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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, February 3, 1997, April 11, 1997, and May 29, 1997 covering 37,651,948
shares of common stock, par value $.001 per share (the "Common Stock"), which
have been and may continue to 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. The terms of the acquisitions involving the
issuance of securities covered by this Prospectus are determined by direct
negotiations with the owners or controlling persons of the businesses or assets
being acquired by the Company. No underwriting discounts or commissions are
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 July 10, 1997, the Company had 72,080,786 shares of Common Stock
outstanding. The Common Stock is traded on the Nasdaq National Market under the
symbol "OFIS." On July 10, 1997, the last reported sale price for the Common
Stock on the Nasdaq National Market was $31.00 per share.
All expenses of these offerings are 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 JULY 15, 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
26, 1997 filed with the Commission on July 8, 1997;
(b) The Company's Current Report on Form 8-K dated April 26, 1997 filed with
the Commission on May 29, 1997; and
(c) 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>
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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...................... 15
Business................................................................................................... 22
Management................................................................................................. 32
Executive Compensation..................................................................................... 36
Certain Transactions....................................................................................... 39
Principal Stockholders..................................................................................... 40
Description of Capital Stock............................................................................... 42
Plan of Distribution....................................................................................... 44
Restrictions on Resale..................................................................................... 44
Legal Matters.............................................................................................. 44
Experts.................................................................................................... 44
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," "INTEND," "MAY," "WILL" AND "EXPECT" AND SIMILAR EXPRESSIONS AS THEY
RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES. 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 ENDED ON THE LAST SATURDAY OF APRIL.
THE COMPANY
U.S. Office Products is one of the fastest growing suppliers of a broad
range of office and educational products and business services to corporate,
commercial, industrial and educational customers. Since its initial public
offering in February 1995 when the Company first acquired six office supply
companies, the Company has evolved to become a leading consolidator of several
highly fragmented industries that serve a wide variety of the product and
service needs of its customers. The Company operates throughout the United
States, as well as in New Zealand, Australia and Canada and, through a 49% owned
affiliate, in the United Kingdom, selling a full range of more than 34,000
office and educational products and business services to its customers. The
Company currently has over 17,000 employees.
The Company's strategy has been to serve as the sole source for the full
range of office products and business services used by its customers around the
world, which are predominately middle market businesses. The Company believes
that middle market businesses, which it defines as those having between 20 and
500 employees, constitute one of the fastest growing sectors 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 customers a full range of
products and services, including office supplies, office furniture, office
coffee and beverage services, technology solutions (including computer and
telecommunications network services), print management, corporate travel
services and school supplies and school furniture. The Company's goal is to
become 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.
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 initial
public offering through April 26, 1997, the end of its most recent fiscal year,
the Company completed 159 acquisitions. The Company made additional acquisitions
after its year end and 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. In addition, on May 22, 1997, the Company
entered into a definitive agreement to acquire Mail Boxes Etc. See "--Proposed
Acquisition." There can be no assurance, however, that definitive agreements for
additional acquisitions will be executed
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or that additional acquisitions will be completed. See "Risk Factors--Rapid
Expansion and Dependence on Acquisitions for Future Growth."
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 office supply companies in the United
States, one of the largest school supply distributors in the United States, one
of the largest providers of office coffee and beverage services in the United
States, one of the largest corporate travel services companies 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
strategic acquisitions within these markets. See "Business--Products and
Services."
During the last several years, the office products industry has been
consolidating rapidly. This consolidation is continuing, and it has led to
significant changes in the composition of the industry. As a result of
consolidation, the number of independent, mid-sized contract stationer companies
(that is, companies that sell office supplies other than through direct mail or
retail operations and that have annual sales of $15-30 million) has declined
significantly. Large companies serving a broad range of customers (including the
Company and its major competitors) have acquired many of these smaller
businesses. As the office products industry continues to consolidate, the
Company believes that many of the remaining smaller contract stationer companies
will be unable to compete because, in part, of their inability to purchase
products at favorable prices. As a result, the Company expects that these
smaller, independent businesses will be acquired by larger companies or will
close. The Company has been, and expects to continue to be, an active
participant in this ongoing consolidation. See "Risk Factors--Rapid Expansion
and Dependence on Acquisitions for Future Growth."
The Company believes that another industry change is the move by certain
large consolidators, including the Company, to leverage their distribution
systems by offering a wider array of products and services to their customers.
The Company believes that this trend also reflects an effort to respond to the
perception that many business customers want to reduce their costs of procuring
office products and services by reducing the number of suppliers with which they
deal. The Company believes that it has positioned itself to capitalize on this
trend through its acquisitions in the office coffee and beverage services, print
management, corporate travel services and technology solutions markets. The
Company expects that it, as well as its competitors, will continue to expand
their product and service offerings in the future, although no assurances can be
made in this regard. See "Risk Factors--Risks Related to Expansion into New
Product and Service Areas and to Acquisitions."
The Company believes that the office products industry outside of North
America also is highly fragmented and therefore represents a consolidation
opportunity for the Company. The Company believes that many of the same trends
that it sees in North America are occurring internationally, with large
companies diversifying their product and service offerings and seeking to serve
a broader range of customers. Developments in any particular country may vary
because of local market conditions, legal and regulatory rules and limits and
other similar factors that affect national or regional markets. The office
products industry in New Zealand, Australia and the United Kingdom, where the
Company and its 49% owned affiliate currently have international operations, has
already undergone significant consolidation and the Company expects this
consolidation to continue. For a discussion of the Company's operations outside
of North America, see "Business--Products and Services" and
"Business--Operations Outside of North America."
In response to the changes in the office products industry described above,
as well as the continued volatility of the market prices of shares of common
stock of companies in the industry, industry consolidation among major
competitors in the office products industry may occur. In addition, the Company
considers, from time to time, additional strategies to enhance stockholder value
in light of such
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changes. These 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 that any one of these strategies will be undertaken, or that, if
undertaken, any such strategy will be completed successfully.
PROPOSED ACQUISITION. On May 22, 1997, the Company signed a definitive
agreement (the "Agreement") to acquire Mail Boxes Etc. ("MBE"), the world's
largest franchisor of business, communication and postal service centers with
more than 3,300 centers operating worldwide. The Company will exchange one share
of its Common Stock for each share of outstanding MBE common stock in the
transaction, subject to adjustment in certain circumstances. As of May 21, 1997,
MBE had approximately 11.3 million shares of common stock outstanding.
The transaction, which will be accounted for under the pooling-of-interests
method of accounting, is subject to the approval of the shareholders of MBE and
other conditions (including regulatory approvals) set forth in the Agreement. If
all of the conditions to the acquisition contained in the Agreement are
satisfied or waived prior thereto, the Company expects the acquisition to be
completed during the second quarter of the Company's current fiscal year. Among
other conditions, the acquisition of MBE is subject to compliance with the
applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR Act"), including notice filings (which were made on June 20,
1997) and the satisfaction of certain waiting period requirements. On July 3,
1997, the Federal Trade Commission (the "FTC") and the Antitrust Division of the
U.S. Department of Justice (the "Antitrust Division") granted early termination
of the HSR waiting period and, therefore, such waiting period requirements have
been satisfied. Nevertheless, at any time before or after consummation of the
acquisition, the FTC, Antitrust Division or state attorneys' general could take
such action under the antitrust laws as they deem necessary or desirable in the
public interest.
Currently, MBE's franchisees sell over $1.3 billion in products and services
primarily to the small office and home office ("SOHO") market. The products and
services that MBE's franchisees sell include packing and shipping, money
transfers, photocopying, faxing, mail receiving services, office supplies and
other related products and services. The franchisees also service large
corporations requiring a national distribution system to dispense a variety of
products and services to their customers and field-based employees and have an
installed base of approximately 400,000 postal box holders at their facilities
worldwide.
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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, in evaluating an investment in the Common Stock.
RAPID EXPANSION AND 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 and business services. From its initial
public offering in February 1995 through the end of its most recent fiscal year,
the Company completed 159 acquisitions. Since the end of its 1997 fiscal year
through July 1, 1997, the Company has acquired 13 companies and has continued to
actively negotiate to acquire additional businesses that sell office and
educational products and business services, both in the United States and
internationally, consistent with its strategy of pursuing an aggressive
acquisition program. There can be no assurance, however, that definitive
agreements for additional acquisitions will be executed or that additional
acquisitions will be completed. In addition, there can be no assurance 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 its operations and acquisition activity.
The Company depends on both acquisitions and organic growth to increase its
earnings. There can be no assurance that it 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 its quarterly
earnings.
In addition, there can be no assurance that future acquisitions will occur
at the same pace or be available to the Company on favorable terms, if at all.
If the Company is unable to use Common Stock as consideration in acquisitions,
for example, because it believes that the market price of the Common Stock is
too low or because the owners of potential acquisition targets conclude that the
market price of the Common Stock is too volatile, the Company would need to use
cash to make acquisitions and, therefore, would be unable to negotiate
acquisitions that it would account for under the pooling-of-interests method of
accounting (which is available only for all-stock acquisitions). This might
adversely affect the pace of the Company's acquisition program and the impact of
acquisitions on the Company's quarterly results. 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 AND TO
ACQUISITIONS
The Company has increased the range of products and services it offers
through acquisitions of companies offering products and services that are
complementary to the office supply services that the Company has offered since
it began operations. 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. The Company has recently acquired businesses that provide
services which were not previously offered by the Company, such as corporate
travel services, technology solutions and print management. In addition, the
Company has recently expanded its catalog to offer the full range of products
and services sold by the Company. The Company's efforts to sell additional
products and services to existing customers and use the new expanded catalog are
in their early stages, however, and there can be no assurance that such efforts
will be successful. In addition, the Company expects that certain of its
products and services will not be easily cross-sold and may be marketed and sold
independently of other products and services.
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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 purchase prices paid by the Company.
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 its 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. 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 an acquired company's
financial or operating results were misrepresented, the acquisition could have a
material adverse effect on the results of operations and financial condition of
the Company.
INTERNATIONAL EXPANSION
As of June 18, 1997, the Company conducted international operations in New
Zealand, Australia and Canada and, through its 49% interest in Dudley Stationery
Limited ("Dudley"), in the United Kingdom. The Company's international
operations have grown substantially since the Company's inception. International
revenues increased from $197.3 million, or 11.7% of consolidated revenues, in
fiscal 1996, to $829.9 million, or 29.3% of consolidated revenues in fiscal
1997. The Company expects to continue to focus significant attention and
resources on international expansion in the future and expects foreign sales to
continue to represent a significant portion 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
The Company was founded in October 1994 and conducted no operations prior to
the acquisition of its founding companies in February 1995. From its initial
public offering through the end of its most recent fiscal year, the Company
acquired 159 companies. Since the end of its 1997 fiscal year, the Company has
continued to make acquisitions. In most cases, the managers of the acquired
companies have continued to operate their companies after being acquired by the
Company. There can be no assurance that the Company will be able to integrate
all of 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 can continue to oversee the Company and effectively
implement its operating or growth strategies in each of the markets that it
serves. There also can be no assurance that the rapid pace of acquisitions will
not adversely affect the Company's continuing efforts to integrate acquisitions
and manage those acquisitions profitably.
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. In December 1996, the Company acquired The
Systems House ("TSH"), its primary software and management information systems
provider. Nonetheless, the Company may experience delays, complications or
expenses in implementing, integrating and operating its various 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 it 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
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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 many of the
markets in which it operates, the Company 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 its large competitors operate in
many of its 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
difficulty acquiring new customers. As a result of competitive pressures on the
pricing of products, the Company's revenues 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
and the continued volatility in the market prices of shares of common stock of
companies in the industry, the Company considers, from time to time, additional
strategies to enhance stockholder value in light of such changes. These 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 that any one
of these strategies will be undertaken, or that, if undertaken, any such
strategy will be completed successfully.
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's management and representatives of
such companies. The consideration paid 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.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
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 been expanding
through acquisitions. For example, the revenues and
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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
business 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, general economic conditions and the retroactive restatement in
accordance with generally accepted accounting principles of the Company's
consolidated financial statements for acquisitions accounted for under the
pooling-of-interests method. 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 its quarterly operating
results. 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. Fluctuations in quarterly operating results may have a
material adverse effect on the market price of the Common Stock.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock is subject to significant fluctuations.
These fluctuations can be 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 July 8, 1997, the Common Stock has traded in the range of
$20.00 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 expects that it will continue to finance acquisitions in the
United States by using cash as well as shares of the Common Stock. In addition,
the Company expects that future acquisitions outside of the United States may be
entirely or substantially for cash consideration. In certain circumstances, the
Company may be unable to use stock as consideration for acquisitions. See
"--Rapid Expansion and Dependence on Acquisitions for Future Growth." If it does
not have sufficient cash resources to pay the cash consideration for
acquisitions, the Company may be unable to continue the current pace of its
aggressive acquisition program, which could have a material adverse impact on it
and the market price of the Common Stock.
Assuming that the current pace of its acquisitions continues, the Company
may need debt or equity financing in order to continue its acquisition program.
There can be no assurance that it will be able to obtain such financing if and
when it is needed or that any such financing will be available on terms it deems
acceptable. The Company has an agreement under which a syndicate of financial
institutions led by Bankers Trust Company (the "Bank"), as agent, is providing
the Company with a $500 million credit facility (the "Credit Facility"). The
amount available to be borrowed under the Credit Facility for acquisitions will
vary from time to time depending upon the level of the Company's consolidated
earnings before interest, taxes, depreciation and amortization on a pro forma
basis reflecting completed acquisitions, and its total indebtedness and related
interest expense. As of July 1, 1997, the Company had $217.8 million outstanding
under the Credit Facility at an annual interest rate of approximately 7.6% and
had $186.0 million and $96.2 million available under the Credit Facility for
acquisition and working capital purposes, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
10
<PAGE>
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, its other
executive officers and the senior management of certain of its subsidiaries.
Furthermore, the Company's operations will likely depend on the senior
management of certain of the companies that may be acquired in the future. If
any of these people becomes unable to continue in his or her present role, or if
the Company is unable to attract and retain other skilled employees, its
business could be adversely affected. The Company currently has key man life
insurance covering Mr. Ledecky in the amount of $20 million, but it 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 of its
subsidiaries.
CONTROL BY MANAGEMENT AND STOCKHOLDERS
As of July 11, 1997, officers and directors of the Company and its
subsidiaries beneficially owned approximately 26.7% of the outstanding shares of
the Common Stock. These stockholders acting together may be able to elect a
sufficient number of directors to control the Company's 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 THE COMMON STOCK
The Company has an aggressive acquisition program under which it has issued
approximately 46 million of its approximately 72 million outstanding shares as
of July 11, 1997. As of July 11, 1997 approximately 2.7 million of the shares
issued in acquisitions were subject to contractual restrictions on the transfer
thereof. The contractual restrictions expire at various times, generally up to
two years from the date of issuance of the shares. In addition, as of July 11,
1997, approximately 10.1 million of the 47 million shares issued in acquisitions
were subject to restrictions on transfer because they were issued in
acquisitions 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, in most cases, all of the stockholders of the
companies acquired by the Company, must be free to sell or otherwise transfer
shares of the Common Stock received in the acquisition, subject to their
compliance with the 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. The approximately
10.1 million shares will become freely transferable (subject to certain volume
and other restrictions of Rule 145(d) under the Securities Act) upon the
Company's public announcement of results of operations reflecting 30 days of
combined post-acquisition operations of it and the acquired companies. In
addition, if the acquisition of MBE is completed, approximately 5 million shares
(including approximately 2 million shares subject to currently exercisable
options) to be received by affiliates of MBE will become freely transferrable
upon the Company's public announcement of results of operations reflecting 30
days of combined post-acquisition operations. 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 the Common
Stock are issued in acquisitions that are completed in close proximity to each
other, such shares will become freely tradeable at the same time. If a large
number of shares are sold in the market by stockholders as soon as their shares
become freely transferable, the price of shares of the Common Stock could be
adversely affected.
11
<PAGE>
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company has the authority to issue up to
500,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further stockholder
action. The rights of the holders of the Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any shares of
preferred stock that may be issued in the future. The issuance of preferred
stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"OFIS." On July 10, 1997, the last sale price of the Common Stock was $31.00 per
share. The following table sets forth, for the fiscal periods indicated, the
range of high and low sale prices for the Common Stock on the Nasdaq National
Market. On July 10, 1997, there were approximately 724 stockholders of record of
the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED APRIL 30, 1996
First fiscal Quarter....................................................................... $15.88 $10.50
Second fiscal Quarter...................................................................... $18.13 $13.50
Third fiscal Quarter....................................................................... $26.38 $16.25
Fourth fiscal Quarter...................................................................... $40.00 $22.00
FISCAL YEAR ENDED APRIL 26, 1997
First fiscal Quarter....................................................................... $45.50 $24.50
Second fiscal Quarter...................................................................... $38.00 $24.75
Third fiscal Quarter....................................................................... $37.25 $26.25
Fourth fiscal Quarter...................................................................... $34.75 $20.00
FISCAL YEAR 1998
First fiscal quarter through July 10, 1997................................................. $31.88 $22.00
</TABLE>
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 26, 1997 and
April 30, 1996 and 1995 have been derived from the Company's consolidated
financial statements that have been audited by Price Waterhouse LLP and that
appear elsewhere in this Prospectus. The Price Waterhouse LLP report on the
financial statements is based in part on the reports of other independent
accountants, which also appear elsewhere in this Prospectus. The Selected
Financial Data for the fiscal years ended April 30, 1994 and 1993 have been
derived from combined financial statements not included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 26,
1993 1994 1995 1996 1997
---------- ---------- ------------ ------------ ------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Revenues.................................... $ 707,541 $ 811,463 $ 1,041,304 $ 1,686,430 $ 2,835,875
Cost of revenues............................ 504,177 580,185 762,724 1,246,647 2,031,713
---------- ---------- ------------ ------------ ------------
Gross profit............................ 203,364 231,278 278,580 439,783 804,162
Selling, general and administrative
expenses.................................. 185,163 202,521 237,864 372,180 655,101
Non-recurring acquisition costs............. 8,057 16,245
Restructuring costs......................... 3,214 4,395
---------- ---------- ------------ ------------ ------------
Operating income........................ 18,201 28,757 40,716 56,332 128,421
Interest expense............................ 6,015 6,067 8,319 20,123 45,901
Interest income............................. (657) (812) (1,135) (4,425) (7,632)
Other income................................ (1,075) (653) (1,389) (1,730) (3,689)
---------- ---------- ------------ ------------ ------------
Income before provision for income taxes and
extraordinary items....................... 13,918 24,155 34,921 42,364 93,841
Provision for income taxes.................. 2,362 2,514 3,754 7,487 35,103
---------- ---------- ------------ ------------ ------------
Income before extraordinary items........... 11,556 21,641 31,167 34,877 58,738
Extraordinary items--losses on early
terminations of credit facilities, net of
income taxes.............................. 701 1,450
---------- ---------- ------------ ------------ ------------
Net income.................................. $ 11,556 $ 21,641 $ 31,167 $ 34,176 $ 57,288
---------- ---------- ------------ ------------ ------------
---------- ---------- ------------ ------------ ------------
Weighted average common shares
outstanding............................... 45,583 61,174
Income per share before extraordinary
items..................................... $ 0.77 $ 0.96
Extraordinary items......................... 0.02 0.02
------------ ------------
Net income per share........................ $ 0.75 $ 0.94
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 26,
1993 1994 1995 1996 1997
--------- ---------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(1)
Working capital..................................... $ 22,662 $ 63,366 $ 87,778 $ 291,973 $ 323,747
Total assets........................................ 75,493 249,251 364,722 990,850 1,810,352
Long-term debt less current portion................. 10,073 36,289 42,850 227,736 389,150
Stockholders' equity................................ 27,986 77,735 128,512 394,746 921,148
</TABLE>
13
<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 the 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 is included
from the dates of their respective acquisitions.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section contains forward-looking statements which
involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate," "intend," "may," "will" and "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company undertakes no obligation
to revise these forward-looking statements to reflect any future events or
circumstances. 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 following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto appearing elsewhere
in this Prospectus.
The Company's financial condition and results of operations have changed
dramatically from its inception in October 1994 to April 26, 1997 as a result of
its acquisition program. See "Business--Business Strategies--Growth Through
Acquisitions." During fiscal 1997, the Company completed 117 business
combinations, 77 of which were accounted for under the purchase method (the
"Fiscal 1997 Purchased Companies") and 40 of which were accounted for under the
pooling-of-interests method. During fiscal 1996, the Company completed 48
business combinations, 34 of which were accounted for under the purchase method
(the "Fiscal 1996 Purchased Companies") and 14 of which were accounted for under
the pooling-of-interests method. The Company's consolidated financial statements
give retroactive effect to the business combinations accounted for under the
pooling-of-interests method and include the results of companies acquired in
business combinations accounted for under the purchase method from their
respective acquisition dates.
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the three fiscal years ended April 26, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
<S> <C> <C> <C>
APRIL 26, APRIL 30, APRIL 30,
1997 1996 1995
------------- ------------- -------------
Revenues............................................................ 100.0% 100.0% 100.0%
Cost of revenues.................................................... 71.6 73.9 73.3
------------- ------------- -------------
Gross profit...................................................... 28.4 26.1 26.7
Selling, general and administrative expenses........................ 23.1 22.1 22.8
Non-recurring acquisition costs..................................... .6 .5
Restructuring charges............................................... .2 .2
------------- ------------- -------------
Operating income.................................................. 4.5 3.3 3.9
Interest expense, net............................................... 1.3 .9 .7
Other (income)...................................................... (.1) (.1) (.2)
------------- ------------- -------------
Income before provision for income taxes and extraordinary items.... 3.3 2.5 3.4
Provision for income taxes.......................................... 1.2 .4 .4
------------- ------------- -------------
Income before extraordinary items................................... 2.1 2.1 3.0
Extraordinary items--losses on early terminations of credit
facilities, net of income taxes................................... .1 .1
------------- ------------- -------------
Net income.......................................................... 2.0% 2.0% 3.0%
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
15
<PAGE>
YEAR ENDED APRIL 26, 1997 COMPARED TO THE YEAR ENDED APRIL 30, 1996
Consolidated revenues increased 68.2%, from $1,686.4 million in fiscal 1996,
to $2,835.9 million in fiscal 1997. This increase was primarily due to the
inclusion in fiscal 1997 revenues of revenues from the Fiscal 1997 Purchased
Companies from their respective dates of acquisition and revenues from the
Fiscal 1996 Purchased Companies for the entire year. Revenues in fiscal 1996
include revenues from the Fiscal 1996 Purchased Companies from their respective
dates of acquisition. The revenues were generated primarily in the office
products and print management industry segments, which represented 72.0% and
13.0%, respectively, of consolidated revenues for fiscal 1997, and 62.4% and
18.8%, respectively, of consolidated revenues for fiscal 1996. The change in the
mix of revenues by industry segment is the direct result of the mix of the
acquisitions in the different industry segments completed in fiscal 1997 and
1996.
