<PAGE>
____________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 26, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-25372
U.S. OFFICE PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 52-1906050
(State of other jurisdiction (I.R.S. Employer
incorporation or organization.) Identification No.)
1025 Thomas Jefferson Street
Suite 600
Washington, D.C. 20007
(Address of principal executive offices) (Zip Code)
(202) 339-6700
(Registrant's telephone number, including area code)
1440 New York Avenue, N.W.
Suite 310
Washington, D.C. 20005
Former Fiscal Year: April 30
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of December 10, 1996, there were 46,003,132 shares of common stock
outstanding.
____________________________________________________________
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet 3
October 26, 1996 (unaudited) and April 30, 1996 (unaudited)
Consolidated Statement of Operations 4
For the three months ended October 26, 1996 (unaudited) and
October 31, 1995 (unaudited) and for the six months ended
October 26, 1996 (unaudited) and October 31, 1995 (unaudited)
Consolidated Statement of Cash Flows 5
For the six months ended October 26, 1996 (unaudited) and
October 31, 1995 (unaudited)
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
October 26, April 30,
ASSETS 1996 1996
------ ---- ----
Current assets:
Cash and cash equivalents $ 51,442 $ 175,386
Accounts receivable, less allowance for doubtful
accounts of $5,872 and $3,366, respectively 294,175 170,111
Inventory 225,616 113,503
Lease receivables 29,865 24,807
Prepaid expenses and other current assets 38,730 25,446
---------- ---------
Total current assets 639,828 509,253
Property and equipment, net 182,222 75,011
Intangible assets, net 541,422 142,240
Lease receivables 46,379 47,005
Other assets 34,380 18,720
---------- ---------
Total assets $1,444,231 $ 792,229
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt $ 227,571 $ 120,488
Accounts payable 159,632 98,010
Accrued compensation 33,302 16,126
Other accrued liabilities 98,517 26,711
---------- ---------
Total current liabilities 519,022 261,335
Long-term debt 383,367 181,592
Deferred income taxes 7,824 7,056
Other long-term liabilities 3,123 1,704
---------- ---------
Total liabilities 913,336 451,687
---------- ---------
Commitments and contingencies
Minority interest 4,672 6,024
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares
authorized, none outstanding
Common stock, $.001 par value, 500,000,000 shares
authorized, 45,698,248 and 39,393,480 shares issued
and outstanding, respectively 46 39
Additional paid-in capital 467,687 298,120
Cumulative translation adjustment 4,988 358
Retained earnings 53,502 36,001
---------- ---------
Total stockholders' equity 526,223 334,518
---------- ---------
Total liabilities and stockholders' equity $1,444,231 $ 792,229
---------- ---------
---------- ---------
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
October 26, October 31, October 26, October 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 587,887 $ 271,066 $ 996,414 $ 485,546
Cost of revenues 420,355 202,033 716,849 361,534
--------- --------- --------- ---------
Gross profit 167,532 69,033 279,565 124,012
Selling, general and administrative expenses 135,485 58,622 227,245 106,852
Nonrecurring acquisition costs 3,940 521 5,727 5,192
--------- --------- --------- ---------
Operating income 28,107 9,890 46,593 11,968
Other (income) expense:
Interest expense 11,477 2,418 18,643 4,639
Interest income (1,119) (416) (5,382) (662)
Foreign currency gain (3,420) (3,420)
Other (393) (460) (476) (718)
--------- --------- --------- ---------
Income before provision for income taxes and
extraordinary item 21,562 8,348 37,228 8,709
Provision for income taxes 8,503 1,770 13,948 494
--------- --------- --------- ---------
Income before extraordinary item 13,059 6,578 23,280 8,215
Extraordinary item - loss on early termination
of credit facility, net of income tax benefit 612 612
--------- --------- --------- ---------
Net income $ 12,447 $ 6,578 $ 22,668 $ 8,215
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share:
Income before extraordinary item $ .29 $ .21 $ .53 $ .29
Extraordinary item .01 .01
--------- --------- --------- ---------
Net income $ .28 $ .21 $ .52 $ .29
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma net income (see Note 3) $ 11,339 $ 4,446 $ 20.251 $ 4,767
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma earnings per share:
