and accrued expenses
approximates fair value due to the immediate or short-term maturity of
these financial instruments.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31,
1996
Leasehold improvements $ 80,426
Furniture and equipment 131,710
Vehicles 201,199
---------
413,335
Less: accumulated depreciation and amortization 227,431
---------
$ 185,904
---------
4. PREPAID EXPENSES
F-278
<PAGE>
Prepaid expenses consist of the following:
MARCH 31,
1996
Prepaid rent $ 17,000
Prepaid insurance 6,200
---------
$ 23,200
---------
5. REBATES RECEIVABLE
Rebates receivable at March 31, 1996 is an estimate of the amounts
earned from suppliers as of the balance sheet date. The rebates are
based on the dollar value of invoiced items and various additional
criteria as established by the suppliers. The Company is eligible for
approximately $65,400 of rebates related to purchases made from its
two largest suppliers Hon and Superior Chair.
In addition, the Company maintains a co-operative advertising
agreement with its largest supplier and has recorded rebates
receivable of $76,000 as of March 31, 1996. Amounts earned under this
agreement are based upon co-operative sales for the supplier's
product.
6. NOTES PAYABLE
MARCH 31,
1996
Notes payable to related parties with interest due
semiannually at 7%, principal due in January 1997,
secured by accounts receivable and inventory $165,000
Note payable to related party with interest payable
monthly at 9%, renewable every three months 75,000
---------
$240,000
---------
F-279
<PAGE>
7. LONG-TERM DEBT
MARCH 31,
1996
Notes payable to banks with interest at 8.5% -
10.95%, monthly payments of principal and
interest of approximately $3,400, through 1999,
secured by specific Company vehicles $73,758
Less: current maturities 34,304
---------
$39,454
---------
Future annual maturities of debt at March 31, 1996 are as follows:
MARCH 31,
1996
1997 $274,304
1998 38,238
1999 1,216
---------
$313,758
---------
8. LEASE OBLIGATIONS
The Company leases certain vehicles, furniture and warehouse space
under various lease arrangements which have been accounted as
operating leases. Future minimum lease payments required under leases
in effect at March 31, 1996, assuming renewal options are not
utilized, are approximately $175,000 in 1997.
9. RELATED PARTY TRANSACTIONS
The Company owes $240,000 in notes payable to various family members
of the owner, including one family member who is also an
F-280
<PAGE>
employee. The terms of such notes are described at Note 6. This debt
was paid in full subsequent to March 31, 1996.
As of March 31, 1996, the Company has recorded distributions due to
the owner of approximately $252,000 for payment of taxes related to
operations for the 1995 calendar year. During the twelve month period
ended March 31, 1996, distributions to the owner and contributions
from the owner totaled approximately $885,000 and $229,000,
respectively.
10. SUBSEQUENT EVENTS
On May 24, 1996, management of the Company entered into a letter of
intent to sell the assets of the Company to U.S. Office Products
Company, a Delaware Corporation, at an amount in excess of the assets
net book value.
11. UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma tax information is presented as if
the Company had been a subchapter C corporation subject to federal and
state income taxes throughout the period presented and had accounted
for income taxes in accordance with Statement of Financial Accounting
Standard No. 109.
Net income before pro forma adjustment $789,637
Provision for income taxes 315,855
---------
Pro forma net income $473,782
---------
F-281