International revenues increased from $197.3 million, or 11.7% of
consolidated revenues, in fiscal 1996, to $829.9 million, or 29.3% of
consolidated revenues in fiscal 1997. International revenues consisted primarily
of revenues from New Zealand and Australia, with the balance from Canada. The
increase in international revenues was primarily due to the inclusion, in the
revenues for fiscal 1997, of revenues from 16 companies that were acquired in
business combinations accounted for under the purchase method during fiscal
1997. Fiscal 1996 international revenues include the results of two companies
for the entire year and the results of three companies acquired in fiscal 1996
in business combinations accounted for under the purchase method.
Gross profit increased 82.9%, from $439.8 million, or 26.1% of revenues, in
fiscal 1996, to $804.2 million, or 28.4% of revenues, in fiscal 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, primarily as a result of
products sold in New Zealand and Australia and as a result of improved
purchasing and rebate programs negotiated with vendors.
Selling, general and administrative expenses increased 76.0%, from $372.2
million, or 22.1% of revenues, in fiscal 1996, to $655.1 million, or 23.1% of
revenues, in fiscal 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
products sold in New Zealand and Australia.
The Company incurred one-time, non-recurring acquisition costs of $16.2
million and $8.1 million during fiscal 1997 and 1996, respectively, in
conjunction with business combinations accounted for under the
pooling-of-interests method. These non-recurring acquisition costs included
accounting and legal fees, investment banking fees, recognition of transaction
related obligations and various other acquisition related costs. Generally
accepted accounting principles ("GAAP") require the Company to expense all
acquisition costs (both those paid by the Company and those paid by the sellers
of the acquired companies) related to business combinations accounted for under
the pooling-of-interests method. The increase in such non-recurring acquisition
costs reflects the increase in the number of business combinations accounted for
under the pooling-of-interests method, from 14 during fiscal 1996 to 40 during
fiscal 1997. The Company expects to incur similar costs in the future, as the
Company anticipates completing additional acquisitions accounted for under the
pooling-of-interests method. See "Business--Business Strategies--Growth Through
Acquisitions" and "Risk Factors--Rapid Expansion and Dependence on Acquisitions
for Future Growth."
The Company also incurred restructuring costs of approximately $4.4 million
and $3.2 million during fiscal 1997 and 1996, respectively. These costs
represent the external costs and liabilities to close redundant Company
facilities, severance costs related to the Company's employees and other costs
associated with the Company's restructuring plans. The Company expects to incur
similar costs in the future as the Company continues to review its operations.
See "Risk Factors--Integration of Acquisitions and Limited Combined Operating
History." On a regional level, the Company is implementing regional
consolidation and integration plans for its office supply, office coffee and
beverage services and office furniture divisions through which the Company has
established and expects to continue to establish district fulfillment centers
("DFCs"). The DFCs are intended to enable certain operational activities, such
as inventory management,
16
<PAGE>
purchasing, accounting and human resources, to be shared among hubs and spokes
located within the same geographic area. This regional approach is intended to
permit the elimination of duplicative facilities and costs and promote
integration of the operations within each region. See "Business -- Business
Strategies -- Achieving Operating Efficiencies."
Interest expense, net of interest income, increased 143.8%, from $15.7
million in fiscal 1996, to $38.3 million in fiscal 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 5 1/2% Convertible Subordinated Notes (the
"Notes") during the fourth quarter of fiscal 1996 and the first quarter of
fiscal 1997 and an increase in the outstanding balance under the Company's
Credit Facility. The proceeds from the issuance of the Notes and the additional
borrowings under the Credit Facility were used primarily to fund the cash
portion of the consideration in certain business combinations accounted for
under the purchase method and to refinance indebtedness assumed in business
combinations.
Other income increased 113%, from $1.7 million in fiscal 1996, to $3.7
million in fiscal 1997. Fiscal 1997 other income consists primarily of foreign
currency gains and equity in the net income of the Company's 49% investment in
Dudley, the largest independent office products dealer in the United Kingdom.
The Company anticipates that foreign currency transaction gains and losses will
be immaterial in the future and that the income from its equity investment will
increase as the fiscal 1997 amount represented earnings from November 14, 1996,
the date of the Company's investment, through April 26, 1997.
Provision for income taxes increased from $7.5 million in fiscal 1996 to
$35.1 million in fiscal 1997, reflecting effective income tax rates of 17.7% and
37.4%, respectively. The low effective income tax rate in fiscal 1996, compared
to the federal statutory rate of 35.0%, was primarily due to the fact that
several of the companies included in the results for such year, 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. In fiscal 1997, this effect was offset by the increase in
nondeductible expenses, including amortization of goodwill and non-recurring
acquisition costs. The Company also reversed a deferred tax asset valuation
allowance of approximately $5.3 million, during fiscal 1997, as it was
considered more likely than not that the related deferred tax benefits would be
realized.
During fiscal 1997, the Company incurred extraordinary items totaling $1.5
million, which represent 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 and the early termination
of credit facilities at two companies acquired in transactions accounted for
under the pooling-of-interests method during fiscal 1997.
Net income per share increased from $.75 in fiscal 1996 to $.94 in fiscal
1997 as a result of the $23.1 million increase in net income, partially offset
by the increase in the weighted average number of common shares outstanding. The
Company anticipates that, as a result of shares of Common Stock issued during
fiscal 1997 related to business combinations and the public offering of
8,682,331 shares of Common Stock in February and March 1997 and the expectation
that the consideration for future acquisitions will include the issuance of
shares of Common Stock, the weighted average number of common shares outstanding
will continue to increase.
YEAR ENDED APRIL 30, 1996 COMPARED TO THE YEAR ENDED APRIL 30, 1995
Consolidated revenues increased 62.0%, from $1,041.3 million in fiscal 1995,
to $1,686.4 million in fiscal 1996. This increase was primarily due to the
inclusion in the revenues for fiscal 1996 of revenues from the Fiscal 1996
Purchased Companies from their respective dates of acquisition and revenues from
six companies that were acquired in business combinations accounted for under
the purchase method during fiscal 1995 (the "Fiscal 1995 Purchased Companies")
for the entire year. Revenues in fiscal 1995 include revenues from the Fiscal
1995 Purchased Companies from their respective dates of acquisition. The
revenues were generated primarily in the office products and print management
industry segments, which
17
<PAGE>
represented 72.0% and 18.8%, respectively, of consolidated revenues for fiscal
1996, and 62.8% and 13.4%, respectively, of consolidated revenues for fiscal
1995. The change in the mix of revenues by industry segment is the direct result
of the mix of the acquisitions in the different industry segments completed in
fiscal 1996 and 1995.
International revenues increased from $35.7 million, or 3.4% of consolidated
revenues, in fiscal 1995, to $197.3 million, or 11.7% of consolidated revenues,
in fiscal 1996. This increase was primarily due to the inclusion in the revenues
for fiscal 1996 of revenues from two companies for the entire year and three
companies that were acquired in business combinations accounted for under the
purchase method during fiscal 1996.
Gross profit increased 57.9%, from $278.6 million, or 26.7% of revenues, in
fiscal 1995, to $439.8 million, or 26.1% of revenues, in fiscal 1996. The
decrease in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix, primarily resulting from acquisitions, to revenues in
traditionally lower gross margin products and services such as print management
and business machines.
Selling, general and administrative expenses increased 56.5%, from $237.9
million, or 22.8% of revenues, in fiscal 1995, to $372.2 million, or 22.1% of
revenues, in fiscal 1996. The decrease in selling, general and administrative
expenses as a percentage of revenues was due primarily to a shift in revenue
mix, primarily resulting from acquisitions, to revenues in products and services
traditionally lower in selling, general and administrative expenses such as
print management and business machines.
The Company incurred one-time, non-recurring acquisition costs of
approximately $8.1 million in fiscal 1996, in conjunction with 14 business
combinations accounted for under the pooling-of-interests method. The
non-recurring acquisition costs in fiscal 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
fiscal 1996, the Company also recorded restructuring charges of $3.2 million
related to the consolidation of two facilities at one subsidiary and the
discontinuation of the printing division at another subsidiary.
Interest expense, net of interest income, increased 118.5% from $7.2
million, in fiscal 1995, to $15.7 million in fiscal 1996. This increase was due
primarily to the increase in the Company's borrowings through the issuance of
$143.75 million of Notes during the fourth quarter of fiscal 1996 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.
Provision for income taxes increased from $3.8 million in fiscal 1995 to
$7.5 million in fiscal 1996 reflecting effective income tax rates of 10.7% and
17.7%, respectively. The low effective income tax rates in fiscal 1995 and 1996,
compared to the federal statutory rate of 35.0%, are primarily due to the fact
that several companies included in the results for fiscal 1995 and 1996, 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.
During fiscal 1996, the Company incurred an extraordinary item of $701,000,
which represented the aggregate expenses, net of the expected tax benefit,
associated with the early termination of a credit facility at a company acquired
in a business combination accounted for under the pooling-of-interests method.
LIQUIDITY AND CAPITAL RESOURCES
At April 26, 1997, the Company had cash of $44.0 million and working capital
of $323.7 million. The Company's capitalization, defined as the sum of long-term
debt and stockholders' equity, at April 26, 1997 was approximately $1.3 billion.
During fiscal 1997, net cash provided by operating activities was $46.1
million. Net cash provided by operating activities was impacted by the Company's
aggressive cash payment policies related to bringing current the accounts
payable balances at all acquired companies and earning all available cash
discounts offered by vendors for paying balances on reduced payment terms. Net
cash used in investing activities was
18
<PAGE>
$463.5 million, including $354.8 million for acquisitions, $51.9 million for
additions to property and equipment and $41.3 million to make an equity
investment in Dudley. Net cash provided by financing activities was $278.4
million. The Company received net proceeds from the sale of shares of Common
Stock of $320.5 million and approximately $222.7 million from the issuance of
the Notes. These net proceeds were used primarily to fund acquisitions and repay
higher interest rate debt assumed in acquisitions.
During fiscal 1996, net cash provided by operating activities was $43.0
million. Net cash used in investing activities was $168.9 million, including
$130.2 million used for acquisitions and $26.8 million used for additions to
property and equipment. Net cash provided by financing activities was $284.2
million. The Company received net proceeds from the sale of shares of Common
Stock of $181.5 million and net proceeds from the issuance of the Notes of
approximately $138.4 million. These net proceeds were used primarily to fund
acquisitions, including the repayment of higher interest rate debt assumed in
business combinations.
During fiscal 1995, net cash provided by operating activities was $23.7
million. Net cash used in investing activities was $30.8 million, including
$18.1 million used for acquisitions and $13.1 million used for additions to
property and equipment. Net cash provided by financing activities was $14.4
million, representing net proceeds from the initial public offering, partially
offset by the payment of $11.3 million to the stockholders of four of the
companies acquired simultaneously with the completion of the Company's initial
public offering and the payment of dividends to certain of the companies
acquired in business combinations accounted for under the pooling-of-interests
method of $16.3 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. The net
proceeds to the Company, after deducting underwriting discounts and commissions
and offering expenses, were approximately $275.7 million and were used to repay
a portion of the then outstanding balance under the Company's Credit Facility.
In October 1996, the Company refinanced $180 million in high interest rate
debt outstanding in New Zealand and Australia with $180 million that was
available to the Company under its 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 net 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 Company's credit
facility.
In August 1996, the Company entered into an agreement under which a
syndicate of financial institutions, led by 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 two sublimits: $100 million for working
capital loans and $400 million for acquisition loans. The Credit Facility is
secured by a majority of the assets of the Company and its subsidiaries and
contains customary covenants, including financial covenants with respect to the
Company's consolidated leverage and interest coverage ratios, capital
expenditures, payment of dividends and purchases and sales of assets, and
customary default provisions, including provisions related to non-payment of
principal and interest, default under other debt agreements and bankruptcy. At
July 1, 1997, the Company had approximately $217.8 million outstanding under the
Credit Facility at an annual interest rate of approximately 7.6% and had $186.0
million and $96.2 million available under the Credit Facility for acquisition
and working capital purposes, respectively.
In May and June 1996, the Company completed the sales, in an offshore
offering and in a concurrent private placement in the United States, of 5 1/2%
Convertible Subordinated Notes due 2003 (the "May Notes") in the principal
amount of $230 million, including the manager's over-allotment option of $30
million principal amount of May Notes (the "May Notes Offering"). The net
proceeds from the May Notes
19
<PAGE>
Offering, after deducting the managers' discounts and commissions and offering
expenses, were approximately $222.7 million and were used for working capital
and acquisition purposes, including the repayment of higher interest rate debt
assumed in business combinations.
Subsequent to April 26, 1997 and through July 1, 1997, the Company completed
13 business combinations for an aggregate purchase price of $165.4 million,
consisting of approximately $101.4 million of cash and 2,405,039 shares of the
Common Stock with an aggregate market value on the dates of acquisition of
approximately $64.0 million. On May 22, 1997, the Company signed a definitive
agreement to acquire MBE. See "Prospectus Summary--Proposed Acquisition."
The Company plans to continue to consolidate and modernize its distribution
facilities and systems, including through creation of DFCs and the consolidation
of existing facilities into DFCs. See "Business-- Business Strategies--Achieving
Operating Efficiencies." The Company expects to incur capital expenditures of
approximately $60 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 remainder of the 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 Common Stock. There can be no
assurances that additional sources of financing will not be required during the
next twelve months or thereafter to fund the Company's acquisition program.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
seasonality of the core office products business, however, is expected to be
impacted by the seasonality of the Company's other operations, which have
expanded through acquisitions. For example, the revenues and profitability of
the Company's school supplies and school furniture business have been higher
during the Company's first and second quarters and significantly lower in its
third and fourth quarters, and the revenues and profitability of the Company's
operations in New Zealand and Australia have generally been higher in the
Company's third quarter. As the Company's mix of businesses evolves through
future acquisitions, these seasonal fluctuations may continue to change.
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.
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, general economic conditions and the retroactive restatement in
accordance with generally accepted accounting principles of the Company's
consolidated financial statements for acquisitions accounted for under the
pooling-of-interests method. 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 its quarterly operating
results. 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 tables set forth certain unaudited consolidated quarterly
financial data for the fiscal years ended April 26, 1997 and April 30, 1996 (in
thousands, except for per share amounts). 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.
20
<PAGE>
FISCAL 1997
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $ 552,489 $ 736,686 $ 756,707 $ 789,993 $ 2,835,875
Gross profit...................................... 153,745 209,509 214,253 226,655 804,162
Operating income.................................. 27,877 39,063 31,253 30,228 128,421
Net income........................................ 16,330 18,092 10,770 12,096 57,288
Net income per share.............................. .29 .31 .18 .18 .94
</TABLE>
FISCAL 1996
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $ 330,612 $ 406,538 $ 458,222 $ 491,058 $ 1,686,430
Gross profit...................................... 84,339 104,745 118,107 132,592 439,783
Operating income.................................. 6,330 15,979 22,272 11,751 56,332
Net income........................................ 4,847 10,179 13,516 5,634 34,176
Net income per share.............................. .12 .23 .30 .11 .75
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1997, 1996 or 1995.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued a new
opinion which establishes standards for computing and presenting earnings per
share ("EPS"). This opinion is intended to simplify the EPS computation and
enhance the comparability of EPS information internationally. The new standard
requires the presentation of both basic and diluted EPS on the face of the
income statement. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. This statement is required to be
adopted by the Company during the third quarter of fiscal 1998. The Company
anticipates that the adoption of this opinion will not have a material effect on
EPS.
21
<PAGE>
BUSINESS
The following "Business" section contains forward-looking statements which
involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate," "intend," "may," "will" and "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company undertakes no obligation
to revise these forward-looking statements to reflect any future events or
circumstances. 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."
BUSINESS STRATEGIES
The Company's objective is to become the premier, sole source provider of
office and educational products and business services to businesses and
educational customers around the world. The Company is pursuing several
strategies to accomplish this objective, including:
GROWTH THROUGH ACQUISITIONS
Since its initial public offering in February 1995, the Company has
significantly grown its operations in the office products segment of its
business (I.E., office supplies, office furniture and office coffee and beverage
services) through acquisitions. In addition, to achieve its goal of becoming a
sole source provider of a broad array of products and services to its customers,
the Company has increasingly focused on acquiring leading companies in
complementary, office-related markets, such as print management, technology
solutions and corporate travel services. The Company has generally used a "hub
and spoke" acquisition strategy, which involves the acquisition of (a) larger,
established, high quality local companies, or hubs, 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 acquired companies'
operating expenses. In geographic regions where the Company currently does not
have operations and where desirable acquisitions at reasonable prices do not
appear to exist, the Company has begun to test start-up operations--or
"greenfield" businesses--on a limited basis.
The Company believes that the product and service markets in which it
operates remain highly fragmented. With respect to the contract stationer
market, the Company believes that there are relatively few remaining independent
contract stationers that could serve as hubs, but that there are several
thousand smaller contract stationers that are attractive, potential spokes.
Outside of the contract stationer market, the Company believes that there are a
significant number of potential hub and spoke acquisitions that could be
pursued, as the Company seeks to consolidate other product and service markets.
See "Risk Factors--Substantial Competition and Industry Consolidation." The
Company has a general policy of retaining the name of an acquired company and
empowering local management, which helps to make it the acquiror of choice for
many companies. Moreover, this strategy enables the Company to draw on the
contacts and expertise of local management by encouraging them to identify
acquisition candidates and to participate in the process of integrating newly
acquired companies into U.S. Office Products.
Similar to the Company's acquisition strategy in North America, the
Company's strategy is to acquire and integrate acquisitions in attractive
international markets. In 1996, the Company acquired Blue Star Group Limited
("Blue Star"), a leading office products company in New Zealand. Through Blue
Star, the Company has acquired numerous office products companies in New Zealand
and Australia. In 1996, the Company also acquired a 49% interest in Dudley, the
largest independent office products dealer in the United Kingdom. The Company
currently operates from 279 facilities in New Zealand, 105 facilities in
Australia and 35 facilities in Canada; Dudley operates in the United Kingdom
from 8 facilities.
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<PAGE>
INCREASING SALES BY EXPANDING THE COMPANY'S PRODUCT AND SERVICE OFFERINGS
The Company believes that it can increase sales to its customers by
broadening the complement of products and services that it offers. Through
acquisitions in complementary, office-related markets, the Company has expanded,
and expects to continue to expand, the range of products and services that it
offers, thereby creating opportunities, where possible, for its sales force to
sell multiple product and service lines to its customer base ("cross-selling").
In addition, the Company believes that its new expanded catalog, which offers a
wider array of products and services, will increase the cross-selling
opportunities for its sales force. See "--Sales and Marketing." The Company's
efforts to cross-sell and use the new expanded catalog are in their early
stages, and there can be no assurance that such efforts will be successful. The
Company expects that certain of its products and services will not be easily
cross-sold and may be operated independently of other product and service
businesses. There can be no assurance whether the Company's efforts to acquire
leading companies in other, complementary product and service markets will be
successful or if any such acquisitions will be successfully integrated into the
Company's operations. See "Risk Factors--Risks Related to Expansion into New
Product and Service Areas and to Acquisitions."
In addition, the Company may seek to expand the range of its products and
services through the formation of strategic alliances with other companies
serving the needs of businesses. In some cases, these alliances may be coupled
with an equity investment by the Company in the strategic partner. The Company
believes that its customer base of middle market businesses and its distribution
systems make it an attractive partner to market other companies' products or
services to businesses in North America and abroad. As an example, 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 office coffee and beverage services market for five years subject to,
among other things, satisfaction of certain minimum purchase requirements. The
Company has developed promotional materials for its catalog, and the Company's
sales force has received training from Starbucks in connection with this
strategic alliance. The Company believes that this strategic alliance will
strengthen its position in the office coffee and beverage services market and
will enhance its ability to cross-sell products and services to its clients.
ACHIEVING OPERATING EFFICIENCIES
The Company seeks to achieve operating efficiencies by (i) volume purchasing
arrangements for office products and for goods and services used by the
Company's operating subsidiaries; (ii) combining certain general and
administrative functions at the corporate level and eliminating redundant
facilities; and (iii) implementing improved technology and operating systems.
- Volume Purchasing. Office product manufacturers and wholesalers
historically have offered more favorable prices and rebates to high volume
purchasers. As it has grown, the Company has negotiated certain discounts
and rebates with its suppliers and vendors. In addition, the Company has
negotiated improved arrangements with wholesalers and manufacturers which
it believes will enable it to reduce its level of inventories, thereby
allowing more efficient operations. The Company also is seeking to
leverage its size and scale to negotiate attractive volume purchasing
programs for goods and services used in the Company's operating
subsidiaries, such as delivery vehicles, long distance voice and data
services, overnight delivery services and insurance.
- Eliminating Redundant Facilities and Services. The Company believes that
it has achieved, and will continue to achieve, operating efficiencies by
eliminating redundant facilities and reducing overhead. On a local level,
the Company's hub and spoke strategy has enabled the Company to eliminate
or reduce the number of facilities and the overhead of those operating
companies, or spokes, that have been folded into hubs. On a regional
level, the Company is implementing regional consolidation and integration
plans for its office products, office coffee and beverage services and
office furniture divisions through which the Company has established and
expects to continue to
23
<PAGE>
establish DFCs. The DFCs are intended to enable certain operational
activities, such as inventory management, purchasing, accounting and human
resources, to be shared among hubs and spokes located within a specific
geographic area. This regional approach is intended to permit the
elimination of duplicative facilities and costs and promote the
integration of the operations within each region. The Company's DFC
program is in its early stages, and the Company cannot yet accurately
assess whether this program will produce the anticipated levels of cost
savings and efficiencies. The school supply and school furniture division
has implemented substantial consolidation plans, and the Company's
international operations in New Zealand and Australia have also moved
ahead with significant consolidation efforts.