Pro forma income before extraordinary item $ .26 $ .14 $ .47 $ .17
Extraordinary item .01 .01
--------- --------- --------- ---------
Pro forma net income $ .25 $ .14 $ .46 $ .17
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
</TABLE>
Page 4
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------
October 26, October 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,668 $ 8,215
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,974 5,184
Deferred income taxes 3,553 156
Write-off of deferred compensation (1,501)
Foreign currency gain (3,420)
Changes in assets and liabilities (net of assets
acquired and liabilities assumed in business
combinations):
Accounts receivable (56,018) (12,510)
Lease receivables (1,394)
Inventory (2,876) (4,675)
Prepaid expenses and other current assets 1,647 (4,999)
Accounts payable (10,582) 10,295
Accrued liabilities (8,490) (584)
--------- --------
Net cash provided by (used in) operating activities (42,439) 1,082
--------- --------
Cash flows from investing activities:
Additions to property and equipment, net of disposals (10,277) (3,503)
Cash used in acquisitions (273,704) (43,406)
Deposits (9,007) (3,239)
Other 1,309 216
--------- --------
Net cash used in investing activities (291,679) (49,932)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 225,098 2,158
Payments of long-term debt (145,306) (6,546)
Increases in short-term debt 90,285 6,952
Proceeds from issuance of common stock 38,113 53,454
Proceeds from exercise of stock options and warrants 2,937
Proceeds from issuance of common stock in employee
stock purchase plan 1,728
Contributions of capital by stockholders of Pooled Companies 1,802 1,848
Adjustment to conform fiscal year-ends of certain Pooled Companies 184 (72)
Payment of dividends (5,316) (8,286)
--------- --------
Net cash provided by financing activities 209,525 49,508
--------- --------
--------- --------
Effect of exchange rates on cash and cash equivalents 649 (11)
Net increase (decrease) in cash and cash equivalents (123,944) 647
Cash and cash equivalents at beginning of period 175,386 19,408
--------- --------
Cash and cash equivalents at end of period $ 51,442 $ 20,055
--------- --------
--------- --------
(Continued)
</TABLE>
Page 5
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Six Months Ended
----------------
October 26, October 31,
1996 1995
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $11,895 $ 3,091
Income taxes paid $ 9,924 $ 1,857
</TABLE>
The Company issued common stock and cash in connection with certain business
combinations for the six months ended October 26, 1996 and October 31, 1995.
The fair values of the assets and liabilities at the dates of the
acquisitions are presented as follows:
<TABLE>
<CAPTION>
Six Months Ended
----------------
October 26, October 31,
1996 1995
---- ----
<S> <C> <C>
Accounts receivable $ 66,509 $ 23,576
Inventory 107,086 17,309
Lease receivables 870
Prepaid expenses and other current assets 12,111 3,845
Property and equipment 102,244 17,105
Intangible assets 398,932 45,451
Other assets 3,732 872
Short-term debt (8,783) (16,425)
Accounts payable (73,042) (14,384)
Accrued liabilities (99,158) (3,485)
Long-term debt (114,649) (7,708)
Other long-term liabilities (1,942) (825)
--------- --------
Net assets acquired $ 393,910 $ 65,331
--------- --------
--------- --------
The acquisitions were funded as follows:
Common stock $ 120,206 $ 21,925
Cash 273,704 43,406
--------- --------
$ 393,910 $ 65,331
--------- --------
--------- --------
See accompanying notes to consolidated financial statements.
</TABLE>
Page 6
<PAGE>
U. S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 26, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products
Company (the "Company" or "U.S. Office Products"), 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.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair statement of such operations. All such adjustments are of a normal
recurring nature. Operating results for interim periods are not necessarily
indicative of results which may be expected for the year as a whole. It is
suggested that these consolidated financial statements be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended April 30, 1996.
On August 20, 1996, the Company's Board of Directors approved a change in the
Company's fiscal year-end, effective for the 1997 fiscal year, from April 30 to
the last Saturday of April.