- Implementing System and Technology Improvements. The Company has developed
operating and technology systems designed to improve and enhance its
operations, including computerized inventory management and order
processing systems, computerized quotation and job costing systems and
computerized logistics and distribution systems. The Company is
incorporating industry-standard technology platforms, including frame
relay networks, bar coding and radio frequency technologies at its
existing and planned 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 its 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 increasing inventory
turns and providing measurement and analysis tools that facilitate
efficient operation. See "Risk Factors--Dependence on Implementation and
Operation of Systems." 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 stationer 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 management information
systems to the industry is enabling it to facilitate the adoption of
systems throughout the Company. The Company's system development plans
center on the installation and enhancement of TSH software and systems.
ORGANIZATIONAL STRUCTURE
The Company's organizational structure reflects both a centralized and
decentralized management philosophy, allowing it to achieve the economies of a
large organization while maintaining a flexible and responsive level of service
to its customers. The Company manages centrally (at corporate headquarters,
through hubs, or at DFCs) where it can leverage its size and scale, such as in
purchasing, accounting, human resources and management information systems. See
"--Business Strategies--Achieving Operating Efficiencies." The Company manages
locally for all functions that "touch the customer," including sales, marketing,
customer service, credit and collections. The Company believes that this
decentralized management philosophy results in better customer service by
allowing local management the flexibility to implement policies and make
decisions based upon the needs and desires of local customers and in response to
local market conditions. The Company's decentralized sales and customer contact
structure also is designed to retain the historical customers of acquired
businesses. The Company believes that many customers purchase office products
and business services based upon established long-term commercial relationships.
The Company seeks to preserve these relationships by retaining the management,
sales organizations and, in most circumstances, the brand name identity of
acquired companies. The Company has also initiated programs which are intended
to assist local managers to work collaboratively within geographic regions and
to share successful operating strategies.
The Company is organized into eight divisions through which it provides its
products and services and seeks complementary acquisitions. To continue to
implement successfully its strategy of acquiring and
24
<PAGE>
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 office supplies, office coffee and beverage
service and office furniture divisions. This regional approach is designed to
promote the efficient integration of operations within each geographic region
and to encourage a focus on both cross-selling and consolidation opportunities
at a regional level.
PRODUCTS AND SERVICES
The Company's operations include two reportable industry segments: (i)
office products, which includes the sale and distribution of office and related
supplies and equipment, office furniture, including catalog, contract and
remanufactured furniture, and office coffee and beverage products and services,
and (ii) print management, which includes the manufacturing, distribution,
management and printing of business forms, envelopes and promotional products.
The Company's other operations include technology solutions, corporate travel
services and school supply and school furniture.
The following table sets forth the Company's worldwide sales by its
principal industry segments, expressed as a percentage of total revenues, during
each of the last three fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
APRIL 26, 1997 APRIL 30, 1996 APRIL 30, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Office Products..................................................... 72.0% 62.4% 62.8%
Print Management.................................................... 13.0% 18.8% 13.4%
Other Products and Services......................................... 15.0% 18.8% 23.8%
----- ----- -----
100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
As the Company's business evolves through future acquisitions, the mix of
products and services is likely to change. Accordingly, the foregoing
percentages are not necessarily indicative of the future mix of the Company's
operations.
OFFICE PRODUCTS
OFFICE SUPPLIES. The Company sells office and related supplies and
equipment in the office contract stationer market primarily to the middle market
corporate segment. The Company's offerings include thousands of items such as
desktop accessories, writing instruments, paper products, computer consumables
and business machines. Recently, the Company has begun to offer office coffee
and beverage services through a number of its traditional contract stationer
subsidiaries and has initiated cross-selling efforts for its other products and
service offerings. 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 obtains office products
from many sources, including manufacturers and wholesalers, and maintains
warehouses in which certain frequently ordered items are stocked.
OFFICE FURNITURE. The Company sells catalog, mid-market, contract and
remanufactured furniture and provides other related furniture services to the
office furniture market, both through its contract stationer businesses and
through its subsidiaries that principally serve the office furniture market. The
smaller customer typically purchases commodity furniture items such as
lower-priced chairs and file cabinets from the Company's office products
catalogs. The middle market customer typically purchases mid-market furniture,
which is furniture of higher quality and functionality than commodity furniture
items. The large customer buys high-quality, contract furniture requiring more
related services and tends to make project-oriented purchases. The Company's
strategy in its furniture division is to focus on
25
<PAGE>
products and services that have traditionally higher profit margins, such as
mid-market furniture, refurbished and remanufactured furniture, moving and
storage services, furniture installation services, furniture rentals and asset
management.
OFFICE COFFEE AND BEVERAGE SERVICES. Office coffee and beverage service
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 office coffee and
beverage service business. Office coffee and beverage service 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 September 1996, the Company signed an agreement through which it secured
an exclusive arrangement to distribute Starbucks-Registered Trademark- coffee in
the North American office coffee and beverage services market for five years
subject to, among other things, satisfaction of certain minimum purchase
requirements. The Company has developed promotional materials for its catalog,
and 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 office coffee and beverage services market and
will enhance its ability to cross-sell products and services to its clients.
PRINT MANAGEMENT
The Company's print management business includes operations that print,
distribute to, manufacture and manage its customers' business forms and related
products. This division's vendor network enables it to offer customers a broad
range of specialized products, including custom and stock business forms,
commercial printing, electronic imaging, promotional products and office
supplies. The objectives of the Company's print management business are to
enhance its position as a leading manufacturer and distributor of business forms
and commercial printing, and to serve as the leading single source provider and
manager of office consumables. Consistent with these objectives, the Company
expects to (i) grow its print manufacturing and distribution capabilities
through selective acquisitions and sales force expansion; (ii) offer value-added
services that meet customers' requirements; (iii) promote outsourcing (by
customers to the Company) of the acquisition of office consumables; and (iv)
offer a broader range of products and services to existing customers.
OTHER PRODUCTS AND SERVICES
TECHNOLOGY SOLUTIONS. The Company's technology solutions business includes
operations that generally focus on six key areas of the technology solutions
market. These areas include: (i) consulting services, which include 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
business software to help the Company's customers achieve best practices. The
Company provides these services to its customers both domestically and
internationally.
CORPORATE TRAVEL SERVICES. The Company provides clients with corporate
travel services throughout the United States. The Company's corporate travel
businesses offer traditional travel agency services to its corporate customers,
including airline and hotel reservations, automobile rental services and leisure
travel services as well as services designed specifically for the business
traveler, such as software that allows businesses to identify the lowest
airfares for selected flights, passport and visa services, 24-hour reservations
and offices at certain major airports. For many of its corporate customers, the
Company places its
26
<PAGE>
own employees in its customers' offices to provide a higher level of service and
convenience than that of a traditional travel agency.
SCHOOL SUPPLIES AND SCHOOL FURNITURE. 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., Re-Print
Corporation and Blue Star subsidiaries. Since being acquired by the Company on
May 2, 1996 and through July 1, 1997, School Specialty has acquired 11
companies. These acquisitions included the May 26, 1997 acquisition from Disney
Enterprises, Inc. of Childcraft Education Corp., a school supply and school
furniture company that targets the pre-kindergarten through third grade markets,
the July 1, 1997 acquisition of Sax Arts & Crafts, a specialty arts and crafts
company targeting art educators, and the July 1, 1997 acquisition of Don
Gresswell Limited, a United Kingdom-based school supplies company which
principally offers library supplies to educational institutions.
The Company's school supplies and school furniture businesses focus 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 uses 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 marketplace.
OPERATIONS OUTSIDE OF NORTH AMERICA
The Company currently sells office products and business services and
certain other products and services in New Zealand and Australia through Blue
Star and its subsidiaries. Dudley, the Company's 49% owned affiliate in the
United Kingdom, also sells a broad range of office products and business
services throughout the United Kingdom.
The Company's operations in New Zealand and Australia currently include, in
addition to their office supplies, office furniture, school supplies and school
furniture, print management and technology solutions operations, 286 retail book
and stationery stores. Blue Star has completed 45 acquisitions during the last
three years to become the largest office products company 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.
The Company expects to continue to focus significant attention and resources
on international expansion in the future and expects foreign revenues to
continue to represent a significant proportion of the Company's total revenues.
If the Company had acquired its international operations as well as its other
acquisitions at the beginning of fiscal 1997, the Company's international
operations would have accounted for approximately 31.1% of the Company's fiscal
1997 pro forma revenues.
SALES AND MARKETING
Historically, companies in the office products industry have operated
through one of three broad channels of distribution: retail (including discount
superstores), direct mail or contract stationer. Retail and direct mail
companies have traditionally served the SOHO market and contract stationers have
traditionally served middle market businesses and larger corporations. More
recently, several major
27
<PAGE>
industry participants, including the Company's competitors, have begun to
operate through two or more of these distribution channels and offer their
products and services to more than one of the customer segments.
As a contract stationer, the Company has focused its marketing efforts on
the middle market business segment of the office products industry. Assuming the
completion of its acquisition of MBE, the Company will begin to serve the SOHO
market segment on which MBE focuses. In addition, because MBE franchisees
operate more than 3,300 retail business service centers worldwide, the MBE
acquisition will provide the Company with a substantial retail distribution
presence. The Company believes that a significant opportunity exists in the
middle market and SOHO market. Currently, the Company has a small number of
retail outlets in North America (primarily in California); in addition, it
operates a significant number of retail book and stationery outlets in New
Zealand and Australia. See "--Products and Services" and "--Operations Outside
of North America."
The Company sells primarily through direct contact with customers and
potential customers and does not conduct significant mass market advertising,
although many of the Company's subsidiaries conduct targeted, business
segment-specific marketing in their local areas. The Company believes that its
ability to expand 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 upon 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 (including retail sales
representatives) in New Zealand and Australia.
Sales representatives, who most frequently are compensated almost
exclusively on a commission or other 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 contract requests from 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. To strengthen the quality and duration of customer relationships at
the local level, the Company is launching national performance development
programs designed to improve the skills and knowledge of front-line personnel
and management.
The Company continues to leverage its expertise in operations that are not
typical of traditional contract stationers, such as office coffee and beverage
services 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. In addition, by leveraging the Company's size and scale, the
Company believes that it can reduce redundant marketing functions and
advertising activities, where appropriate, while increasing the quality and
effectiveness of the Company's marketing programs and selling tools, thereby
reducing overall selling costs.
The Company publishes several catalogs of its office products. The full-line
catalog, published annually, features approximately 19,000 items, including
office supplies, office furniture and office coffee and beverage products. The
2,500-item catalog allows operating companies to develop targeted catalogs
customized to each company's competitive marketing and pricing requirements. The
third catalog is published as a series of bi-monthly publications focused on the
introduction of new products and seasonal goods. Substantially all of the items
in the Company's catalogs can be delivered within 24 hours, throughout the
continental United States. Consistent with the Company's decentralized operating
approach, the Company-wide catalogs are customized for each subsidiary so that
the cover bears the name
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<PAGE>
of the subsidiary and the initial pages can provide information specifically
about that subsidiary. In addition, these initial pages present the Company's
ability to provide a wide variety of office products and business services as a
convenient "single source" to the customer.
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 primarily owned by large manufacturers of office products.
In the contract stationer market, as well as the other markets that it
serves or may in the future seek 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 its five largest competitors in the contract stationer market on the basis
of service and price. However, some of these companies have greater financial
resources than the Company.
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 may seek 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
acquiror 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. On June 30, 1997, the United States District Court for the
District of Columbia granted the FTC a preliminary injunction blocking the
proposed merger of Staples, Inc. and Office Depot, Inc., and the Company cannot
predict whether the FTC, in the wake of this decision, would oppose other future
significant transactions involving major companies in the office products
industry. The Company does not expect, however, that the court's ruling will
have an adverse impact on the Company's acquisition program. See "Prospectus
Summary."
EMPLOYEES
As of April 26, 1997, the Company had more than 17,000 full-time employees,
a small number of which are members of labor unions. In general, the Company
considers its relations with its employees to be satisfactory.
PROPERTIES
As of April 26, 1997, the Company operated 875 facilities in various states
and in New Zealand, Australia and Canada, including one facility located in
Washington, D.C. for its corporate headquarters. Of these facilities, 823 are
leased and 52 are owned. The facilities are used for retail, warehouse and
office purposes, or a combination of these functions. The aggregate square
footage for all facilities is approximately 11.4 million square feet, consisting
of approximately 2 million square feet for retail use, approximately 7.1 million
square feet for warehouse use and approximately 2.3 million square feet for
office use.
29
<PAGE>
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.
The following table sets forth the locations of all the Company's facilities
as of April 26,1997:
<TABLE>
<CAPTION>
NUMBER OF
LOCATION FACILITIES
- ------------------------------------------------------------------------------------ -------------
<S> <C>
DOMESTIC
Alabama........................................................................... 14
Arkansas.......................................................................... 2
California........................................................................ 50
Colorado.......................................................................... 13
Connecticut....................................................................... 3
District of Columbia.............................................................. 3
Delaware.......................................................................... 1
Florida........................................................................... 24
Georgia........................................................................... 11
Iowa.............................................................................. 4
Illinois.......................................................................... 24
Indiana........................................................................... 8
Kansas............................................................................ 3
Kentucky.......................................................................... 5
Louisiana......................................................................... 13
Massachusetts..................................................................... 7
Maryland.......................................................................... 12
Michigan.......................................................................... 19
Minnesota......................................................................... 9
Missouri.......................................................................... 12
Mississippi....................................................................... 11
North Carolina.................................................................... 17
Nebraska.......................................................................... 2
New Jersey........................................................................ 7
New Mexico........................................................................ 4
New York.......................................................................... 13
Ohio.............................................................................. 21
Oklahoma.......................................................................... 1
Oregon............................................................................ 7
Pennsylvania...................................................................... 16
South Carolina.................................................................... 6
Tennessee......................................................................... 12
Texas............................................................................. 39
Virginia.......................................................................... 13
Washington........................................................................ 20
Wisconsin......................................................................... 30
---
DOMESTIC TOTAL.................................................................... 456
---
INTERNATIONAL
Australia......................................................................... 105
Canada............................................................................ 35
New Zealand....................................................................... 279
---
INTERNATIONAL TOTAL............................................................... 419
---
TOTAL DOMESTIC AND INTERNATIONAL.................................................... 875
---
---
</TABLE>
30
<PAGE>
In addition to the facilities described above, Dudley, the Company's 49%
owned affiliate, operates eight facilities in the United Kingdom.
LEGAL PROCEEDINGS
On June 13, 1997, U.S. Office Products, Inc., a Pennsylvania corporation,
filed a complaint in the United States District Court for the Eastern District
of Pennsylvania alleging trademark infringement under the Lanham Act and unfair
competition and trademark dilution under Pennsylvania law in connection with the
Company's use of the name "U.S. Office Products." The court entered a 30-day
stay of the proceedings on July 10, 1997 and the matter was referred to a
magistrate for settlement proceedings. The Company believes that the claims are
without merit and intends to defend itself vigorously.
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.
31
<PAGE>
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 Vice Chairman of the Board
Thomas I. Morgan.................. 43 Chief Operating Officer; Director
Donald H. Platt................... 50 Senior Vice President, Chief Financial Officer and Treasurer
Mark D. Director.................. 39 Chief Administrative Officer, General Counsel and Secretary
DIRECTORS
Jack L. Becker, Jr................ 47 Director; President--Dameron-Pierson Company, Limited
("Dameron-Pierson")
David C. Copenhaver............... 34 Director; Vice President--North American Office Products Group;
formerly Senior Vice President--The Smith-Wilson Co. ("Smith-Wilson")
Timothy J. Flynn.................. 43 (See above.)
David C. Gezon.................... 45 Director; President--C.W. Mills Acquisition Corp. ("C.W. Mills")
Milton H. Kuyers.................. 60 Director
Jonathan J. Ledecky............... 39 (See above.)
Allon H. Lefever.................. 50 Director
Edward J. Mathias................. 55 Director
Thomas I. Morgan.................. 43 (See above.)
Clifton B. Phillips............... 38 Director
John A. Quelch.................... 45 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 to September 1994 as President and Chief Executive
Officer of Legacy Dealer Capital Fund, Inc., a wholly owned subsidiary of
Steelcase Inc. ("Steelcase"), the nation's largest manufacturer of office
furniture products. While at Legacy Dealer Capital Fund, Inc., 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.
TIMOTHY J. FLYNN has served as Vice Chairman of the Company since June 9,
1997. From February 1995 through June 8, 1997, Mr. Flynn served as 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
32
<PAGE>
Products Association). Mr. Flynn received his undergraduate degree and a Masters
in Administration from the University of Maryland.
THOMAS I. MORGAN has served as Chief Operating Officer since June 9, 1997
and as a director since February 1997. From February 1997 until June 8, 1997, he
was the President of the Company's North American Office Products Group. 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 had 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 Steelease dealerships in the U.S. and Canada from
January 1994 through April 1995. He 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 has served as Chief Administrative Officer since June 9,
1997, and as General Counsel and Secretary since February 1996 and August 1996,
respectively. From February 1996 until June 8, 1997, Mr. Director also served as
Executive Vice President. 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, and from September 1995
until joining the Company, as Executive Vice President, of Radio Movil Digital
Americas, Inc., a company that owns and operates specialized mobile radio
networks throughout South America. Mr. Director received his undergraduate
degree from Harvard College and his law degree from Harvard Law School.
JACK L. BECKER, JR. has served as a Director of the Company since 1995 and
the President of Dameron-Pierson since 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, Krueger International and All Steel, Inc., 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. COPENHAVER has served as a director of the Company since September
1995, and since June 9, 1997, Vice President--North American Office Products
Group. Mr. Copenhaver served as the Senior Vice President of Smith-Wilson, a
wholly owned subsidiary of the Company, from January 1990 through March 1997,
and President of Copenhaver Holdings, Incorporated from May 1989 through March
1997. Mr. Copenhaver received both an undergraduate degree and an M.B.A. from
the University of Virginia.
DAVID C. GEZON has served as a director of the Company since July 1995, and
he is the President of the C.W. Mills Acquisition Corp., a wholly owned
subsidiary of the Company. 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 an M.B.A. from Western Michigan University.
MILTON H. KUYERS has served as a director of the Company since April 1995.
He is a part owner and executive officer of a number of privately held
companies, including Zero Zone, Inc., a manufacturer of
33
<PAGE>
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; Digicorp 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.
Mr. Kuyers previously served on the board of directors of Medical Advances,
Inc., a manufacturer of parts for medical diagnostic applications until its sale
in March 1997. Prior to its acquisition by the Company, Mr. Kuyers also served
as a director of The H.H. West Company. Mr. Kuyers holds an undergraduate degree
in business administration and an M.B.A. from the University of Michigan.
ALLON H. LEFEVER has served as a director of the Company since February
1995. He has served as Senior 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 is also a director of Red Rose
SuperNet, Goodville Insurance Co., 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 has served as a director of the Company since February
1995. Currently, Mr. Mathias is a Managing Director of The Carlyle Group, a
merchant bank based in Washington, D.C. 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. He 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 serves on the board of directors of
Sirrom Capital Corporation, a publicly traded small business investment company,
Pathogenesis, a publicly traded bio-technology company, The Fortress Group,
Inc., a publicly-traded home building 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.
CLIFTON B. PHILLIPS has served as a director of the Company since August
1995. Mr. Phillips served as Chairman of Mills Morris Business Products, Inc.
("Mills Morris") from June 1996 to the present. Previously, Mr. Phillips served
as President of Mills Morris from 1993 to May 1996. For more than four years
prior to becoming President of Mills Morris, Mr. Phillips held a variety of
positions with Mills Morris 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.
JOHN A. QUELCH has served as a director of the Company since February 1995.
Dr. Quelch is the Sebastian S. Kresge Professor of Marketing at the Harvard
Business School, and he is the author of 12 books on marketing and is widely
published in leading American business publications. Dr. Quelch serves on the
board of directors of WPP Group plc, a marketing services company that includes
Ogilvy & Mather, J. Walter Thompson and Hill & Knowlton. He is a national public
director of the Council of Better Business Bureaus Inc. 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.
34
<PAGE>
DIRECTORS' REMUNERATION
Non-employee directors of the Company receive an annual retainer of $25,000
and are reimbursed for all expenses relating to attendance at meetings. During
the fiscal year ended April 26, 1997, fees for all directors aggregated
$100,000. In addition, each non-employee director who agreed to serve as such
prior to the consummation of the Company's initial public offering of Common
Stock in February 1995 (Messrs. Lefever, Mathias and Quelch) received options 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 thereafter will
receive annually options to acquire 6,000 shares. In connection with the
adoption of the Directors' Plan at the Company's 1996 Annual Meeting, each of
the four non-employee directors who served as directors during the 1996 fiscal
year received upon their re-election options for 21,000 shares of Common Stock
and, for the 1997 fiscal year, received options for 6,000 shares of Common
Stock. In addition, pursuant to the Directors' Plan, non-employee directors are
entitled to have their directors' fees paid in the form of shares of the Common
Stock or "deferred" shares of the Common Stock. Two directors, Mr. Lefever and
Mr. Quelch, made elections to have their 1997 directors' fee paid in the form of
deferred 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 1997 fiscal year for his
service as a director of the Company other than pursuant to the standard
compensation arrangement described above.
35
<PAGE>
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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------------ --------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
FISCAL SALARY BONUS COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION (1) YEAR (2) (3) (4) SARS (#) (5) (6)
- ---------------------------------- --------- ---------- ---------- ------------- -------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan J. Ledecky 1997 $ 950,000 -- -- 500,000 $ 2,170
Chief Executive Officer 1996 250,000 -- -- 500,000 --
and Chairman of the Board 1995 145,833 -- -- 100,000 --
Timothy J. Flynn 1997 300,000 -- -- 75,000 1,001
President and Chief 1996 250,000 $ 75,000 -- 310,000 --
Operating Officer 1995 45,912 -- -- 25,000 --
Thomas I. Morgan 1997 101,000 37,500 $ 36,500 250,000 --
President--North American
Office Products Division
Donald H. Platt 1997 200,000 100,000 -- 75,000 1,740
Senior Vice President-Chief 1996 150,000 125,000 45,300 250,000 --
Financial Officer
Mark D. Director 1997 200,000 100,000 -- 75,000 --
Executive Vice President, 1996 38,061 75,000 -- 100,000 --
General Counsel and
Assistant Secretary
Martin S. Pinson 1997 175,000 -- -- 25,000 --
Executive Vice President 1996 150,000 50,000 -- 100,000 --
1995 57,757 -- -- 25,000 --
</TABLE>
- ------------------------
(1) The positions of Messrs. Flynn, Morgan, Director and Pinson changed after
the end of the Company's 1997 fiscal year. Their new positions are indicated
in Item 10 herein. Mr. Pinson resigned from his position after the end of
the fiscal year.
(2) The salary for Mr. Morgan for fiscal 1997 represents less than one full
year's compensation, as he commenced employment with the Company during
fiscal 1997. 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, the date that the
Company commenced operations. With respect to Messrs. Ledecky and Pinson,
the salary amounts for 1995 include $99,921 and $30,000 respectively, for
services rendered prior to the commencement of operations by the Company.
36
<PAGE>
(3) In addition to the cash bonuses paid related to fiscal 1996, the Company
granted options in fiscal 1997 as bonuses for fiscal 1996 to Messrs. Flynn,
Platt, Director and Pinson to purchase 75,000, 75,000, 75,000 and 25,000
shares of Common Stock, respectively, at an exercise price of $38.00 per
share. The amount of $37,500 reflects an accrual of the pro rata portion of
a bonus payable to Mr. Morgan no later than 12 months after the date of his
employment. See "--Employment Agreements."
(4) Includes $36,500 of moving related expenses for Mr. Morgan during fiscal
1997 and $45,300 in moving and automobile related expenses for Mr. Platt in
fiscal 1996.
(5) Represents options granted during fiscal years 1997, 1996 and 1995 with
respect to the stated number of shares of Common Stock.
(6) Represents matching contributions under the Company's 401(k) Retirement
Plan.
EMPLOYMENT AGREEMENTS
Each named executive officer has entered into an employment agreement with
the Company. The employment agreements (the "Employment Agreements") for
Jonathan Ledecky, Timothy J. Flynn, Donald H. Platt, Mark D. Director and Martin
S. Pinson (the "Specific Officers") include substantially the same terms (except
for base salary amounts) and are described together below; Thomas I. Morgan's
employment agreement is described separately below.
Pursuant to the Employment Agreements, the named executive officers are
entitled to receive annual base salaries of no less then the following amount:
Jonathan Ledecky, $250,000; Timothy J. Flynn, $250,000; Donald H. Platt,
$150,000; Mark D. Director, $150,000; and Martin S. Pinson, $150,000. Base
salaries are reviewed and subject to upward adjustment by the Compensation
Committee of the Board of Directors on an annual basis. The base salaries of the
Specific Officers for the Company's last three fiscal years are set forth under
the heading "Executive Compensation--Summary Compensation Table." In addition,
each Specific Officer is eligible to earn additional year-end bonus compensation
in an amount equal to up to 100% of such employee's base salary, payable out of
a bonus pool 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 upon 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
is automatically renewable at the end of the second year and each succeeding
year for an additional year, such that the remaining terms of such agreements
are 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, the Specific Officer
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), each Employment Agreement permits the
employee to elect to terminate his employment, entitling him 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 as 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
37
<PAGE>
with applicable law, the compensation to which the Specific Officer 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.
Mr. Morgan's employment agreement provides for a base salary of $450,000,
which is reviewed and subject to upward adjustment by the Compensation Committee
of the Board of Directors on an annual basis. Mr. Morgan is entitled to a bonus
under the same terms as are the Specific Officers, except that his employment
agreement guarantees the payment of an incentive bonus of no less than $150,000
to be paid no later than the end of the first 12 months after the date of his
employment. In addition, Mr. Morgan's employment agreement provides for an
initial grant of an option for 250,000 shares of Common Stock to Mr. Morgan,
which grant was made on February 3, 1997. Mr. Morgan's employment agreement is
for an initial term of two years and is automatically renewable for additional,
successive one-year terms, unless terminated or not renewed by the Company or
Mr. Morgan. In the event of a termination of employment by the Company without
cause, Mr. Morgan is entitled to receive his base salary for the longer of one
year from the date of termination or whatever period is remaining under the
employment agreement. Pursuant to his agreement, Mr. Morgan is subject to the
same covenant not to compete as is included in the Employment Agreements.
OPTION GRANTS IN FISCAL 1997
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.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL OPTIONS
OPTIONS GRANTED TO
GRANTED EMPLOYEES IN EXERCISE EXPIRATION
NAME (1) FISCAL YEAR PRICE DATE
- ------------------------------------- ---------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Jonathan J. Ledecky.................. 500,000 11.1% $ 25.38 3/6/2006
Timothy J. Flynn..................... 75,000 1.7% $ 38.00 6/3/2006
Thomas I. Morgan..................... 250,000 5.6% $ 33.13 2/3/2007
Donald H. Platt...................... 75,000 1.7% $ 38.00 6/3/2006
Mark D. Director..................... 75,000 1.7% $ 38.00 6/3/2006
Martin S. Pinson..................... 25,000 0.6% $ 38.00 6/3/2006
All Optionees........................ 4,486,110 100.0% $ 30.62 Various
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR OPTION
TERM (2)
--------------------------------------
NAME 0% 5% 10%
- ------------------------------------- ------- ------------- -------------
<S> <C> <C> <C>
Jonathan J. Ledecky.................. $ -- $ 7,979,101 $ 20,220,607
Timothy J. Flynn..................... -- 1,792,350 4,542,166
Thomas I. Morgan..................... -- 5,208,034 13,198,180
Donald H. Platt...................... -- 1,792,350 4,542,166
Mark D. Director..................... -- 1,792,350 4,542,166
Martin S. Pinson..................... -- 597,450 1,514,055
All Optionees........................ -- 86,387,914 218,923,936
</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 appreciation of zero percent (0%), five
percent (5%) and ten percent (10%). These assumed rates of growth were
selected by the 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.
38
<PAGE>
OPTION EXERCISES IN FISCAL 1997 AND VALUE OF OPTIONS AT APRIL 26, 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT FISCAL IN-THE-MONEY (3) OPTIONS AT
SHARES VALUE YEAR END (#) FISCAL YEAR END ($)(4)
ACQUIRED ON REALIZED -------------------------- ---------------------------
NAME EXERCISE (#) (1) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------------- -------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan J. Ledecky............. 0 0 175,000 925,000 $ 1,298,438 $ 2,432,813
Timothy J. Flynn................ 0 0 90,000 320,000 613,438 1,474,688
Thomas Morgan................... 0 0 250,000 -- --
Donald H. Platt................. 1,650 $ 32,950 60,850 262,500 392,750 1,228,219
Mark D. Director................ 0 0 25,000 150,000 157,813 473,438
Martin S. Pinson................ 0 0 37,500 112,500 350,781 686,719
</TABLE>
- ------------------------
(1) Represents the number of shares with respect to which 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 Common
Stock on the date of exercise.
(3) Options are "in-the-money" if the closing market price of the 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 $22.625, the closing market price of the
Common Stock on April 26, 1997.
CERTAIN TRANSACTIONS
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 amount paid to these partnerships by The H.H. West Company, a
wholly owned subsidiary of the Company, during fiscal 1997 was approximately
$446,709, and, pursuant to the terms of the lease agreement, will increase by
five percent (5%) for fiscal 1998.
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, a wholly owned subsidiary of the Company.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 16, 1997, information with
respect to beneficial ownership of the Common Stock by (i) each director, (ii)
each executive officer named in the Summary Compensation Table, (iii) the
executive officers, the former executive officer and the 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)..................................................................... 1,818,304 2.57%
Clifton B. Phillips (2)(3).................................................................. 1,219,857 1.73%
Timothy J. Flynn (3)(4)..................................................................... 574,102 *
David C. Copenhaver (3)(5).................................................................. 223,195 *
Edward J. Mathias (6)....................................................................... 209,750 *
Martin S. Pinson (7)........................................................................ 169,551 *
David C. Gezon (3)(8)....................................................................... 120,311 *
Donald H. Platt (9)......................................................................... 105,911 *
Milton H. Kuyers (3)(10).................................................................... 100,021 *
Jack L. Becker, Jr. (3)(11)................................................................. 47,898 *
Allon H. Lefever (3)(12).................................................................... 44,700 *
Mark D. Director (13)....................................................................... 43,997 *
John A. Quelch (14)......................................................................... 28,500 *
Thomas I. Morgan (15)....................................................................... 400 *
All executive officers, the former executive officer and the directors as a group........... 4,706,497 6.66%
5% STOCKHOLDERS
Pilgrim Baxter & Associates (16)............................................................ 4,128,400 5.85%
1255 Drummers Lane, Suite 300
Wayne, PA 19087-1950
FMR Corp.(17)............................................................................... 3,983,470 5.64%
82 Devonshire Street
Boston, MA 02109
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes 200,000 shares which may be acquired upon the exercise of options
which currently are exercisable. Mr. Ledecky is the Chief Executive Officer
and Chairman of the Board of Directors.
(2) Includes 200,000 shares held in two grantor retained annuity trusts. 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 127,500 shares which may be acquired upon exercise of options which
currently are exercisable. Mr. Flynn is the Vice Chairman of the Board of
Directors.
(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 and 2,500
shares which may be acquired upon the exercise of options which are
currently exercisable. Mr. Copenhaver is a Director of the Company and Vice
President--North American Office Products Group.
40
<PAGE>
(6) Includes 28,500 shares which may be acquired upon exercise of options which
currently are exercisable and 50,000 shares owned by Mr. Mathias' wife. Mr.
Mathias is a Director of the Company.
(7) Includes 100,000 shares owned by the Pinson and Associate Profit Sharing
Plan of which Mr. Pinson is the trustee and beneficiary and 68,750 shares
which may be acquired upon the exercise of options which currently are
exercisable. Mr. Pinson resigned from his position with the Company after
the end of its 1997 fiscal year.
(8) Includes 4,000 shares which may be acquired upon the exercise of options
which currently are exercisable, 1,500 shares owned by Mr. Gezon's children,
113,083 shares held in two trusts and 40,824 shares that are subject to
contractual restrictions. Mr. Gezon is a Director of the Company and
President of C.W. Mills Acquisition Corp., a subsidiary of the Company.
(9) Includes 104,600 shares which may be acquired upon the exercise of options
which are currently exercisable. 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 currently are exercisable and 86,251 shares held by the Kuyers 1996
Joint Revocable Trust in which Mr. Kuyers serves as a trustee. Mr. Kuyers is
a Director of the Company.
(11) Includes 42,500 shares which may be acquired upon the exercise of options
which currently are exercisable. Mr. Becker is a Director of the Company and
President of Dameron-Pierson.
(12) Includes 28,500 shares which may be acquired upon the exercise of options
which currently are exercisable. Mr. Lefever is a Director of the Company.
(13) Includes 43,750 shares which may be acquired upon the exercise of options
which currently are exercisable. Mr. Director is the Chief Administrative
Officer, General Counsel and Secretary of the Company.
(14) Includes 28,500 shares which may be acquired upon the exercise of options
which currently are exercisable. Mr. Quelch is a Director of the Company.
(15) Includes 200 shares owned by Mr. Morgan and 200 shares owned by Mr.
Morgan's wife. Mr. Morgan is the Chief Operating Officer of the Company and
is a Director of the Company.
(16) Pilgrim Baxter & Associates disclosed in a Schedule 13G filed with the
Commission that, as of December 31, 1996, it had sole investment power and
shared voting power with respect to the 4,128,400 shares reported herein.
Pilgrim Baxter & Associates also filed a Form 13F with the Commission
reporting that, as of March 31, 1997, it had sole investment discretion and
shared voting authority with respect to 3,685,100 shares of the Common
Stock.
(17) FMR Corp. disclosed in a Schedule 13G filed with the Commission that, as of
December 31, 1996, it and certain affiliated persons had sole dispositive
power and no voting power with respect to the 3,983,470 shares reported
herein. FMR Corp. also filed a Form 13F with the Commission reporting that,
as of March 31, 1997, it had shared investment discretion and no voting
authority with respect to 7,895,500 shares of the Common Stock.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of July 10, 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 July 10, 1997, the Company had outstanding approximately 72,080,786 shares of
Common Stock and no shares of Preferred Stock. As of July 10, 1997, there were
approximately 724 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
42
<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.
43
<PAGE>
PLAN OF DISTRIBUTION
The Company has issued and will continue to issue the Common Stock from time
to time in connection with the acquisition by the Company of other businesses,
assets or securities. 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.
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, among other things, 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 26, 1997
and April 30, 1996, and for each year in the three year period ended April 26,
1997, except as they relate to School Specialty, Inc., The Re-Print Corporation,
Fortran Corporation, Bay State Computer Group, Inc., SFI Corp., Hano Document
Printers, Inc., Data Business Forms, Huxley Envelope Corp. and United Envelope
Co., Inc., and its affiliate, Rex Envelope Co., 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.,
Hano Document Printers, Inc., Data Business Forms, Huxley Envelope Corp. and
United Envelope Co., Inc., and its affiliate, Rex Envelope Co., Inc., by Ernst &
Young LLP, BDO Seidman, LLP, Parent McLaughlin & Nangle, Rubin, Koehmstedt &
Nadler, PLC, KPMG Peat Marwick LLP, Ernst & Young and Hertz, Herson & Company
whose reports thereon appear herein. The Company's financial statements have
been included herein in reliance upon the reports of such independent
accountants given upon the authority of such firms as experts in auditing and
accounting.
44
<PAGE>
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 consolidated financial statements of Mail Boxes Etc. as of April 30,
1997 and 1996 and for the three year period ended April 30, 1997 have been
included herein in reliance upon the report of Ernst & Young, LLP, independent
auditors, given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Data Business Forms Limited as of December 31,
1996 and for the year ended, have been incorporated herein by reference in
reliance upon the report of Ernst & Young, independent accountants, given upon
the authority of such firm as experts in auditing and accounting.
The financial statements of Huxley Envelope Corp., as of December 31, 1996
and for the year then ended, have been incorporated herein by reference in
reliance upon the report of Hertz, Herson & Company, LLP, independent
accountants, given upon the authority of such firm as experts in auditing and
accounting.
The financial statements of United Envelope Co., Inc., and its affiliate,
Rex Envelope Co., Inc., as of December 31, 1996 and for the year then ended,
have been incorporated herein by reference in reliance upon the report of Hertz,
Herson & Company, LLP, independent accountants, given upon the authority of such
firm as experts in auditing and accounting.
45
<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-4
Report of Ernst & Young LLP, Independent Auditors.................................................... F-5
Report of BDO Seidman, LLP Independent Auditors...................................................... F-6
Report of Parent, McLaughlin & Nangle................................................................ F-7
Report of Rubin, Koehmstedt & Nadler, PLC............................................................ F-8
Reports of KPMG Peat Marwick LLP..................................................................... F-9
Report of Ernst & Young.............................................................................. F-12
Reports of Hertz, Herson & Company, LLP.............................................................. F-13
Consolidated Balance Sheet for the years ended April 26, 1997 and April 30, 1996..................... F-15
Consolidated Statement of Income for the years ended April 26, 1997, April 30, 1996 and April 30,
1995............................................................................................... F-16
Consolidated Statement of Stockholders' Equity for the fiscal years ended April 30, 1995 and 1996 and
April 26, 1997..................................................................................... F-17
Consolidated Statement of Cash Flows for the years ended April 26, 1997, April 30, 1996 and April 30,
1995............................................................................................... F-19
Notes to Consolidated Financial Statements........................................................... F-21
Introduction to Pro Forma Financial Information...................................................... F-43
Pro Forma Combined Balance Sheet at April 26, 1997 (unaudited)....................................... F-44
Pro Forma Combined Statement of Income for the year ended April 26, 1997 (unaudited)................. F-45
Pro Forma Combined Statement of Income for the year ended April 30, 1996 (unaudited)................. F-46
Pro Forma Combined Statement of Income for the year ended April 30, 1995 (unaudited)................. F-47
Notes to Pro Forma Combined Financial Statements..................................................... F-48
</TABLE>
F-1
<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-50
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-50
Consolidated Statement of Financial Position as at December 31, 1995 (unaudited) and 1994 (unaudited)
and June 30, 1995 (unaudited)...................................................................... F-51
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-52
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-53
Notes to the Unaudited Financial Statements.......................................................... F-54
Report of Deloitte Touche Tohmatsu, Independent Auditors............................................. F-56
Profit and Loss Account for the years ended June 30, 1995 and 1994................................... F-57
Balance Sheet as of June 30, 1995 and 1994........................................................... F-58
Statement of Cash Flows for the years ended June 30, 1995 and 1994................................... F-59
Reconciliation of Net Cash Flows from Operating Activities to Net Profit After Taxation for the years
ended June 30, 1995 and 1994....................................................................... F-60
Notes to the Financial Statements.................................................................... F-61
Report of Deloitte Touche Tohmatsu, Independent Auditors............................................. F-78
Consolidated Profit and Loss Account for the years ended June 30, 1994 and 1993...................... F-79
Consolidated Balance Sheet as of June 30, 1994 and 1993.............................................. F-80
Consolidated Statement of Cash Flows for the years ended June 30, 1994 and 1993...................... F-81
Reconciliation of Consolidated Net Cash Flows from Operating Activities to Net Profit After Taxation
for the years ended June 30, 1994 and 1993......................................................... F-82
Notes to the Financial Statements.................................................................... F-83
Profit and Loss Account for the year ended June 30, 1996............................................. F-99
Statements of Movements in Equity for the year ended June 30, 1996................................... F-100
Balance Sheet as of June 30, 1996.................................................................... F-101
Statement of Cash Flows for the year ended June 30, 1996............................................. F-102
Reconciliation of Net Cash Flows from Operating Activities to Net Profit after Taxation.............. F-103
Notes to the Financial Statements.................................................................... F-104
Report of Deloitte Touche Tohmatsu, Independent Auditors............................................. F-122
</TABLE>
F-2
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
MAIL BOXES ETC.
Report of Ernst & Young LLP, Independent Auditors.................................................... F-123
Consolidated Balance Sheets as of April 30, 1997 and 1996............................................ F-124
Consolidated Statements of Income for the fiscal years ended April 30, 1997, 1996 and 1995........... F-125
Consolidated Statement of Shareholders' Equity for the fiscal years ended April 30, 1997, 1996 and
1995............................................................................................... F-126
Consolidated Statements of Cash Flows for fiscal years ended April 30, 1997, 1996 and 1995........... F-127
Notes to Consolidated Financial Statements........................................................... F-128
</TABLE>
F-3
<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
consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of U.S. Office Products
Company and its subsidiaries at April 26, 1997 and April 30, 1996, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended April 26, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of certain wholly-owned subsidiaries, which statements reflect total
revenues of $616.9 million and $323.1 million included in the Company's fiscal
years ended April 30, 1996 and 1995, respectively. Those statements were audited
by other auditors whose reports thereon have been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
those wholly-owned subsidiaries, is based solely on the reports of the other
auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Minneapolis, Minnesota
June 6, 1997
F-4
<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-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheets of the Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for three years ended December 31, 1995,
1994, and 1993 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for three years ended December 31, 1995, 1994, and 1993 in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
Atlanta, Georgia
February 8, 1996
F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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.
/s/ Parent, McLaughlin and Nangle
Certified Public Accountants
May 23, 1996, except for Note N
as to which the date is
October 14, 1996
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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 and above present
fairly, in all material respects, the financial position of Fortran Corp. as of
March 31, 1996, and 1995 and the results of its operations and its cash flows
for three years ended march 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
/s/ RUBIN, KOEHMSTEDT AND NADLER
June 7, 1996, except for Note 9,
as to which the date is
October 24, 1996
F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SFI Corp.
We have audited the accompanying balance sheet of SFI Corp. as of December
31, 1995 and the related statements of income, stockholders' equity, and cash
flows for the year then ended, which are not included herein. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SFI Corp. as of December 31,
1995 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
August 28, 1996
F-9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Hano Document Printers, Inc.
We have audited the accompanying balance sheet of Hano Document Printers,
Inc. as of December 31, 1995 and the related statements of income, stockholders'
equity, and cash flows for the year then ended, which are not included herein.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
August 28, 1996
F-10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SFI Corp. and Hano Document Printers, Inc.
We have audited the combined balance sheet of SFI Corp. and Hano Document
Printers, Inc. (collectively referred to as the "Companies") as of December 31,
1994, and the related statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1994, which are
not included herein. These combined financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of SFI Corp. and Hanco
Document Printers, Inc., as of December 31, 1994 and the results of their
operations and cash flows for each of the years in the two-year period ended
December 31, 1994, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
August 28, 1996
F-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Data Business Forms Limited
We have audited the balance sheet of Data Business Forms Limited ("DBF") as
of December 31, 1995 and the statements of income and retained earnings and
changes in financial position for the period from amalgamation to December 31,
1995 These financial statements are the responsibility of DBF's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of DBF as at December 31, 1995 and the results
of its operations and the changes in its financial position for the period from
amalgamation to December 31, 1995 in accordance with generally accepted
accounting principles.
/s/ Ernst & Young
Chartered Accountants
Toronto, Canada,
February 6, 1996
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheets of United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc., as at December 31, 1995 and 1994, and the
related combined statements of income and retained earnings and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As referred to in Note A on "Principles of Combination," the companies,
whose financial statements are combined, are related through common ownership
and control. In addition, each has pledged certain assets and guaranteed
long-term indebtedness of the other as described in the notes to financial
statements. In view of their close operating and financial relationship, the
preparation of combined financial statements was considered appropriate. The
combined statements, however, do not refer to a legal entity of the companies
guarantees trade obligations of the other.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of United
Envelope Co., Inc. and its affiliates as at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Huxley Envelope Corporation
Industrial Park Blvd.