NOTE 2 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the six months ended October 26, 1996
were as follows:
Stockholders' equity balance at April 30, 1996 $ 334,518
Issuance of common stock in connection
with business combinations 120,206
Sale of common stock 38,113
Issuance of common stock for employee
stock purchase plan, net of expenses 1,728
Issuance of common stock for stock options
exercised, including tax benefits 1,633
Issuance of common stock for stock options and
warrants at Pooled Companies 1,980
Contributions of capital at Pooled Companies 5,878
Dividends at Pooled Companies (5,316)
Adjustments to conform fiscal year-ends
of certain Pooled Companies 184
Cumulative translation adjustment 4,631
Net income 22,668
---------
Stockholders' equity balance at October 26, 1996 $ 526,223
---------
---------
Page 7
<PAGE>
NOTE 3 - UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," as if certain Pooled Companies, which were subchapter S
corporations prior to their business combinations with the Company, had been
subject to federal income taxes throughout the periods presented:
Three Months Ended Six Months Ended
------------------ ----------------
October 26, October 31, October 26, October 31,
1996 1995 1996 1995
---- ---- ---- ----
Net income before pro forma
adjustment, per the
consolidated statement
of operations $ 12,447 $ 6,578 $ 22,668 $ 8,215
Provision for income taxes 1,108 2,132 2,417 3,448
-------- ------- -------- -------
Pro forma net income $ 11,339 $ 4,446 $ 20,251 $ 4,767
-------- ------- -------- -------
-------- ------- -------- -------
NOTE 4 - BUSINESS COMBINATIONS
In fiscal 1996, the Company completed a total of 40 business combinations, 14
accounted for under the pooling-of-interests method and 26 accounted for under
the purchase method. During the first six months of fiscal 1997, the Company
completed a total of 66 business combinations, 21 accounted for under the
pooling-of-interests method and 45 accounted for under the purchase method. In
the second quarter of fiscal 1997, the Company completed a total of 38 business
combinations, 11 accounted for under the pooling-of-interests method and 27
accounted for under the purchase method.
As the Company's consolidated financial statements give retroactive effect to
the acquisitions of the Pooled Companies for all periods presented, the
following presents the separate results of U.S. Office Products and the Pooled
Companies for periods prior to the completion of each of the business
combinations accounted for under the pooling-of-interests method:
U.S. Office
Products Pooled
Company Companies Combined
----------- --------- --------
THREE MONTHS ENDED
OCTOBER 26, 1996:
Revenues $ 541,742 $ 46,145 $ 87,887
Net income $ 9,468 $ 2,979 $ 12,447
THREE MONTHS ENDED
OCTOBER 31, 1995:
Revenues $ 94,599 $ 176,467 $ 71,066
Net income $ 1,754 $ 4,824 $ 6,578
SIX MONTHS ENDED
OCTOBER 26, 1996:
Revenues $ 858,093 $ 138,321 $ 96,414
Net income $ 15,500 $ 7,168 $ 22,668
SIX MONTHS ENDED
OCTOBER 31, 1995:
Revenues $ 146,491 $ 339,055 $ 85,546
Net income $ 3,734 $ 4,481 $ 8,215
Page 8
<PAGE>
The following presents the unaudited pro forma results of operations of the
Company for the three and six month periods ended October 26, 1996 and October
31, 1995 as if all 71 of the companies acquired in business combinations
accounted for under the purchase method, completed since the beginning of fiscal
1996, had been consummated at the beginning of fiscal 1996. The pro forma
results of operations include certain pro forma adjustments including the
amortization of intangible assets and reductions in executive compensation:
Three Months Ended Six Months Ended
------------------ ----------------
October 26, October 31, October 26, October 31,
1996 1995 1996 1995
---- ---- ---- ----
Revenues $ 611,495 $ 574,223 $ 1,184,488 $ 1,120,277
Net income 12,912 5,279 24,105 6,090
Net income per share .29 .12 .53 .13
The 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.
NOTE 5 - SUBSEQUENT EVENTS
Subsequent to October 26, 1996, the Company has completed eight business
combinations for an aggregate purchase price of $70.4 million, consisting of
approximately $60.8 million of cash and 303,134 shares of the Company's
common stock with an aggregate market value on the dates of acquisition of
approximately $9.6 million. This includes the acquisition of a 49% equity
interest in Dudley Stationery Limited ("Dudley"), the largest independent
office products dealer in the United Kingdom. Under the terms of the
agreement, the Company agreed to invest approximately $80 million of working
capital into Dudley over a two-year period. In addition, Dudley plans to
raise approximately an additional $80 million in debt financing. The Company
has currently invested approximately $41.3 million of the total $80 million
in Dudley.