Mt. Pocono Industrial Park
Mt. Pocono, Pennsylvania 18344
We have audited the accompanying balance sheet of Huxley Envelope
Corporation as at December 31, 1996, and the related statements of income,
changes in shareholder equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Huxley Envelope Corporation
as at December 31, 1996, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
As referred to in Note A to the financial statements, the Company changed
its method of computing depreciation for machinery and equipment in 1996.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 7, 1997, except for Note L,
as to which the date is April 14, 1997
F-14
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 26, APRIL 30,
1997 1996
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 44,026 $ 183,483
Accounts receivable, less allowance for doubtful accounts of $10,066 and $6,000....... 380,402 248,934
Inventories........................................................................... 281,605 152,429
Prepaid expenses and other current assets............................................. 98,644 56,644
------------ ----------
Total current assets.............................................................. 804,677 641,490
Property and equipment, net............................................................. 241,402 127,581
Intangible assets, net.................................................................. 643,629 152,312
Other assets............................................................................ 120,644 69,467
------------ ----------
Total assets...................................................................... $ 1,810,352 $ 990,850
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt....................................................................... $ 150,458 $ 151,731
Accounts payable...................................................................... 204,814 134,832
Accrued compensation.................................................................. 40,285 25,677
Other accrued liabilities............................................................. 85,373 37,277
------------ ----------
Total current liabilities......................................................... 480,930 349,517
Long-term debt.......................................................................... 389,150 227,736
Deferred income taxes................................................................... 8,656 10,052
Other long-term liabilities and minority interests...................................... 10,468 8,799
------------ ----------
Total liabilities................................................................. 889,204 596,104
------------ ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, none outstanding
Common stock, $.001 par value, 500,000,000 shares authorized,69,652,669 and 52,976,280
shares issued and outstanding, respectively......................................... 70 53
Additional paid-in capital............................................................ 809,433 313,304
Cumulative translation adjustment..................................................... (5,583) 770
Retained earnings..................................................................... 117,228 80,619
------------ ----------
Total stockholders' equity........................................................ 921,148 394,746
------------ ----------
Total liabilities and stockholders' equity........................................ $ 1,810,352 $ 990,850
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
----------------------------------------
<S> <C> <C> <C>
APRIL 26, APRIL 30, APRIL 30,
1997 1996 1995
------------ ------------ ------------
Revenues................................................................ $ 2,835,875 $ 1,686,430 $ 1,041,304
Cost of revenues........................................................ 2,031,713 1,246,647 762,724
------------ ------------ ------------
Gross profit........................................................ 804,162 439,783 278,580
Selling, general and administrative expenses............................ 655,101 372,180 237,864
Non-recurring acquisition costs......................................... 16,245 8,057
Restructuring costs..................................................... 4,395 3,214
------------ ------------ ------------
Operating income.................................................... 128,421 56,332 40,716
Interest expense........................................................ 45,901 20,123 8,319
Interest income......................................................... (7,632) (4,425) (1,135)
Other income............................................................ (3,689) (1,730) (1,389)
------------ ------------ ------------
Income before provision for income taxes and
extraordinary items................................................... 93,841 42,364 34,921
Provision for income taxes.............................................. 35,103 7,487 3,754
------------ ------------ ------------
Income before extraordinary items....................................... 58,738 34,877 31,167
Extraordinary items--losses on early terminations of credit
facilities, net of income taxes....................................... 1,450 701
------------ ------------ ------------
Net income.............................................................. $ 57,288 $ 34,176 $ 31,167
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding.............................. 61,174 45,583
Income per share before extraordinary items............................. $ 0.96 $ 0.77
Extraordinary items..................................................... 0.02 0.02
------------ ------------
Net income per share.................................................... $ 0.94 $ 0.75
------------ ------------
------------ ------------
Unaudited pro forma income before extraordinary
items (see Note 10)................................................... $ 51,143 $ 21,945 $ 20,359
------------ ------------ ------------
------------ ------------ ------------
Unaudited pro forma income per share before
extraordinary items................................................... $ 0.84 $ 0.48
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------------- PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
------------ ----------- ----------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994.............. 25,628,841 $ 25 $ 26,496 $ (340) $ 58,733 $ (7,562) $ 77,352
Transactions of Combined Companies
upon formation of Company:
Issuance of common stock........... 3,878,000 4 (3) 1
Capital contribution............... 1,500 1,500
Distributions to stockholders...... (11,300) (11,300)
Adjustments to stockholders'
equity........................... (12,597) 5,035 7,562
Cash dividends..................... (222) (222)
Issuance of common stock, net of
associated expenses in conjunction
with:
Initial public offering............ 3,737,500 4 32,686 32,690
Acquisition........................ 875,000 1 8,749 8,750
Transactions of Pooled Companies:
Exercise of warrants and stock
options.......................... 13,563 201 201
Cash dividends..................... (16,086) (16,086)
Adjustment to conform the year-ends
of Pooled Companies................ 2,235 2,235
Cumulative translation adjustments... 207 207
Net income........................... 31,167 31,167
------------ ----- ----------- ----------- --------- --------- ------------
Balance at April 30, 1995.............. 34,132,904 34 57,032 (133) 69,562 126,495
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offerings................... 9,568,045 10 174,727 174,737
Acquisitions....................... 7,413,442 8 68,610 68,618
Exercise of stock options,
including tax benefits........... 63,350 1,023 1,023
Transactions of Pooled Companies:
Issuances of common stock for cash
and repayment of debt............ 581,499 8,298 8,298
Capital contributions.............. 500 500
Exercise of warrants and stock
options.......................... 652,615 1 1,752 1,753
Cash and stock dividends........... 564,425 1,362 (32,017) (30,655)
Adjustment to conform the year-ends
of Pooled Companies................ 8,898 8,898
Cumulative translation adjustments... 903 903
Net income........................... 34,176 34,176
------------ ----- ----------- ----------- --------- --------- ------------
Balance at April 30, 1996.............. 52,976,280 53 313,304 770 80,619 394,746
</TABLE>
F-17
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED APRIL 26, 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------------- PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
------------ ----------- ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996............. 52,976,280 $ 53 $ 313,304 $ 770 $ 80,619 $ 394,746
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering................... 8,682,331 9 275,703 275,712
Direct equity investment.......... 1,250,000 1 38,112 38,113
Acquisitions...................... 5,790,300 6 166,074 166,080
Exercise of stock options,
including tax benefits.......... 131,828 2,843 2,843
Employee stock purchase plan...... 153,332 3,145 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............ 273,087 6,859 6,859
Capital contributions............. 8,228 1,857 1,857
Exercise of warrants and stock
options......................... 319,077 1 1,979 1,980
Retirement of common stock........ 68,206 (443) (34) (477)
Cash dividends paid and
declared........................ (20,931) (20,931)
Adjustment to conform the year-ends
of Pooled Companies............... 286 286
Cumulative translation
adjustments....................... (6,353) (6,353)
Net income.......................... 57,288 57,288
------------ --- ---------- ----------- ---------- --- ------------
Balance at April 26, 1997............. 69,652,669 $ 70 $ 809,433 $ (5,583) $ 117,228 $ $ 921,148
------------ --- ---------- ----------- ---------- --- ------------
------------ --- ---------- ----------- ---------- --- ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-18
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
----------------------------------
<S> <C> <C> <C>
APRIL 26, APRIL 30, APRIL 30,
1997 1996 1995
---------- ----------- ---------
Cash flows from operating activities:
Net income.................................................................. $ 57,288 $ 34,176 $ 31,167
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 48,364 20,389 13,270
Non-recurring acquisition costs........................................... 16,245 8,057
Unrealized foreign currency gain.......................................... (3,420)
Deferred income taxes..................................................... (3,260) 32 (133)
Extraordinary losses...................................................... 1,450 701
Equity in net income of affiliate......................................... (782)
Stock issued to pay certain acquisition expenses.......................... 500
Changes in current assets and liabilities (net of assets acquired and
liabilities assumed in business combinations accounted for under the
purchase method):
Accounts receivable..................................................... (27,417) (8,166) (32,479)
Inventories............................................................. (3,291) 1,817 (3,557)
Prepaid expenses and other current assets............................... (11,155) (24,405) (2,733)
Accounts payable........................................................ (31,467) 6,531 11,858
Accrued liabilities..................................................... 3,084 3,879 6,337
---------- ----------- ---------
Net cash provided by operating activities............................. 46,139 43,011 23,730
---------- ----------- ---------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received............................. (354,811) (130,178) (18,099)
Payments of non-recurring acquisition costs................................. (13,588) (7,283)
Additions to property and equipment, net of disposals....................... (51,908) (26,834) (13,054)
Investment in affiliate..................................................... (41,270)
Other....................................................................... (1,877) (4,653) 364
---------- ----------- ---------
Net cash used in investing activities................................. (463,454) (168,948) (30,789)
---------- ----------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock...................................... 320,543 181,530 32,891
Proceeds from issuance of long-term debt.................................... 227,982 207,241 11,798
Payments of long-term debt.................................................. (218,861) (22,099) (10,670)
Proceeds from (payments of) short-term debt, net............................ (32,563) (58,999) 5,914
Payments to terminate credit facilities..................................... (1,235) (579)
Payments of dividends at Pooled Companies................................... (19,611) (22,166) (16,305)
Capital contributed by stockholders of Pooled Companies..................... 1,857 500
Net change in cash due to conforming fiscal year-ends of certain Pooled
Companies................................................................. 286 (1,221) 601
Capital contributed by Combined Company stockholder......................... 1,500
Payments to stockholders of Combined Companies.............................. (11,300)
---------- ----------- ---------
Net cash provided by financing activities............................. 278,398 284,207 14,429
---------- ----------- ---------
Effect of exchange rates on cash and cash equivalents......................... (540) 267 (180)
---------- ----------- ---------
Net (decrease) increase in cash and cash equivalents.......................... (139,457) 158,537 7,190
Cash and cash equivalents at beginning of period.............................. 183,483 24,946 17,756
---------- ----------- ---------
Cash and cash equivalents at end of period.................................... $ 44,026 $ 183,483 $ 24,946
---------- ----------- ---------
---------- ----------- ---------
Supplemental disclosure of cash flow information:
Interest paid............................................................. $ 39,916 $ 12,255 $ 13,091
Income taxes paid......................................................... 28,905 8,744 7,726
</TABLE>
F-19
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company issued common stock, notes payable and cash in connection with
certain business combinations accounted for under the purchase method during
fiscal 1997, 1996 and 1995. 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 FISCAL YEAR ENDED
----------------------------------
<S> <C> <C> <C>
APRIL 26, APRIL 30, APRIL 30,
1997 1996 1995
---------- ----------- ---------
Accounts receivable........................................................... $ 105,538 $ 93,741 $ 23,462
Inventories................................................................... 122,917 68,861 20,074
Prepaid expenses and other current assets..................................... 23,344 9,740 1,779
Property and equipment........................................................ 95,615 57,372 5,459
Intangible assets............................................................. 506,386 127,870 21,079
Other assets.................................................................. 7,847 56,529 339
Short-term debt............................................................... (24,895) (106,672) (15,038)
Accounts payable.............................................................. (103,851) (48,825) (15,627)
Accrued liabilities........................................................... (55,477) (21,554) (4,958)
Long-term debt................................................................ (155,237) (17,950) (6,283)
Other long-term liabilities and minority interest............................. (1,296) (12,175) (437)
---------- ----------- ---------
Net assets acquired................................................... $ 520,891 $ 206,937 $ 29,849
---------- ----------- ---------
---------- ----------- ---------
The acquisitions were funded as follows:
Common stock.................................................................. $ 166,080 $ 68,618 $ 8,750
Debt.......................................................................... 8,141 3,000
Cash.......................................................................... 354,811 130,178 18,099
---------- ----------- ---------
$ 520,891 $ 206,937 $ 29,849
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
Noncash transactions:
- - During fiscal 1997 and 1996, the Company issued 256,420 and 194,447 shares of
common stock, respectively, to repay $6,359 and $2,470 of indebtedness,
respectively.
- - During fiscal 1997 and 1996, the Company recorded additional paid-in capital
of approximately $1,250 and $426, respectively, related to the tax benefit
on stock options exercised.
- - During fiscal 1996, one Pooled Company converted $1,385 of debt to common
stock.
- - During fiscal 1996, one Pooled Company paid a dividend of $9,851 through the
issuance of 564,425 shares of common stock
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--BUSINESS ORGANIZATION
U.S. Office Products Company ("U.S. Office Products" and the "Company") was
founded in October 1994. The Company is a supplier of a broad range of office
and educational products and business services to corporate, commercial,
industrial and educational customers. The Company operates throughout the United
States, as well as in New Zealand, Australia and Canada and, through a 49% owned
affiliate, in the United Kingdom.
NOTE 2--FORMATION OF COMPANY
Concurrent with the closing of its initial public offering in February 1995,
the Company acquired four companies (the "Combined Companies") for a combination
of its common stock and cash and acquired two companies in business combinations
accounted for under the purchase method. Because of the substantial ongoing
interest of the stockholders of the Combined Companies in U.S. Office Products,
the assets and liabilities of the Combined Companies were combined on a
historical cost basis. The capital stock of the Combined Companies is included
in additional paid-in capital.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products,
the Combined Companies and the companies acquired in business combinations
accounted for under the purchase method (the "Purchased Companies") from their
respective acquisition dates and give retroactive effect to the results of the
companies acquired in business combinations accounted for under the
pooling-of-interests method (the "Pooled Companies") for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DEFINITION OF FISCAL YEAR
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1997," "fiscal 1996" and "fiscal
1995" refer to the Company's fiscal years ended April 26, 1997 and April 30,
1996 and 1995, respectively. On August 20, 1996, the Company's Board of
Directors approved a change in the Company's fiscal year-end, effective for the
1997 fiscal year, from April 30 to the last Saturday in April.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Investments in less than 50% owned entities
are accounted for under the equity method. All significant intercompany
transactions and accounts are eliminated in consolidation.
F-21
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Substantially all goodwill is amortized
on a straight line basis over an estimated useful life of 40 years. Management
periodically evaluates the recoverability of goodwill, which would be adjusted
for a permanent decline in value, if any, by comparing anticipated undiscounted
future cash flows from operations to net book value.
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's wholly-owned foreign subsidiary has entered into forward
foreign currency exchange contracts (the "Exchange Contracts") with
counterparties to hedge the exposure of foreign currency fluctuations to the
extent permissible by hedge accounting requirements. At April 26, 1997, the
Exchange Contracts, in the notional amount of $3,319, hedge certain foreign
currency denominated assets. The
F-22
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Exchange Contracts generally have maturity dates of 60 days or less. Discounts
or premiums on the Exchange Contracts are amortized over the life of the
contracts.
The Company's wholly-owned foreign subsidiary also entered into interest
rate swap agreements (the "Swap Agreements") with counterparties to convert the
interest rates associated with certain outstanding debt from variable rates to
fixed rates. The notional amount of the Swap Agreements was $43,000 at April 30,
1996. During fiscal 1997, the Swap Agreements were terminated resulting in a
loss of $117.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using the following methods and assumptions:
- - The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value;
- - The fair values of the 5 1/2% Convertible Subordinated Notes due 2001 and the
5 1/2% Convertible Subordinated Notes due 2003 are based on quoted market
prices;
- - The carrying amounts of the Company's debt, other than the 5 1/2% Convertible
Subordinated Notes due 2001 and the 5 1/2% Convertible Subordinated Notes
due 2003, approximate fair value, estimated by discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar types
of borrowing arrangements.
INCOME TAXES
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Certain
companies acquired in pooling-of-interests transactions elected to be taxed as
Subchapter S corporations, and accordingly, no federal income taxes were
recorded by those companies for periods prior to their acquisition by U.S.
Office Products.
TAXES ON UNDISTRIBUTED EARNINGS
No provision is made for U.S. income taxes on earnings of subsidiary
companies which the Company controls but does not include in the consolidated
federal income tax return since it is management's practice and intent to
permanently reinvest the earnings of these subsidiaries.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers. The Company also leases equipment to
customers under both short-term and long-term lease agreements. Revenue related
to short-term leases is recognized on a monthly basis over the life of the
lease. Certain long-term leases qualify as sales-type leases and, accordingly,
the present value of the future lease payments is recognized as income upon
delivery of the equipment to the customer.
F-23
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, investment banking fees,
recognition of transaction related obligations and various other acquisition
related costs.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees in accordance with EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring)."
ACCRUED ACQUISITION COSTS
The Company accrues the direct external costs incurred in conjunction with
the consummation of business combinations and the costs incurred to consolidate
acquired operations into existing Company facilities, including the external
costs and liabilities to close redundant facilities and severance and relocation
costs related to the acquired entity's employees in accordance with EITF Issue
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
NET INCOME PER SHARE
Net income per share for fiscal 1997 and 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 has not been presented as it is not considered meaningful due to the
acquisitions of the Combined Companies and the Company's initial public offering
in conjunction with the formation of the Company during fiscal 1995.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. The adoption of SFAS 121 did not have
a material effect on the Company's consolidated operating results or financial
position.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
during fiscal 1997. Under the provisions of SFAS 123, companies can elect to
account for stock-based compensation
F-24
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
plans using a fair-value based method or continue measuring compensation expense
for those plans using the intrinsic value method prescribed in APB Opinion No.
25. The Company has elected to continue using the intrinsic value method to
account for stock-based compensation plans. Pro forma disclosures of net income
and net income per share, as if the fair value-based method of accounting
defined in SFAS 123 has been applied, are presented in Note 14.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This Statement establishes standards for computing
and presenting earnings per share ("EPS"). SFAS 128 simplifies the standards for
computing EPS and makes the presentation comparable to international EPS
standards by replacing the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. This Statement is required to be
adopted by the Company during fiscal 1998.
NOTE 4--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1997 and 1996, the Company issued 22,108,776 and 8,440,852 shares
of common stock, respectively, to acquire 40 (the "1997 Poolings") and 14 (the
"1996 Poolings") companies, respectively, in business combinations accounted for
under the pooling-of-interests method. The Company's consolidated financial
statements give retroactive effect to the acquisitions of the Pooled Companies
for all periods presented. Certain of the Pooled Companies previously reported
on fiscal years ending other than April 26, 1997 and April 30, 1996.
Commencing on May 1, 1996 and 1995, the year-ends of the 1997 Poolings and
the 1996 Poolings were changed to April 26, 1997 and April 30, 1996,
respectively, resulting in adjustments to retained earnings of $286, $8,898 and
$2,235 during fiscal 1997, 1996 and 1995, respectively. Following is a summary
of the results related to the adjustments to retained earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 26, APRIL 30, APRIL 30,
1997 1996 1995
---------- ---------- ---------
Revenues....................................................................... $ (9,907) $ 245,737 $ 55,126
Costs and expenses............................................................. (10,193) 236,839 52,891
---------- ---------- ---------
Net adjustment............................................................. $ 286 $ 8,898 $ 2,235
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
F-25
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
The following presents the separate results, in each of the periods
presented, of U.S. Office Products (excluding the results of Pooled Companies
prior to the dates on which they were acquired), and the Pooled Companies up to
the dates on which they were acquired:
<TABLE>
<CAPTION>
U.S. OFFICE POOLED
PRODUCTS COMPANIES COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
For the year ended April 26, 1997
Revenues.............................................................. $ 2,175,170 $ 660,705 $ 2,835,875
Net income............................................................ $ 36,246 $ 21,042 $ 57,288
For the year ended April 30, 1996
Revenues.............................................................. $ 488,670 $ 1,197,760 $ 1,686,430
Net income............................................................ $ 7,828 $ 26,348 $ 34,176
For the year ended April 30, 1995
Revenues.............................................................. $ 120,479 $ 920,825 $ 1,041,304
Net income............................................................ $ 1,514 $ 29,653 $ 31,167
</TABLE>
PURCHASE METHOD
In fiscal 1997, the Company made 77 acquisitions accounted for under the
purchase method for an aggregate purchase price of $520,891 consisting of
$354,811 of cash, and 5,790,300 shares of common stock with a market value of
$166,080. The total assets related to these 77 acquisitions were $861,647,
including goodwill of $506,386. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
In fiscal 1996, the Company made 34 acquisitions accounted for under the
purchase method for an aggregate purchase price of $206,937, consisting of
$130,178 of cash, $8,141 of debt and 7,413,442 shares of common stock with a
market value of $68,618. The total assets related to these 34 acquisitions were
$414,113, including goodwill of $127,870. The results of these acquisitions have
been included in the Company's results from their respective dates of
acquisition.
In fiscal 1995, in addition to the acquisitions of the Combined Companies,
the Company made six acquisitions accounted for under the purchase method for an
aggregate purchase price of $29,849, consisting of $18,099 of cash, $3,000 of
notes payable and 875,000 shares of common stock with a market value of $8,750.
The total assets related to these six acquisitions were $72,192, including
goodwill of $21,079. The results of these acquisitions have been included in the
Company's results form their respective dates of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 26, 1997 and April 30, 1996 and
includes the Company's consolidated financial statements, which give retroactive
effect to the acquisitions of the Pooled Companies for all periods presented,
and the results of the Purchased Companies as if all such purchase acquisitions
had been made at the beginning of fiscal 1996. The results presented below
include certain pro forma adjustments to
F-26
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
reflect the amortization of intangible assets, adjustments in executive
compensation and the inclusion of a federal income tax provision on all
earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
<S> <C> <C>
APRIL 26, APRIL 30,
1997 1996
------------ ------------
Revenues.......................................................... $ 3,225,582 $ 3,094,608
Income before extraordinary items................................. 73,029 49,170
Net income........................................................ 71,579 48,469
Income per share before extraordinary items....................... 1.03 0.70
Net income per share.............................................. 1.01 0.69
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1996 or the
results which may occur in the future.
EQUITY INVESTMENT IN AFFILIATE
In November 1996, the Company acquired a 49% equity interest in Dudley
Stationery Limited ("Dudley"), which is being accounted for under the equity
method. Under the terms of the agreement, the Company agreed to invest
approximately $80 million for working capital into Dudley over a two-year
period. The Company has currently invested approximately $41.3 million of the
total $80 million in Dudley.
NOTE 5--ACCRUED ACQUISITION COSTS
In conjunction with the acquisitions of the fiscal 1997 Purchased Companies,
the Company accrued the direct external costs incurred in conjunction with the
consummation of the acquisitions and the costs to consolidate acquired
operations into existing Company facilities, including the external costs
associated with closing redundant facilities of acquired companies, and
severance and relocation costs related to the acquired companies' employees.
As of the consummation date of the acquisition, the Company begins to assess
and formulate a plan to exit activities of the acquired companies. Typically,
this involves evaluating the facilities of the Company and the acquired
companies in the specific geographic areas, determining which of the acquired
facilities will be exited and identifying employee groups that will be
terminated or relocated. In most cases, the facilities are closed and the
employees terminated within one year of the completion of the plan.
F-27
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--ACCRUED ACQUISITION COSTS (CONTINUED)
The following table sets forth the Company's accrued acquisition costs for
the periods ended April 26, 1997 and April 30, 1996:
<TABLE>
<CAPTION>
EMPLOYEE DISPOSAL OF
REDUNDANT SEVERANCE & ASSETS &
FACILITIES RELOCATION OTHER TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30, 1996................... $ -- $ -- $ -- $ --
Additions................................. 1,593 2,484 6,712 10,789
----------- ------ ----------- ---------
Balance at April 26, 1997................... $ 1,593 $ 2,484 $ 6,712 $ 10,789
----------- ------ ----------- ---------
----------- ------ ----------- ---------
</TABLE>
NOTE 6--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs for the periods ended April 26, 1997 and April 30, 1996:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE- DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30 1995:
Additions.............................. $ 641 $ 469 $ 2,104 $ 3,214
Utilizations........................... (682) (682)
------ ----- ----------- ---------
Balance at April 30, 1996................ 641 469 1,422 2,532
Additions.............................. 1,337 308 2,750 4,395
Utilizations........................... (943) (698) (3,615) (5,256)
------ ----- ----------- ---------
Balance at April 26, 1997................ $ 1,035 $ 79 $ 557 $ 1,671
------ ----- ----------- ---------
------ ----- ----------- ---------
</TABLE>
F-28
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 26, APRIL 30,
1997 1996
----------- ----------
<S> <C> <C>
Land................................................................. $ 34,153 $ 6,993
Buildings............................................................ 59,470 46,305
Furniture and fixtures............................................... 181,715 86,719
Warehouse equipment.................................................. 29,174 35,987
Equipment under capital leases....................................... 14,787 8,082
Leasehold improvements............................................... 22,637 12,329
----------- ----------
341,936 196,415
Less: Accumulated depreciation....................................... (100,534) (68,834)
----------- ----------
Net property and equipment........................................... $ 241,402 $ 127,581
----------- ----------
----------- ----------
</TABLE>
Depreciation expense for fiscal years 1997, 1996 and 1995 was $31,153,
$14,798 and $10,856, respectively.
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 26, APRIL 30,
1997 1996
---------- ----------
<S> <C> <C>
Goodwill.............................................................. $ 653,600 $ 146,273
Other................................................................. 11,345 14,309
---------- ----------
664,945 160,582
Less: Accumulated amortization........................................ (21,316) (8,270)
---------- ----------
$ 643,629 $ 152,312
---------- ----------
---------- ----------
</TABLE>
Amortization expense for fiscal years 1997, 1996 and 1995 was $14,224,
$5,229 and $1,600, respectively.
F-29
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 26, APRIL 30,
1997 1996
---------- ----------
<S> <C> <C>
Credit facilities with banks, average interest rates of 7.6% at April
26, 1997 and 7.8% at April 30, 1996................................. $ 140,090 $ 26,029
Annual renewal loans provided by banks and other financial
institutions of foreign subsidiary secured by lease receivables of
foreign subsidiary. Interest rates ranging from 7.8% to 10.2% at
April 30, 1996...................................................... 89,456
Bank lines of credit of foreign subsidiary operations secured by
assets of those operations. Interest rates ranging from 9.2% to
9.8% at April 30, 1996.............................................. 12,731
Other................................................................. 2,160 7,296
Current maturities of long-term debt.................................. 8,208 16,219
---------- ----------
Total short-term debt........................................... $ 150,458 $ 151,731
---------- ----------
---------- ----------
</TABLE>
The Company currently has an agreement under which a syndicate of financial
institutions, led by Bankers Trust Company, as Agent (the "Bank"), is providing
the Company with a $500 million credit facility (the "Credit Facility") bearing
interest, at the Company's option, at the Bank's base rate plus an applicable
margin of up to 1.25%, or a eurodollar rate plus an applicable margin of up to
2.5%. The availability under the Credit Facility is subject to certain
sublimits including $100 million for working capital loans and $400 million for
acquisition loans. The Credit Facility is secured by a majority of the assets
of the Company and its subsidiaries and contains customary covenants, including
financial covenants with respect to the Company's consolidated leverage and
interest coverage ratios, capital expenditures, payment of dividends and
purchases and sales of assets, and customary default provisions, including
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy. The Company was in compliance with or obtained
waivers relating to these covenants at April 26, 1997. At April 26, 1997, the
balance outstanding under the Credit Facility was $140,090 and included five
eurodollar contracts, expiring within 30 days, totaling $105,000 at an average
interest rate of 7.2%.
F-30
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 26, APRIL 30,
1997 1996
---------- ----------
<S> <C> <C>
Convertible Subordinated Notes due 2003, interest at 5 1/2%,
convertible into shares of common stock at any time prior to
maturity at a conversion price of $47.40 per share, subject to
adjustment in certain events........................................ $ 230,000
Convertible Subordinated Notes due 2001, interest at 5 1/2%,
convertible into shares of common stock at any time prior to
maturity at a conversion price of $28.50 per share, subject to
adjustment in certain events........................................ 143,750 $ 143,750
Notes payable, secured by certain assets of the Company, interest
rates ranging from 8.0% to 10.0%, maturities from October 1996
through 2003........................................................ 35,400
Other................................................................. 16,627 53,175
Capital lease obligations............................................. 6,981 11,630
---------- ----------
397,358 243,955
Less: Current maturities of long-term debt............................ (8,208) (16,219)
---------- ----------
Total long-term debt............................................ $ 389,150 $ 227,736
---------- ----------
---------- ----------
</TABLE>
The 5 1/2% Convertible Subordinated Notes due 2003 (the "2003 Notes") are
redeemable, in whole or in part, at the Company's option at specified redemption
prices on or after May 22, 1998, but may not be redeemed prior to May 15, 1999
unless the closing price of the common stock is at least 150% of the conversion
price for a period of time prior to the notice of redemption. Costs incurred in
connection with the issuance of the 2003 Notes are included in other assets and
are being amortized over the seven year period of maturity. The fair value of
the 2003 Notes at April 26, 1997, based upon quoted market prices, totaled
$184,000.
The 5 1/2% Convertible Subordinated Notes due 2001 (the "2001 Notes") are
redeemable, in whole or in part, at the Company's option at specified redemption
prices on or after February 3, 1998, but may not be redeemed prior to February
2, 1999 unless the closing price of the common stock is at least 150% of the
conversion price for a period of time prior to the notice of redemption. Costs
incurred in connection with the issuance of the 2001 Notes are included in other
assets and are being amortized over the five year period of maturity. The fair
value of the 2001 Notes at April 26, 1997, based upon quoted market prices,
totaled $147,344.
F-31
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $ 8,208
1999.............................................................. 8,957
2000.............................................................. 1,862
2001.............................................................. 144,557
2002.............................................................. 333
Thereafter........................................................ 233,441
---------
$ 397,358
---------
---------
</TABLE>
NOTE 10--INCOME TAXES
Domestic and foreign income before provision for income taxes and
extraordinary items consist of the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
<S> <C> <C> <C>
APRIL 26, APRIL 30, APRIL 30,
1997 1996 1995
--------- --------- ---------
Domestic..................................................... $ 66,076 $ 37,931 $ 32,728
Foreign...................................................... 27,765 4,433 2,193
--------- --------- ---------
$ 93,841 $ 42,364 $ 34,921
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-----------------------------------
<S> <C> <C> <C>
APRIL 26, APRIL 30, APRIL 30,
1997 1996 1995
--------- ----------- -----------
Income taxes currently payable:
Federal....................................................... $ 22,829 $ 6,011 $ 2,374
State......................................................... 3,797 608 704
Foreign....................................................... 11,737 836 809
--------- ----------- -----------
38,363 7,455 3,887
--------- ----------- -----------
Deferred income tax expense (benefit)......................... (3,260) 32 (133)
--------- ----------- -----------
Total provision for income taxes.............................. $ 35,103 $ 7,487 $ 3,754
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
F-32
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 26, APRIL 30,
1997 1996
--------- ----------
<S> <C> <C>
Current deferred tax assets:
Inventory............................................................. $ 1,223 $ 1,087
Allowance for doubtful accounts....................................... 2,028 1,475
Net operating loss carryforward....................................... 3,192 3,192
Accrued liabilities................................................... 4,177 3,289
--------- ----------
Total current deferred tax assets................................... 10,620 9,043
--------- ----------
Long-term deferred tax liabilities:
Property and equipment................................................ (4,540) (4,998)
Intangible assets..................................................... (670) (441)
Internal Revenue Service tax assessment............................... (3,383) (3,383)
Other................................................................. (63) (1,230)
--------- ----------
Total long-term deferred tax liabilities............................ (8,656) (10,052)
--------- ----------
Subtotal............................................................ 1,964 (1,009)
Valuation allowance................................................. (5,468)
--------- ----------
Net deferred tax asset (liability).................................. $ 1,964 $ (6,477)
--------- ----------
--------- ----------
</TABLE>
At April 30, 1996, a valuation allowance had been recorded, related to
deferred tax assets of a Pooled Company, including net operating loss
carryforwards. Based upon the improved profitability of this Pooled Company
during fiscal 1997, the valuation allowance was reversed resulting in a lower
provision for income taxes.
The Internal Revenue Service ("IRS") tax assessment relates to the deferral
of a gain on the sale of land and a building by a subsidiary of the
Company. The IRS has determined that a portion of the gain recorded by the
subsidiary does not qualify for deferral and has assessed the Company additional
taxes. The subsidiary has recorded a deferred tax liability, including
interest, as a result of the assessment. The Company has filed an appeal with
the IRS relating to the above assessment; however, the IRS has not yet responded
to the appeal.
F-33
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--INCOME TAXES (CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
APRIL 26, APRIL 30, APRIL 30,
1997 1996 1995
----------- ----------- -----------
U.S. federal statutory rate.................................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit.......... 2.9 5.4 4.1
Subchapter S corporation income not subject to corporate level
taxation..................................................... (8.1) (30.5) (31.0)
Foreign earnings not subject to U.S. taxes..................... 2.0 (0.6)
Minority interest in foreign taxes............................. 2.5
Nondeductible goodwill......................................... 3.1 2.6 1.4
Nondeductible acquisition costs................................ 5.3 1.1
Reversal of valuation allowance................................ (5.8)
Other.......................................................... 3.0 2.2 1.2
--- ----- -----
Effective income tax rate...................................... 37.4% 17.7% 10.7%
--- ----- -----
--- ----- -----
</TABLE>
One Combined Company and certain Pooled Companies were organized as
subchapter S corporations prior to the closing of their acquisitions by the
Company and, as a result, the federal tax on their income was theresponsibility
of their individual stockholders. Accordingly, the Combined Company and the
specific Pooled Companies provided no federal income tax expense prior to these
acquisitions by the Company.
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the Combined Company and the specific Pooled
Companies had been subject to federal income taxes for the entire periods
presented.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
<S> <C> <C> <C>
APRIL 26, APRIL 30, APRIL 30,
1997 1996 1995
--------- --------- ---------
Income before extraordinary items per consolidated statement
of income.................................................. $ 58,738 $ 34,877 $ 31,167
Pro forma income tax provision adjustment.................... 7,595 12,932 10,808
--------- --------- ---------
Pro forma income before extraordinary items.................. $ 51,143 $ 21,945 $ 20,359
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-34
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998................................................................... $ 2,057 $ 53,197
1999................................................................... 1,995 44,640
2000................................................................... 1,147 35,873
2001................................................................... 726 24,994
2002................................................................... 492 18,919
Thereafter............................................................. 3,433 58,759
--------- ----------
Total minimum lease payments........................................... 9,850 $ 236,382
----------
----------
Less: Amounts representing interest.................................... (2,869)
---------
Present value of net minimum lease payments............................ $ 6,981
---------
---------
</TABLE>
Rent expense for all operating leases for fiscal 1997, 1996 and 1995 was
$49,704, $29,443 and $18,352, respectively.
NOTE 12--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 26, 1997 or April
30, 1996 related to these agreements.
NOTE 13--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue
Code. The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service. In fiscal 1997, the Company's matching contribution expense was
$1,195.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases
F-35
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 13--EMPLOYEE BENEFIT PLANS (CONTINUED)
made matching contributions on behalf of the employees. For fiscal 1997, 1996
and 1995, the subsidiaries incurred expenses totaling $2,524, $3,292 and $3,089,
respectively, related to these plans.
NOTE 14--STOCKHOLDERS' EQUITY
STOCK COMPENSATION PLANS
In October 1994, the Board of Directors and the Company's stockholders
approved the Company's 1994 Long-Term Compensation Plan (the "Plan"). The
purpose of the Plan is to provide officers, key employees and consultants with
additional incentives by increasing their ownership interests in the
Company. The maximum number of options to purchase common stock granted in any
calendar or fiscal year under the Plan, as amended, is equal to 20% of the
aggregate number of shares of the Company's common stock outstanding at the time
an award is granted, less, in each case, the number of shares subject to
previously outstanding awards under the Plan.
In August 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Non-Employee Directors' Stock Plan (the "Directors'
Plan"). The purpose of the Directors' Plan is to promote ownership by
non-employee directors of a greater proprietary interest in the Company, thereby
aligning such directors' interests more closely with the interests of
stockholders of the Company. A total of 750,000 shares of common stock has been
reserved for issuance under the Directors' Plan. At April 26, 1997, options to
acquire 108,000 shares of common stock have been granted under the Directors'
Plan.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans. Accordingly, because the exercise prices of the options have equaled the
market price on the date of grant, no compensation expense has been recognized
for stock options granted. Had compensation cost for the Company's stock
options been recognized based upon the fair value of the stock options on the
grant date under the methodology prescribed by SFAS 123, the Company's net
income and net income per share would have been impacted as indicated in the
following table. The pro forma results shown below reflect only the impact of
options granted in fiscal 1997 and 1996.
<TABLE>
<CAPTION>
APRIL 26, APRIL 30,
1997 1996
--------- ---------
<S> <C> <C>
Net income:
As reported........................................................... $ 57,288 $ 34,176
Pro forma............................................................. 44,643 32,017
Net income per share:
As reported........................................................... $ 0.94 $ 0.75
Pro forma............................................................. 0.73 0.70
</TABLE>
F-36
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Expected life of option.................................................. 7 years 7 years
Risk free interest rate.................................................. 6.66% 6.58%
Expected volatility of USOP stock........................................ 44.0% 58.5%
</TABLE>
The weighted-average fair value of options granted was $17.06 and $12.44 for
fiscal 1997 and 1996, respectively.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1994............. 83,665 $ 0.68 83,665 $ 0.68
Granted............................. 629,500 8.92
Canceled............................ (7,000) 10.00
----------
Balance at April 30, 1995............. 706,165 7.93 118,665 2.84
Granted............................. 2,764,591 18.83
Exercised........................... (63,350) 9.37
Canceled............................ (16,200) 12.70
----------
Balance at April 30, 1996............. 3,391,206 16.77 216,532 5.66
Granted............................. 4,486,110 30.62
Exercised........................... (131,829) 12.58
Canceled............................ (48,963) 18.98
----------
Balance at April 26, 1997............. 7,696,524 24.90 1,065,485 15.15
----------
----------
</TABLE>
The following table summarizes information about stock options outstanding
at April 26, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE EXERCISABLE PRICE
- -------------------------------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.68 to $10.00................. 589,665 7.1 years $ 7.63 317,753 $ 6.48
$10.01 to $20.00................ 1,773,599 8.6 years 14.13 468,202 14.55
$20.01 to $30.00................ 2,823,324 9.3 years 26.33 209,244 24.37
$30.01 to $40.00................ 2,491,336 9.3 years 34.91 70,286 30.97
$40.01 to $44.88................ 18,600 9.1 years 42.19
---------- ----------
$0.68 to $44.88................. 7,696,524 9.0 years 24.90 1,065,485 15.15
---------- ----------
---------- ----------
</TABLE>
F-37
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
The option outstanding information includes 83,665, 39,201 and 228,992
shares subject to options to acquire common stock at exercise prices of $0.68,
$15.89 and $16.05, respectively, which were granted at certain Pooled Companies
prior to their respective acquisitions by the Company.
Non-qualified options granted to employees 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.
COMMON STOCK
In November 1994, the Board of Directors of the Company approved a one
thousand-for-one split of the Company's common stock and changed the par value
of common stock from $1 per share to $.001 per share. The consolidated
financial statements have been adjusted to reflect the stock split. In February
1996, the Company's stockholders approved the amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 25,000,000 to 100,000,000 shares. In August 1996,
the Company's stockholders approved the amendment to the Company's Restated
Certified of Incorporation to increase the number of authorized shares of common
stock from 100,000,000 to 500,000,000.
NOTE 15--SEGMENT REPORTING
INDUSTRY SEGMENT
The Company currently operates in two reportable industry segments: office
products and print management. The office products industry segment involves
the sale and distribution of office and related supplies and equipment, catalog,
contract and remanufactured furniture, and office coffee and beverage products
and services. The print management industry segment involves the manufacturing,
distribution, management and printing of business forms, envelopes and
promotional products. The other industry segments that the Company operates in
include technology solutions, education products
F-38
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--SEGMENT REPORTING (CONTINUED)
and corporate travel services. The following table sets forth information as to
the Company's operations in its different industry segments:
<TABLE>
<CAPTION>
OFFICE PRINT
PRODUCTS MANAGEMENT OTHER TOTAL
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fiscal 1997:
Revenues............................. $ 2,042,321 $ 368,378 $ 425,176 $ 2,835,875
Operating income..................... 91,030 20,300 17,091 128,421
Identifiable assets.................. 1,274,335 185,357 350,660 1,810,352
Depreciation and amortization........ 31,522 8,758 8,084 48,364
Capital expenditures................. 30,684 16,599 14,494 61,777
Fiscal 1996:
Revenues............................. $ 1,051,660 $ 317,033 $ 317,737 $ 1,686,430
Operating income..................... 31,567 12,388 12,377 56,332
Identifiable assets.................. 517,479 122,027 351,344 990,850
Depreciation and amortization........ 10,464 5,089 4,836 20,389
Capital expenditures................. 18,395 6,098 2,341 26,834
Fiscal 1995:
Revenues............................. $ 653,791 $ 139,732 $ 247,781 $ 1,041,304
Operating income..................... 19,962 5,571 15,183 40,716
Identifiable assets.................. 227,300 51,906 85,516 364,722
Depreciation and amortization........ 4,697 4,478 4,095 13,270
Capital expenditures................. 5,675 2,456 4,923 13,054
</TABLE>
F-39
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--SEGMENT REPORTING (CONTINUED)
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
NEW ZEALAND
UNITED AND
STATES AUSTRALIA CANADA TOTAL
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fiscal 1997:
Revenues............................. $ 2,006,017 $ 700,793 $ 129,065 $ 2,835,875
Operating income..................... 89,793 28,708 9,920 128,421
Identifiable assets at year-end...... 998,824 753,254 58,274 1,810,352
Fiscal 1996:
Revenues............................. $ 1,489,172 $ 77,141 $ 120,117 $ 1,686,430
Operating income..................... 47,422 3,533 5,377 56,332
Identifiable assets at year-end...... 748,002 188,134 54,714 990,850
Fiscal 1995:
Revenues............................. $ 1,005,609 $ 28,574 $ 7,121 $ 1,041,304
Operating income..................... 38,386 1,429 901 40,716
Identifiable assets at year-end...... 356,201 5,512 3,009 364,722
</TABLE>
NOTE 16--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during fiscal 1997 and 1996
in the Company's Quarterly Reports on Form 10-Q as a result of the restatement
of the financial statements to give retroactive effect to the results of the
companies acquired during fiscal 1997 and 1996 in business combinations
accounted for under the pooling-of-interests method.
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
Revenues..................... $ 552,489 $ 736,686 $ 756,707 $ 789,993 $ 2,835,875
Gross profit................. 153,745 209,509 214,253 226,655 804,162
Operating income............. 27,877 39,063 31,253 30,228 128,421
Net income................... 16,330 18,092 10,770 12,096 57,288
Net income per share......... 0.29 0.31 0.18 0.18 0.94
Pro forma income before
extraordinary item (see
Note 10)................... 12,985 16,578 10,212 11,368 51,143
Pro forma income per share
before extraordinary
item....................... 0.23 0.28 0.17 0.16 0.84
</TABLE>
F-40
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 16--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
Revenues..................... $ 330,612 $ 406,538 $ 458,222 $ 491,058 $ 1,686,430
Gross profit................. 84,339 104,745 118,107 132,592 439,783
Operating income............. 6,330 15,979 22,272 11,751 56,332
Net income................... 4,847 10,179 13,516 5,634 34,176
Net income per share......... 0.12 0.23 0.30 0.11 0.75
Pro forma income before
extraordinary item (see
Note 10)................... 1,735 6,477 9,421 4,312 21,945
Pro forma income per share
before extraordinary
item....................... 0.04 0.15 0.21 0.08 0.48
</TABLE>
NOTE 17--SUBSEQUENT EVENTS
BUSINESS COMBINATION SUBSEQUENT TO YEAR-END
On May 22, 1997, the Company signed a definitive agreement (the "Agreement")
to acquire Mail Boxes Etc. ("MBE"), the world's largest franchisor of business,
communication and postal service centers with more than 3,300 centers operating
worldwide. The Company will exchange one share of its common stock for each
share of outstanding MBE common stock in the transaction, subject to adjustment
in certain circumstances. As of May 21, 1997, MBE had approximately 11.3
million shares of common stock outstanding. The transaction, which will be
accounted for under the pooling-of-interests method of accounting, is subject to
the approval of the shareholders of MBE and other conditions (including
regulatory approvals) described in the Agreement. If all of the conditions to
the acquisition contained in the Agreement are satisfied or waived prior
thereto, the Company expects the acquisition to be completed during the second
quarter of fiscal 1998.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the acquisition described above had been
consummated as of the beginning of fiscal 1997. The results presented below
include certain pro forma adjustments to reflect the amortization of intangible
assets, adjustments in executive compensation and the inclusion of a federal
income tax provision on all earnings:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
APRIL 26, 1997
----------------
<S> <C>
Revenues.................................................................... $ 3,293,418
Income before extraordinary items........................................... 81,672
Income per share before extraordinary items................................. 0.99
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
F-41
<PAGE>
SCHEDULE II
U.S. OFFICE PRODUCTS COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE FISCAL YEARS ENDED APRIL 26, 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER
DESCRIPTION DATE OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS DATE
- ------------------------------------ ----------- ---------- ---------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts..... May 1, 1994 $1,502,000 $2,519,000 $ 195,000(a) $ (2,311,000)(b) April 30, 1995
May 1, 1995 1,905,000 2,634,000 3,344,000(a)(c) (1,883,000)(b) April 30, 1996
May 1, 1996 6,000,000 6,861,000 945,000(a) (3,740,000)(b) April 26, 1997
Accumulated amortization of
intangibles....................... May 1, 1994 4,277,000 1,600,000 (924,000)(d) April 30, 1995
May 1, 1995 4,953,000 5,229,000 562,000(e) (2,474,000)(d) April 30, 1996
May 1, 1996 8,270,000 14,224,000 (1,178,000)(d) April 26, 1997
<CAPTION>
BALANCE
AT END OF
DESCRIPTION PERIOD
- ------------------------------------ ----------
<S> <C>
Allowance for doubtful accounts..... $1,905,000
6,000,000
10,066,000
Accumulated amortization of
intangibles....................... 4,953,000
8,270,000
21,316,000
</TABLE>
- ------------------------
(a) Allowance for doubtful accounts acquired in purchase acquisitions.