Page 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 26, 1996 COMPARED TO THREE MONTHS ENDED
OCTOBER 31, 1995
Historical revenues increased 116.9%, from $271.1 million for the three
months ended October 31, 1995 to $587.9 million for the three months ended
October 26, 1996. This increase was primarily due to the inclusion in the
revenues for the three months ended October 26, 1996 of revenues from 63
companies that were acquired in business combinations accounted for under the
purchase method during the last two quarters of fiscal 1996 and the first two
quarters of fiscal 1997 (the "Purchased Companies").
Gross profit increased 142.7%, from $69.0 million, or 25.5% of revenues, for the
three months ended October 31, 1995, to $167.5 million, or 28.5% of revenues,
for the three months ended October 26, 1996. 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, such as
office coffee services, school supplies and school furniture and products sold
in Australia and New Zealand.
Selling, general and administrative expenses increased 131.1%, from $58.6
million, or 21.6% of revenues, for the three months ended October 31, 1995 to
$135.5 million, or 23.0% of revenues, for the three months ended October 26,
1996. The increase in selling, general and administrative expenses is due
primarily to the inclusion of the Purchased Companies in the results for the
three months ended October 26, 1996. The increase in selling, general and
administrative expenses as a percentage of revenues is due primarily to the
inclusion of the Purchased Companies, which had higher selling, general and
administrative expenses as a percentage of revenues.
The Company incurred nonrecurring acquisition costs of approximately $3.9
million and $521,000 during the three months ended October 26, 1996 and October
31, 1995, respectively, in conjunction with business combinations that were
accounted for under the pooling-of-interests method. These nonrecurring
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 require the Company to
expense all acquisition costs related to the business combinations accounted for
under the pooling-of-interests method. The increase in such nonrecurring
acquisition costs reflects the larger number of business combinations accounted
for under the pooling-of-interest method during the three months ended October
26, 1996 as compared to the three months ended October 31, 1995. The Company
expects to incur similar costs in the future as the Company anticipates
additional acquisitions accounted for under the pooling-of-interests method.
Interest expense, net of interest income, increased 417.6%, from $2.0 million
for the three months ended October 31, 1995 to $10.4 million for the three
months ended October 26, 1996. 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 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 the refinancing of indebtedness assumed in such
business combinations.
Foreign currency gain of $3.4 million represents the effect of the change in
the exchange rate between the New Zealand and U.S. dollars during the three
months ended October 26, 1996 on short-term loans between the Company and
Blue Star Group Limited ("Blue Star"), its wholly owned subsidiary in New
Zealand. At October 26, 1996, the Company had advanced Blue Star
approximately $255.9 million. While the Company continues to evaluate the
alternative financing options for its international operations, management
currently intends to have Blue Star repay the advances in the near future.
The Company does not have any currency hedges in place to limit the impact of
currency rate fluctuations on such advances, but is currently investigating
strategies which would minimize such effect on future periods.
Page 10
<PAGE>
Provision for income taxes increased from $1.8 million for the three months
ended October 31, 1995 to $8.5 million for the three months ended October 26,
1996, reflecting effective tax rates of 21.2% and 39.4% for the three month
periods ended October 31, 1995 and October 26, 1996, respectively. The low
effective rate for the three months ended October 31, 1995, compared to the
federal statutory rate of 34.0% plus state, local and foreign taxes, is
primarily due to the fact that several companies included in the results of such
three month period, which companies were acquired by the Company in business
combinations accounted for under the pooling-of-interests method, were not
subject to federal income taxes on a corporate level as they had elected to be
treated as subchapter S corporations prior to being acquired by the Company.
The Company incurred an extraordinary item of $612,000 which represents the
aggregate expenses, net of the expected tax benefit, associated with the
early termination of the Company's $50 million credit facility with First
Bank National Association due to the Company entering into a new $500 million
credit facility in August 1996 with a syndicate of banks led by Bankers Trust
Company (the "Credit Facility"). The expenses consisted of the write-off of
certain capitalized debt issue costs, which were being amortized over the
life of the credit facility, and the direct costs of terminating the facility.