(b) Represents write-offs of uncollectible accounts receivable.
(c) Includes a $581,000 adjustment to conform the year-ends of certain Pooled
Companies.
(d) Represents write-offs of fully amortized intangible assets.
(e) Represents a $562,000 adjustment to conform the year-ends of certain Pooled
Companies.
F-42
<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 April 26, 1997 and the pending
acquisition of Mail Boxes Etc. The unaudited pro forma combined balance sheet
gives effect to the pending acquisition of Mail Boxes Etc. as if the transaction
had occurred as of the Company's most recent balance sheet date, April 26, 1997.
The pro forma combined statement of income for the year ended April 26, 1997
gives effect to (i) the 77 acquisitions completed during fiscal 1997 which were
accounted for under the purchase method of accounting (the "Fiscal 1997
Purchased Companies") as if such acquisitions had been made on May 1, 1996; (ii)
the Mail Boxes Etc. acquisition to be accounted for under the pooling of
interests method of accounting as if such acquisition had been made on May 1,
1996; (iii) 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, 1996; (iv) the sale by the
Company in September 1996 (the "September Stock Sale") of 1,250,000 shares of
USOP Common Stock as if such sale had been made on May 1, 1996; and (v) the
sales by the Company in February and March 1997 or 8,682,331 shares of USOP
Common Stock as if such sales had been made on May 1, 1996.
The pro forma combined statement of income for the year ended April 26, 1997
includes (i) the audited financial statements of the Company for the year ended
April 26, 1997; (ii) the audited financial statements of Mail Boxes Etc. for the
year ended April 30, 1997; and (iii) the unaudited financial information for
Fiscal 1997 Purchased Companies for the period from May 1, 1996 to the
consummation date.
The pro forma combined statements of income for the years ended April 30,
1996 and 1995 include the historical financial information of USOP and give
effect to the acquisition of Mail Boxes Etc. as if the acquisition had been made
on May 1, 1994.
In addition, the pro forma combined income statements give effect to tax
adjustments for certain pooled companies that were S corporations, as if such
earnings had been subject to corporate taxes for all periods presented.
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 include elsewhere in this report and in other
reports filed by the Company.
F-43
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO-FORMA COMBINED BALANCE SHEET
APRIL 26, 1997
(000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE
PRODUCTS MAIL BOXES PRO FORMA PRO FORMA
COMPANY ETC. ADJUSTMENTS COMBINED
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 44,026 $ 32,947 $ (32,947)(a) $ 44,026
Accounts receivable, net................................ 380,402 6,797 387,199
Inventory............................................... 281,605 447 282,052
Prepaid expenses and other current assets............... 98,644 11,665 110,309
------------ ----------- ----------- ------------
Total current assets.................................. 804,677 51,856 (32,947) 823,586
Property and equipment, net............................. 241,402 5,087 246,489
Intangible assets, net.................................. 643,629 6,826 650,455
Other assets............................................ 120,644 21,906 142,550
------------ ----------- ----------- ------------
Total assets.......................................... $ 1,810,352 $ 85,675 $ (32,947) $ 1,863,080
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities
Short-term debt......................................... $ 150,468 $ 692 $ (29,031)(a) $ 122,119
Accounts payable........................................ 204,814 1,363 206,177
Accrued compensation.................................... 40,285 2,390 42,675
Other accrued liabilities............................... 85,373 6,176 91,549
------------ ----------- ----------- ------------
Total current liabilities............................. 480,930 10,621 (29,031) 462,520
Long-term debt............................................ 389,150 3,916 (3,916)(a) 389,150
Deferred income taxes..................................... 8,656 8,656
Other long-term liabilities and minority interests........ 10,468 10,468
------------ ----------- ----------- ------------
Total liabilities..................................... 889,204 14,537 (32,947) 870,794
Stockholders' equity
Common stock............................................ 70 16,728 (16,717)(b) 81
Additional paid-in capital.............................. 809,433 16,717(b) 826,150
Cumulative translation adjustment....................... (5,583) (5,583)
Retained earnings....................................... 117,228 54,410 171,638
------------ ----------- ----------- ------------
Total stockholders' equity............................ 921,148 71,138 -- 992,286
------------ ----------- ----------- ------------
Total liabilities and stockholders' equity............ $ 1,810,352 $ 85,675 $ (32,947) $ 1,863,080
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
F-44
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 26, 1997
(000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL
U.S. OFFICE 1997
PRODUCTS PURCHASED MAIL BOXES PRO FORMA PRO FORMA
COMPANY COMPANIES(C) ETC. ADJUSTMENTS COMBINED
--------------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $ 2,835,875 $ 389,706 $ 67,837 $ 3,293,418
Cost of revenues.................................. 2,031,713 279,987 27,150 2,338,850
--------------- ----------- ----------- --------------- ---------------
Gross profit.................................... 804,162 109,719 40,687 954,568
Selling, general and admistrative expenses........ 655,101 99,225 28,825 $ 3,545(d) 776,251
(10,445)(e)
Non-recurring acquisition costs................... 16,245 (16,245)(f) --
Restructuring costs............................... 4,395 4,395
--------------- ----------- ----------- --------------- ---------------
Operating income................................ 128,421 10,494 11,862 23,145 173,922
Interest expense.................................. 45,901 3,346 (15,769)(g) 33,478
Interest income................................... (7,632) (212) (963) 8,807(h) --
Other income...................................... (3,689) (2,174) (5,863)
--------------- ----------- ----------- --------------- ---------------
Income before provision for income taxes and
extraordinary items............................. 93,841 9,534 12,825 30,107 146,307
Provision for income taxes........................ 35,103 3,167 4,835 21,530(i) 64,635
--------------- ----------- ----------- --------------- ---------------
Income before extraordinary items................. $ 58,738 $ 6,367 $ 7,990 $ 8,577 $ 81,672
--------------- ----------- ----------- --------------- ---------------
--------------- ----------- ----------- --------------- ---------------
Weighted average common shares outstanding........ 61,174 82,590(j)
Income per share before extraordinary items....... $ 0.96 $ 0.99
--------------- ---------------
--------------- ---------------
Pro Forma income before extraordinary items....... $ 51,143(k)
---------------
---------------
Pro Forma income per share before extraordinary
items........................................... $ 0.84
---------------
---------------
</TABLE>
F-45
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO-FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1996
(000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE
PRODUCTS MAIL BOXES PRO FORMA
COMPANY ETC. SUBTOTAL ADJUSTMENT
--------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues................................................... $ 1,686,430 $ 59,107 $ 1,745,537
Cost of revenues........................................... 1,246,647 31,071 1,277,718
--------------- ----------- --------------- ---------------
Gross profit........................................... 439,783 28,036 467,819
Selling, general and administrative expenses............... 372,180 14,361 386,541
Non-recurring acquisition costs............................ 8,057 8,057
Restructuring costs........................................ 3,214 3,214
--------------- ----------- --------------- ---------------
Operating income....................................... 56,332 13,675 70,007
Interest expense........................................... 20,123 (674) 19,449
Interest income............................................ (4,425) (4,425)
Other income............................................... (1,730) (1,730)
--------------- ----------- --------------- ---------------
Income before provision for income taxes and extraordinary
items.................................................... 42,364 14,349 56,713
Provision for income taxes................................. 7,487 5,620 13,107 $ 12,932(k)
--------------- ----------- --------------- ---------------
Income before extraordinary items.......................... $ 34,877 $ 8,729 $ 43,606 $ (12,932)
--------------- ----------- --------------- ---------------
--------------- ----------- --------------- ---------------
Weighted average common shares outstanding................. 45,583 57,552(j)
Income per share before extraordinary items................ $ 0.77 $ 0.76
--------------- ---------------
--------------- ---------------
Pro forma income before extraordinary items................ $ 21,945(k)
---------------
---------------
Pro forma income per share before extraordinary items...... $ 0.48
---------------
---------------
<CAPTION>
PRO FORMA
COMBINED
-----------
<S> <C>
Revenues................................................... $ 1,745,537
Cost of revenues........................................... 1,277,718
-----------
Gross profit........................................... 467,819
Selling, general and administrative expenses............... 386,541
Non-recurring acquisition costs............................ 8,057
Restructuring costs........................................ 3,214
-----------
Operating income....................................... 70,007
Interest expense........................................... 19,449
Interest income............................................ (4,425)
Other income............................................... (1,730)
-----------
Income before provision for income taxes and extraordinary
items.................................................... 56,713
Provision for income taxes................................. 26,039
-----------
Income before extraordinary items.......................... $ 30,674
-----------
-----------
Weighted average common shares outstanding................. 57,552(j)
Income per share before extraordinary items................ $ 0.53
-----------
-----------
Pro forma income before extraordinary items................
Pro forma income per share before extraordinary items......
</TABLE>
F-46
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO-FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1995
(000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE
PRODUCTS MAIL BOXES PRO FORMA PRO FORMA
COMPANY ETC. SUBTOTAL ADJUSTMENT COMBINED
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 1,041,304 $ 50,351 $ 1,091,655 $ 1,091,655
Cost of revenues........................... 762,724 27,109 789,833 789,833
------------ ----------- ------------ ----------- ------------
Gross Profit............................. 278,580 23,242 301,822 301,822
Selling, general and administrative
expenses................................. 237,864 12,508 250,372 250,372
Nonrecurring acquisition costs............. --
Restructuring costs........................ --
------------ ----------- ------------ ----------- ------------
Operating income......................... 40,716 10,734 51,450 51,450
Interest expense........................... 8,319 (447) 7,872 7,872
Interest income............................ (1,135) (1,135) (1,135)
Other income............................... (1,389) (1,389) (1,389)
------------ ----------- ------------ ----------- ------------
Income before provision for income taxes
and extraordinary items.................. 34,921 11,181 46,102 46,102
Provision for income taxes................. 3,754 4,411 8,165 $ 10,808(k) 18,973
------------ ----------- ------------ ----------- ------------
Income before extraordinary items.......... $ 31,167 $ 6,770 $ 37,937 $ (10,808) $ 27,129
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
Pro forma income before extraordinary
items.................................... $ 20,359(k)
------------
------------
</TABLE>
F-47
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE NUMBERS IN THOUSANDS)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect the reduction in short-term and long-term debt of
Mail Boxes Etc. and existing short-term debt of the Company.
(b) Adjustment to reflect issuance of stock to effect the acquisition of
Mail Boxes Etc.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(c) Includes the following with respect to Fiscal 1997 Purchased Companies
for the period from May 1, 1996 to consummation date:
<TABLE>
<CAPTION>
SIGNIFICANT
ACQUISITION- INDIVIDUALLY
WHITCOULLS GROUP INSIGNIFICANT
LIMITED ACQUISITIONS TOTAL
---------------- ------------ ----------
<S> <C> <C> <C>
Revenue...................................................... $ 98,905 $ 290,801 $ 389,706
Gross Profit................................................. 37,888 71,831 109,719
Operating Income............................................. 6,922 3,572 10,494
</TABLE>
(d) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1997
Purchased Companies. The goodwill is being amortized over an estimated
life of 40 years.
(e) 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.
(f) Adjustment to reflect the elimination of non-recurring acquisition costs
relating to pooling-of-interests business combinations.
(g) Adjustment to reflect the decrease in interest expense resulting from
the utilization of the proceeds from the September Stock Sale and the
sales by the Company in February and March 1997 of 8,682 shares of Common
Stock to repay outstanding indebtedness as if such stock sales had been
made on May 1, 1996.
(h) Adjustment to reflect the decrease in interest income resulting from the
utilization of excess cash to repay outstanding indebtedness.
(i) Adjustment to calculate the provision for income taxes on the combined
pro forma results at an effective income tax rate of approximately 44%.
The difference between the effective tax rate of 44% and the federal
statutory tax rate of 35% relates primarily to state income taxes and
non-deductible goodwill.
F-48
<PAGE>
(j) The weighted average shares outstanding used to calculate pro forma
earnings per share is comprised of the following:
<TABLE>
<CAPTION>
APRIL 26, 1997 APRIL 30, 1996
-------------- --------------
<S> <C> <C>
Historical weighted average common shares
outstanding............................................................... 61,174 45,583
Shares assumed outstanding for the entire
period related to issues for (i) Fiscal 1997
Purchased Companies and (ii) September
Stock Sale and February and March 1997
Stock Sales............................................................. 8,479
Shares to be issued for the acquisition of Mail Boxes Etc. 11,300 11,300
The Company and Mail Boxes Etc. Common Stock Equivalents 1,637 669
-------------- --------------
Total 82,590 57,552
-------------- --------------
-------------- --------------
</TABLE>
Net income per share for fiscal 1995 has not been presented as it is not
considered meaningful due to the acquisitions of the Combined Companies
and the Company's initial public offering in conjunction with the
formation of the Company during fiscal 1995.
(k) Adjustment to reflect the federal income taxes for certain acquisitions
accounted for under the pooling-of-interests method which were taxed as
subchapter S corporations as if these companies had been subject to
taxation as C corporations. As a result of being subchapter S
corporations, any tax liabilities prior to acquisition were the
responsibility of the individual company stockholders.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------------
APRIL 26, APRIL 30, APRIL 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Income before extraordinary items........................... $ 58,738 $ 34,877 $ 31,167
Pro forma income tax provision adjustment................... 7,595 12,932 10,808
------------- ------------- -------------
Pro forma income tax before extraordinary items............. 51,143 $ 21,945 $ 20,359
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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 $000
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUE 2 603,455 526,832 12,089 13,959
------- ------- ------- -------
LESS:
Operating Expenses 509,773 447,265 251 557
Depreciation of Fixed Assets 12,021 9,321 23 19
Audit Fees 254 230 - 18
Rental and Lease Expenses 33,268 25,561 - -
Directors' Fees 31 28 21 19
Goodwill Amortization 2,974 2,164 8 -
------- ------- ------- -------
EARNINGS BEFORE INTEREST AND TAXATION 45,134 42,263 11,786 13,346
Net Interest Expense 2 11,293 6,836 (943) (288)
------- ------- ------- -------
NET PROFIT BEFORE TAXATION 33,841 35,427 12,729 13,634
Provision for Taxation 3 13,538 11,291 250 (103)
Minority Interests 115 74 - -
------- ------- ------- -------
NET PROFIT AFTER TAXATION 20,188 24,062 12,479 13,737
Plus Retained Earnings Brought Forward 59,401 42,628 9,021 3,754
Transfer from Reserves 14 65 1,181 - -
Dividends Paid and Proposed 4 (12,100) (8,470) (12,100) (8,470)
------- ------- ------- -------
Retained Earnings Carried Forward 67,554 59,401 9,400 9,021
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to the financial statements.
- --------------------------------------------------------------------------------
F-57
<PAGE>
FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
WHITCOULLS GROUP LIMITED
BALANCE SHEET
AS AT 30 JUNE
($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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-121
<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-122
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Mail Boxes Etc.
We have audited the accompanying consolidated balance sheets of Mail Boxes Etc.
as of April 30, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mail Boxes Etc. at
April 30, 1997 and 1996, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended April 30, 1997, in
conformity with generally accepted accounting principles.
San Diego, California
June 6, 1997
F-123
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
APRIL 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents.................................................................... $ 3,992 $ 1,416
Restricted cash--franchisee deposits......................................................... 1,613 2,073
Short-term investments....................................................................... 27,342 21,825
Accounts receivable, net of allowance for doubtful accounts of $1,334 and $1,507, at April
30, 1997 and 1996, respectively............................................................ 6,547 6,799
Receivable from National Media Fund.......................................................... 250 770
Inventories.................................................................................. 447 544
Current portion of notes receivable.......................................................... 6,048 6,756
Current portion of net investment in sales-type leases....................................... 2,322 2,414
Deferred income taxes........................................................................ 1,272 1,846
Re-acquired area and center rights held for resale........................................... 629 638
Other........................................................................................ 1,394 1,063
--------- ---------
TOTAL CURRENT ASSETS..................................................................... 51,856 46,144
Notes receivable, net........................................................................ 12,977 10,831
Net investment in sales-type leases.......................................................... 6,067 7,518
Property and equipment:
Land....................................................................................... 1,200 1,200
Building and improvements.................................................................. 5,076 4,201
Office furniture and equipment............................................................. 4,307 4,018
Vehicles................................................................................... 209 209
--------- ---------
Total property and equipment............................................................. 10,792 9,628
Less accumulated depreciation and amortization........................................... 4,831 4,247
--------- ---------
NET PROPERTY AND EQUIPMENT............................................................... 5,961 5,381
Excess of cost over assets acquired, net of accumulated amortization of $607 and $549 at
April 30, 1997 and 1996, respectively...................................................... 383 441
Re-acquired area rights, net of accumulated amortization of $511 and $240 at April 30, 1997
and 1996, respectively..................................................................... 6,443 3,240
Deferred income taxes........................................................................ 1,249 1,307
Other assets................................................................................. 739 904
--------- ---------
TOTAL ASSETS............................................................................. $ 85,675 $ 75,766
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................................. $ 1,363 $ 2,096
Franchisee deposits.......................................................................... 2,097 2,619
Royalties, referrals and commissions payable................................................. 1,760 2,515
Accrued employee expenses and related taxes.................................................. 2,390 1,963
Other accrued expenses....................................................................... 1,550 2,012
Income taxes payable......................................................................... 769 838
Current maturities of long term debt......................................................... 692 958
--------- ---------
TOTAL CURRENT LIABILITIES................................................................ 10,621 13,001
Long-term debt, net of current maturities...................................................... 3,916 1,402
Commitments and contingencies.................................................................. -- --
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and
outstanding................................................................................ -- --
Common stock, no par value, 40,000,000 shares authorized, with 11,300,273 and 11,139,698
shares issued and outstanding at April 30, 1997 and 1996, respectively..................... 16,728 14,944
Retained earnings............................................................................ 54,410 46,419
--------- ---------
TOTAL SHAREHOLDERS' EQUITY............................................................... 71,138 61,363
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................... $ 85,675 $ 75,766
--------- ---------
--------- ---------
</TABLE>
(See accompanying notes)
F-124
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Royalty and marketing fees..................................................... $ 35,254 $ 30,947 $ 24,673
Franchise fees................................................................. 9,915 8,557 8,670
Sales of supplies and equipment................................................ 12,775 10,839 10,020
Interest income on leases and other............................................ 8,687 6,975 5,424
Company centers................................................................ 1,206 1,789 1,564
--------- --------- ---------
TOTAL REVENUES............................................................. 67,837 59,107 50,351
Cost and expenses:
Franchise operations........................................................... 18,463 14,881 12,506
Franchise development.......................................................... 6,383 5,883 5,090
Cost of supplies and equipment sold............................................ 9,585 8,465 7,915
Marketing...................................................................... 6,219 4,068 4,630
General and administrative..................................................... 9,060 10,293 7,878
Company centers................................................................ 1,265 1,842 1,598
Litigation settlement expenses................................................. 5,000 -- --
--------- --------- ---------
TOTAL COST AND EXPENSES.................................................... 55,975 45,432 39,617
--------- --------- ---------
Operating income................................................................. 11,862 13,675 10,734
Interest on investments and other................................................ 963 674 447
--------- --------- ---------
Income before provision for income taxes......................................... 12,825 14,349 11,181
Provision for income taxes....................................................... 4,834 5,620 4,411
--------- --------- ---------
NET INCOME................................................................. $ 7,991 $ 8,729 $ 6,770
--------- --------- ---------
--------- --------- ---------
NET INCOME PER COMMON SHARE...................................................... $ 0.68 $ 0.77 $ 0.60
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING............................................................. 11,780 11,403 11,357
--------- --------- ---------
--------- --------- ---------
</TABLE>
(See accompanying notes)
F-125
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, April 30, 1994................................................ 11,569 $ 19,195 $ 30,920 $ 50,115
Exercise of employee stock options and other........................... 146 928 928
Common stock repurchased............................................... (657) (5,681) (5,681)
Income tax benefit from stock option activity.......................... 13 13
Net income............................................................. 6,770 6,770
--------- --------- --------- ---------
Balance, April 30, 1995................................................ 11,058 14,455 37,690 52,145
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 221 2,135 2,135
Common stock repurchased............................................... (140) (1,922) (1,922)
Income tax benefit from stock option activity.......................... 276 276
Net income............................................................. 8,729 8,729
--------- --------- --------- ---------
Balance, April 30, 1996................................................ 11,139 14,944 46,419 61,363
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 180 1,590 1,590
Common stock repurchased............................................... (19) (410) (410)
Income tax benefit from stock option activity.......................... 604 604
Net income............................................................. 7,991 7,991
--------- --------- --------- ---------
Balance, April 30, 1997................................................ 11,300 $ 16,728 $ 54,410 $ 71,138
--------- --------- --------- ---------
</TABLE>
(See accompanying notes)
F-126
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
OPERATING ACTIVITIES:
Net income.......................................................................... $ 7,991 $ 8,729 $ 6,770
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization..................................................... 1,046 1,030 1,024
Gain on sale of equipment under sales type lease agreements....................... (429) (558) (681)
Increase (decrease) in allowance for doubtful accounts............................ (530) 880 1,236
Loss (gain) on disposal of property and equipment................................. (7) 4 122
Deferred income taxes............................................................. 632 (1,054) (1,023)
Changes in assets and liabilities:
Restricted cash................................................................... 460 (459) (252)
Accounts and notes receivable..................................................... (760) (1,049) (7,386)
Receivable from National
Media Fund........................................................................ 520 830 (1,600)
Assets leased to franchisees and inventories...................................... (1,338) (1,235) (1,999)
Re-acquired area and center rights held for resale................................ 109 378 261
Other current assets.............................................................. (331) (58) 421
Other assets...................................................................... (38) 152 173
Accounts payable.................................................................. (733) 945 419
Franchisee deposits............................................................... (522) 466 747
Royalties, referrals and commissions payable...................................... (755) 66 610
Accrued employee expenses and related taxes....................................... 427 500 697
Other accrued expenses............................................................ (369) 838 821
Income taxes payable.............................................................. 535 397 730
--------- --------- ---------
NET CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES................................. 5,908 10,802 1,090
INVESTING ACTIVITIES:
Net change in short-term investments.............................................. (5,517) (11,773) 389
Additions to property and equipment............................................... (1,292) (472) (477)
Principal payments received on sales-type leases.................................. 3,407 3,628 3,223
Re-acquired area rights........................................................... (439) (185) (887)
--------- --------- ---------
NET CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES....................... (3,841) (8,802) 2,248
FINANCING ACTIVITIES:
Borrowing under line of credit.................................................... 1,630 3,720 3,800
Repayments under line of credit................................................... (2,150) (4,550) (2,200)
Repayments on notes payable....................................................... (354) (146) (54)
Repurchase of common stock........................................................ (410) (1,922) (5,681)
Proceeds from the issuance of common stock........................................ 1,793 1,923 937
--------- --------- ---------
NET CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES....................... 509 (975) (3,198)
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS............................................. 2,576 1,025 140
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................ 1,416 391 251
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............................................. $ 3,992 $ 1,416 $ 391
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for Income taxes........................................ $ 3,762 $ 6,348 $ 5,479
Cash paid during the year for interest expense.................................... $ 261 $ 155 $ 98
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Equipment sold under sales-type leases............................................ $ 1,864 $ 2,232 $ 2,724
Cost of equipment sold under sales-type leases.................................... $ 1,435 $ 1,674 $ 2,043
Notes payable issued in connection with re-acquired area rights................... $ 3,123 $ 185 $ 1,495
Accounts and notes forgiven in connection with re-acquired area rights............ $ 104 -- $ 468
Exchange of area rights........................................................... -- -- $ 260
</TABLE>
(See accompanying notes)
F-127
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Mail Boxes Etc. ("MBE" or "the Company") was incorporated in November 1983
as a California corporation. It operates domestically through one wholly-owned
subsidiary, Mail Boxes Etc. USA, Inc. This subsidiary grants territorial
franchise rights for the operation or sale of service centers specializing in
postal, packaging, business and communication services. The purchase price paid
by the Company to acquire this subsidiary exceeded the subsidiary's net assets
by $0.9 million; the excess is being amortized on the straight-line method over
20 years.
The Company acquired a majority interest in the master license for the
United Kingdom during FY96. During FY97 MBE acquired the remaining interest in
the United Kingdom and operated this entity as a wholly-owned subsidiary,
MBE-UK. All accounts of this foreign subsidiary have been measured using U.S.
dollars as the functional currency. The gains and losses arising from the
measurement of the foreign subsidiary's account have not been significant. At
the end of FY97, the MBE Master License for the United Kingdom was sold to a
group comprised of the individual principal owners of the MBE Master License for
Canada and several other MBE Area and Individual Franchisees.
The Company provides franchisees with a system of business training, advice
regarding site location, marketing, advertising programs and management support
designed to assist the franchisee in opening and operating MBE Centers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
REVENUE RECOGNITION
The Company enters into area and individual franchise agreements in the
United States and master license agreements in other countries. Area franchise
agreements grant the area franchisee the exclusive right to market individual
franchise centers for the Company in the area franchisee's territory. The area
franchisee generally receives a commission on individual franchises sold as well
as a share of future royalties earned by the Company from centers in the area
franchisee's territory. Individual franchise agreements grant the individual
franchisee the exclusive right to open and operate a franchise center in the
individual franchisee's territory.
Franchise fee revenue is recognized upon completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is completed. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant initial obligations that must be completed before
any revenue is recognized are: all operating manuals are provided and training
is completed.
F-128
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue is recognized using the installment method when the revenue is
collectable over an extended period and no reasonable basis exists for
estimating collectability.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
In FY95, the National Media Fund was created to administer national
advertising programs. The National Media Fund is managed by a committee of area
franchisees, individual franchisees and MBE. Certain advertising fees, based on
franchisees' sales (as defined), are collected by the Company for the National
Media Fund. Such advertising fees are not included in the accompanying financial
statements. As of April 30, 1997 and 1996, the Company had advanced $250
thousand and $770 thousand to the National Media Fund, respectively, to fund
certain national advertising programs. These advances, including interest, are
repaid to the Company based on the collection of the advertising fees and
availability of funds.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers cash equivalents to be those instruments which have
original maturities of three months or less.
In accordance with Financial Accounting Standards Board Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities for which the Company
does not have the intent or the ability to hold to maturity are classified as
available for sale along with the Company's investments in equity securities.
Securities classified as available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. At April 30, 1997 and 1996, the Company had no investments
that were classified as trading or held to maturity as defined by Statement No.
115.
Realized gains and losses are included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available for sale is included in interest income.
The following is a summary of cash and cash equivalents and the estimated
fair value of available for sale securities by balance sheet classification at
April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents Cash.............................................................. $ 351 $ 1,339
Money market fund......................................................................... 3,641 77
Short-term investments:
U.S. Government securities................................................................ 5,842 4,000
Mutual fund preferred equity securities................................................... 21,500 17,825
--------- ---------
Total cash, cash equivalents and short-term investments..................................... $ 31,334 $ 23,241
--------- ---------
--------- ---------
</TABLE>
F-129
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimated fair value of each investment approximates the amortized cost,
and therefore, there are no unrealized gains or losses as of April 30, 1997 or
1996.
"Restricted cash-franchisee deposits" is the amount that prospective
franchisees have deposited into a separate account managed by MBE. When all of
the requirements for recognizing revenue for an individual, area or master
license sale are completed (see the "Revenue Recognition" section of Note 1),
then the deposit amount is transferred from this separate account into MBE's
regular account and the revenue from the sale is recognized. If MBE's
obligations are not completed then these deposits are usually refundable. The
account, "Franchisee deposits", in the liability section of the balance sheet
includes the restricted cash deposit amount and other deposits received from its
franchisees.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt and equity instruments of
financial institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments.
Receivables from franchisees include trade receivables, lease receivables
and notes receivable. Credit is extended based on an evaluation of the
franchisee's financial condition. Sales-type leases are collateralized by the
leased equipment and fixtures.
Trade receivables are not collateralized. However, the center ownership
transfer process requires that all amounts owed be paid when a center ownership
is transferred.
Notes receivable from area franchisees and master licensees are
collateralized by the area rights or master license rights, respectively. The
Company has provided for estimated credit losses.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of resources and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories consist of supplies and equipment held for resale to franchisees
and equipment held for lease. Inventories are recorded at the lower of cost
(first-in, first-out method) or market.
RE-ACQUIRED INDIVIDUAL AND AREA FRANCHISE RIGHTS
The Company repurchases franchise rights for two primary reasons. The
Company may repurchase area rights with the intention of developing a better
support system and then reselling the areas within a short period of time. The
Company may acquire individual center rights to upgrade the Center and then
resell it within a short period of time. The Company had an investment of
approximately $629 thousand and $638 thousand in such individual and area rights
at April 30, 1997 and 1996, respectively. The
F-130
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company may also repurchase the area rights with the primary intention of
retaining the royalties normally shared with the former area franchisees and
maintaining such rights as long-term investments. The area repurchases have been
accounted for as purchases. The Company records these area repurchases at cost
less accumulated amortization. Periodically the Company assesses the fair value
of these areas based on estimated cash flows to determine if an impairment in
the value has occurred and an adjustment is necessary. As of April 30, 1997 no
adjustment is necessary. The Company had an investment of $6.4 million and $3.2
million in such area rights at April 30, 1997 and 1996, respectively. Area
franchise rights held as long-term investments are amortized over a period of 20
years.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Building..................................................... 31.5 years
12.5-31.5
Building improvements........................................ years
Office furniture and equipment............................... 3-5 years
Vehicles..................................................... 3 years
</TABLE>
EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's stock options generally equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
ACCOUNTING FOR ASSET IMPAIRMENT
The Company adopted Statement of Financial Accounting Standards No. 121
(SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", effective May 1, 1995. SFAS No. 121
required impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. There was no effect on the financial
statements from the adoption of SFAS No. 121.
NET INCOME PER COMMON SHARE
Earnings per share are based on the weighted average number of common shares
and common share equivalents (stock options) outstanding during the period.
F-131
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NOTES RECEIVABLE
Notes receivable consist of the following at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Notes with interest rates ranging from 8%-14%, from individual franchisees, due at varying
dates through 2005........................................................................ $ 11,688 $ 11,170
Notes with interest rates ranging from 8%-14%, from area franchisees, due at varying dates
through 2005.............................................................................. 7,252 6,611
Notes with interest rates ranging from 8.5%--11.75%, from master licensees, due at varying
dates through 2004........................................................................ 1,728 1,806
--------- ---------
20,668 19,587
--------- ---------
Less portion due within one year............................................................ (6,048) (6,756)
Less allowance for uncollectible notes...................................................... (1,643) (2,000)
--------- ---------
$ 12,977 $ 10,831
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:......................................... $ 1,997 $ 2,041
--------- ---------
--------- ---------
</TABLE>
Scheduled principal maturities for notes receivable as of April 30, 1997,
are as follows (in thousands): 1998--$6,048; 1999--$4,164; 2000--3,384;
2001--$2,582; 2002--$1,997; and thereafter $2,493
At April 30, 1997, the Company was obligated to fund approximately $281
thousand under certain financing programs offered to franchisees.
3. NET INVESTMENT IN SALES--TYPE LEASES
The Company leases various types of office and computer equipment to
franchisees under three to eight-year lease agreements. The following summarizes
the components of the net investment in sales-type leases at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Total minimum lease payments to be received................................................. $ 10,980 $ 13,241
Less unearned income........................................................................ (2,591) (3,309)
--------- ---------
Net investment in sales-type leases......................................................... 8,389 9,932
Less portion due within one year............................................................ (2,322) (2,414)
--------- ---------
$ 6,067 $ 7,518
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:......................................... $ 1,203 $ 1,420
--------- ---------
--------- ---------
</TABLE>
Annual minimum lease payments subsequent to April 30, 1997, are as follows
(in thousands): 1998-- $3,307; 1999--$2,736; 2000--$2,031; 2001--$1,330;
2002--$778; and thereafter--$798.
F-132
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT
The Company has a line of credit with a bank which allows maximum borrowings
of $7 million. As of April 30, 1997, $250 thousand has been borrowed and $6.750
million is available for borrowing under the line of credit. The line of credit
is unsecured and bears interest at a rate based on LIBOR plus certain basis
points (6.81% at April 30, 1997). The agreement expires on September 1, 1998, at
which time all outstanding borrowing can be converted to a three-year term loan,
which would be payable in equal monthly installments. The line of credit
agreement contains various covenants, including limitations on additional
indebtedness and maintaining certain financial ratios.
5. NOTES PAYABLE
Long-term debt consists of notes payable to former area franchisees in
connection with the repurchase of area franchise rights. Payments are made in
monthly installments of $51 thousand including interest at 8% to 8.5% per annum.
Aggregate principal maturities on notes payable at April 30, 1997 are as follows
(in thousands): 1998--$442; 1999--$452; 2000--$447; 2001--$457; 2002 - $463; and
thereafter-- $2,097.
6. INCOME TAXES
The provision for income taxes consists of the following for each of the
years ended April 30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal............................................................................ $ 3,297 $ 5,324 $ 4,352
State.............................................................................. 905 1,344 1,088
--------- --------- ---------
4,202 6,668 5,440
Deferred:
Federal............................................................................ 557 (913) (890)
State.............................................................................. 75 (135) (139)
--------- --------- ---------
632 (1,048) (1,029)
--------- --------- ---------
$ 4,834 $ 5,620 $ 4,411
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has derived tax deductions measured by the excess of the market
value over the option price at the date employee stock options were exercised.
The cumulative related tax benefit of approximately $1.4 million has been
credited to common stock.
Significant components of the Company's deferred tax assets for federal and
state income taxes as of April 30 are:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS: 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Valuation reserves................................................................... $ 1,884 $ 2,646 $ 1,679
State taxes.......................................................................... 247 339 295
Deferred compensation................................................................ 390 168 131
--------- --------- ---------
Total deferred tax assets............................................................ $ 2,521 $ 3,153 $ 2,105
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-133
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
A reconciliation between the amount of tax computed by multiplying income
before taxes by the applicable statutory rates and the amount of reported taxes
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate....................................................... 34.0% 35.0% 34.0%
State tax, net of federal tax benefit................................ 5.0% 5.5% 5.6%
Other................................................................ (1.3%) (1.3%) (0.1%)
--- --- ---
37.7% 39.2% 39.5%
--- --- ---
--- --- ---
</TABLE>
7. STOCK OPTIONS
The Company has granted options to directors, officers and key employees
under stock option plans to purchase shares of the Company's common stock.
Options are generally granted at prices equal to the fair market value of
the shares at the date of grant and are generally exercisable in equal
increments over three to five years, commencing one year after the date of
grant. At April 30, 1997, 473 thousand options were exercisable and the Company
had nearly 2.6 million shares available for future grant under the stock option
plan for employees and 160 thousand shares available for future grant under the
stock option plan for outside directors.
A summary of the Company's stock option activity and related information is
as follows (shares in thousands):
<TABLE>
<CAPTION>
FY97
--------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 1,113 $ 9.85
Granted................................................................................ 489 $ 17.54
Exercised.............................................................................. (180) $ 9.97
Forfeited.............................................................................. (169) $ 13.12
----- ------
Outstanding at the end of the year..................................................... 1,253 $ 12.39
----- ------
Exercisable at the end of the year..................................................... 473* $ 10.75
----- ------
</TABLE>
- ------------------------
* Because of the Merger Agreement with U.S. Office Products described in Note
13, all stock options granted prior to May 22, 1997 (the date of the Merger
Agreement), will become vested and fully exercisable prior to the Merger. If
the Merger is not consummated, all options that were accelerated solely as a
result of the Merger Agreement, but were not exercised, will revert back to
their original vesting schedule.
F-134
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
FY96
--------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 914 $ 9.93
Granted................................................................................ 441 $ 9.17
Exercised.............................................................................. (221) $ 8.70
Forfeited.............................................................................. (21) $ 13.30
----- ------
Outstanding at the end of the year..................................................... 1,113 $ 9.85
----- ------
Exercisable at the end of the year..................................................... 394 $ 12.49
----- ------
</TABLE>
<TABLE>
<CAPTION>
FY95
----------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
------------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 847 $ 9.90
Granted................................................................................ 258 $ 7.81
Exercised.............................................................................. (146) $ 6.29
Forfeited.............................................................................. (45) $ 9.31
--- ------
Outstanding at the end of the year..................................................... 914 $ 9.93
--- ------
Exercisable at the end of the year..................................................... 408 $ 10.77
--- ------
</TABLE>
Adjusted pro forma information regarding net income and earnings-per-share
is required by SFAS 123, and has been determined as if the Company had accounted
for its employee and non-employee directors stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using the "Black Scholes" method for option pricing with the
following weighted-average assumptions for FY97 and FY96: 1) risk free interest
rates of 6%; 2) dividend yields of 0%; 3) volatility factors of the expected
market value of the Company's common stock of .395; and a weighted-average
expected life of the options of 5 years.
For purposed of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information would have been as follows (in
thousands):
<TABLE>
<CAPTION>
FY97 FY96
--------- ---------
<S> <C> <C>
Adjusted pro forma net income.................................................................. $ 7,403 $ 8,549
Adjusted pro forma earnings-per-share.......................................................... $ 0.63 $ 0.75
</TABLE>
The results above are not likely to be representative of the effects of
applying FAS 123 on reported net income or loss for future years as these
amounts reflect the expense for only one or two years vesting.
F-135
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
The following summarizes information about the Company's stock options
outstanding at April 30, 1997 (number of options in thousands):
<TABLE>
<CAPTION>
SHARES SUBJECT TO OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
OPTION WGTD. AVE NUMBER
RANGE OF SHARES REMAINING WGTD. AVE. EXERCIS- WGTD. AVE.
EXERCISE PRICE OUTSTANDING LIFE EXER. PRICE ABLE EXER. PRICE
- --------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$4.13 8 1.0 yrs $ 4.13 8 $ 4.13
$6.81--$8.25 390 7.5 $ 7.84 112 $ 7.57
$9.00--$10.50 278 4.6 $ 10.00 195 $ 9.96
$11.50--$14.50 145 4.8 $ 13.80 140 $ 13.78
$16.50--$23.13 432 9.1 $ 17.70 18 $ 18.27
----- ---
1,253 473
</TABLE>
8. FRANCHISE FEES
Franchise fees consist of the following for each of the years ended April
30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Individual franchises................................................................ $ 7,240 $ 6,397 $ 6,774
Area franchises...................................................................... 296 292 58
Master licenses & international fees................................................. 1,062 957 1,170
Transfer and renewal fees............................................................ 1,317 911 668
--------- --------- ---------
$ 9,915 $ 8,557 $ 8,670
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. ROYALTY EXPENSES
Royalties shared with area franchisees are included in franchise operations
in the accompanying consolidated statements of income and are as follows (in
thousands): 1997--$12,875; 1996--$11,686; and 1995--$9,689.
10. EMPLOYEE BENEFIT PLANS
In November 1988, the Company adopted an amended and restated Stock Purchase
and Salary Savings Plan (Plan) covering substantially all employees that have
been employed for at least six months and meet other age and eligibility
requirements. Employees may contribute up to ten percent of compensation per
year (subject to a maximum limit by federal tax law) into various funds.
Profit sharing contributions by the Company to the Plan are made at the
discretion of the Board of Directors and were $240 thousand, $450 thousand, and
$420 thousand for the years ended April 30, 1997, 1996 and 1995, respectively.
At the discretion of the Board of Directors, the Company may also make annual
matching contributions to the Plan. Matching contributions for 1997, 1996 and
1995 were $214 thousand, $162 thousand, and $136 thousand, respectively and
equal to 50% of the employee's contributions.
F-136
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has entered into an employment agreement with its chief
executive officer, under which the Company agreed to obtain a split dollar life
insurance policy for his benefit. The Company contributed $100 thousand in both
FY97 and FY96 toward the funding of this policy. The Company has retained an
equity interest in this policy equal to the extent of its contributions.
Consequently, there is no effect on the Company's earnings as a result of these
contributions.
Contributions after FY97 will be determined annually by the Board of
Directors.
11. LITIGATION
On November 6, 1996, the Company entered into a comprehensive settlement of
various lawsuits and claims made by certain franchisees in several lawsuits
being pursued in San Diego County Superior Court. Under the settlement
agreement, the Company paid $4 million in cash and will deliver an aggregate
amount of 39,080 shares of its common stock over a period of two years. The
settlement expense reflected in the Company's financial results is $5 million.
The Company is still involved in various lawsuits and claims from its
franchisees and former employees in the course of conducting its business. While
the Company intends to vigorously defend these actions, management is unable to
make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation. It is possible that the
Company's results of operations in a particular quarter or annual period could
be materially adversely affected by an ultimate unfavorable outcome of certain
pending litigation. Management believes, however, that the ultimate outcome of
all pending litigation should not have a material adverse effect on the
Company's financial position or liquidity.
12. RELATED PARTY TRANSACTIONS
Nearly 40% of the franchisees' gross sales and almost 50% of their
subject-to-royalty revenues are generated by selling UPS Services. The Company
receives royalty revenue based on revenues earned by the franchisees. The
Company recognized royalty and marketing fee revenues generated from UPS
services of $16.9 million, $14.9 million, and $11.8 million for the years ended
April 30, 1997, 1996, and 1995, respectively.
13. SUBSEQUENT EVENTS
On May 22, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with U.S. Office Products Company ("USOP"), pursuant to
which a newly-formed, wholly-owned subsidiary of USOP will be merged (the
"Merger") with and into MBE, with MBE to be the surviving corporation. Once the
merger is completed, MBE will be a wholly-owned subsidiary of USOP. Consummation
of the Merger is subject to certain conditions, including the approval of the
principal terms of the transaction by the Company's shareholders.
F-137
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information includes all adjustments which
management considers necessary for a fair statement of such information. For
interim quarterly financial statements, the provision for income taxes is
estimated using the best available information for projected results for the
entire year (in thousands, except for per share data).
<TABLE>
<CAPTION>
FY97 FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues........................................................ $ 14,779 $ 17,047 $ 18,838 $ 17,173
Total cost and expenses............................................... 11,634 18,078 13,204 13,059
Provision for (benefit from) income taxes............................. 1,331 (341) 2,310 1,534
Net income (loss)..................................................... 2,070 (470) 3,557 2,834
Earnings (loss) per share............................................. .18 (0.04) .30 .24
</TABLE>
<TABLE>
<CAPTION>
FY96 FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues........................................................ $ 12,803 $ 15,097 $ 16,164 $ 15,093
Total cost and expenses............................................... 10,279 11,804 11,870 11,479
Provision for income taxes............................................ 1,036 1,345 1,751 1,488
Net income............................................................ 1,622 2,091 2,708 2,308
Earnings per share.................................................... .14 .18 .24 .20
</TABLE>
F-138
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
MAIL BOXES ETC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
- ---------------------------- ----------------------- ---------------------------------------- ---------------------
<S> <C> <C> <C> <C>
BALANCE AT
DESCRIPTION BEGINNING OF PERIOD ADDITIONS DEDUCTIONS-DESCRIBE
- ---------------------------- ----------------------- ---------------------------------------- ---------------------
<CAPTION>
(1) (2)
CHARGED TO COSTS CHARGED TO OTHER
AND EXPENSES ACCOUNTS-DESCRIBE
----------------- ---------------------
<S> <C> <C> <C> <C>
Year ended April 30, 1997:
Deducted from asset
accounts: $ 3,507 $ 1,571 $ 2,101
Allowance for doubtful
accounts and notes
receivable:
Year ended April 30, 1996:
Deducted from asset
accounts: $ 2,627 $ 3,291 $ 2,411
Allowance for doubtful
accounts and notes
receivable:
Year ended April 30, 1995
Deducted from asset
accounts: $ 1,391 $ 760 $ 727 $ 251
Allowance for doubtful
accounts and notes
receivable:
<CAPTION>
COL. A COL. E
- ---------------------------- -----------------
<S> <C>
BALANCE AT END
DESCRIPTION OF PERIOD
- ---------------------------- -----------------
<S> <C>
Year ended April 30, 1997:
Deducted from asset
accounts: $ 2,977
Allowance for doubtful
accounts and notes
receivable:
Year ended April 30, 1996:
Deducted from asset
accounts: $ 3,507
Allowance for doubtful
accounts and notes
receivable:
Year ended April 30, 1995
Deducted from asset
accounts: $ 2,627
Allowance for doubtful
accounts and notes
receivable:
</TABLE>
F-139