SIX MONTHS ENDED OCTOBER 26, 1996 COMPARED TO SIX MONTHS ENDED
OCTOBER 31, 1995
Historical revenues increased 105.2%, from $485.5 million for the six months
ended October 31, 1995 to $996.4 million for the six months ended October 26,
1996. This increase was primarily due to the inclusion in the revenues for
the six months ended October 26, 1996 of revenues from the Purchased
Companies.
Gross profit increased 125.4%, from $124.0 million, or 25.5% of revenues, for
the six months ended October 31, 1995, to $279.6 million, or 28.1% of revenues,
for the six months ended October 26, 1996. 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, such as
office coffee services, school supplies and school furniture and products sold
in Australia and New Zealand.
Selling, general and administrative expenses increased 112.7%, from $106.9
million, or 22.0% of revenues, for the six months ended October 31, 1995 to
$227.2 million, or 22.8% of revenues for the six months ended October 26, 1996.
The increase in selling, general and administrative expenses is due primarily to
the inclusion of the Purchased Companies in the six months ended October 26,
1996. The increase in selling, general and administrative expenses as a
percentage of revenues is due primarily to the inclusion of the Purchased
Companies, which had higher selling, general and administrative expenses as a
percentage of revenues.
The Company incurred nonrecurring acquisition costs of approximately $5.7
million and $5.2 million during the six months ended October 26, 1996 and
October 31, 1995, respectively, in conjunction with business combinations that
were accounted for under the pooling-of-interests method. The nonrecurring
acquisition costs for the six months ended October 26, 1996 represented costs
associated with 21 business combinations accounted for under the
pooling-of-interests method compared to four such business combinations during
the six month period ended October 31, 1995. The nonrecurring acquisition costs
for the six months ended October 31, 1995 included a charge of approximately
$4.7 million related to one business combination which included the payment of
significant transaction related compensation obligations.
Interest expense, net of interest income, increased 233.5% from $4.0 million
for the six months ended October 31, 1995 to $13.3 million for the six months
ended October 26, 1996. This increase was due primarily to the increase in
the Company's borrowings through the issuance of an aggregate of $373.75
million of Notes during the fourth quarter of fiscal 1996 and the first
quarter of fiscal 1997 and an increase in the outstanding balance on the
Company's Credit Facility. The proceeds from the issuance of the Notes and
the additional borrowings from the Credit Facility were used to fund the cash
portion of the consideration in business combinations and the refinancing of
indebtedness assumed in such business combinations.
Page 11
<PAGE>
Provision for income taxes increased from $494,000 for the six months ended
October 31, 1995 to $13.9 million for the six months ended October 26, 1996,
reflecting effective tax rates of 5.7% and 37.5% for the six month periods ended
October 31, 1995 and October 26, 1996, respectively. The low effective rate for
the six months ended October 31, 1995, compared to the federal statutory rate of
34.0% plus state, local and foreign taxes, is primarily due to the fact that
several companies included in the results of such six month period, which
companies were acquired by the Company 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.
LIQUIDITY AND CAPITAL RESOURCES
At October 26, 1996, the Company had cash of $51.4 million and working capital
of $120.8 million. The Company's capitalization, defined as the sum of
long-term debt and stockholders' equity, at October 26, 1996 was $909.6 million.
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 Offering, after deducting the manager's discounts
and commissions and offering expenses, were approximately $223.1 million and
were used for working capital and acquisition purposes, including the repayment
of higher interest rate debt assumed in business combinations.
In August 1996, the Company entered into an agreement under which a syndicate
of financial institutions, led by Bankers Trust Company, as Agent (the
"Bank"), is providing the Company with the $500 million Credit Facility
bearing interest, at the Company's option, at the Bank's base rate plus an
applicable margin of up to 1.25%, or a eurodollar rate plus an applicable
margin of up to 2.5%. The availability under the Credit Facility is subject
to certain sublimits including $100 million for working capital loans and
$400 million for acquisition loans, with $180 million of the acquisition loan
sublimit available solely to refinance certain outstanding indebtedness of
the Company in Australia and New Zealand. The Credit Facility is secured by
a majority of the assets of the Company and its subsidiaries and contains
customary covenants, including financial covenants with respect to the
Company's consolidated leverage and interest coverage ratios, capital
expenditures, payment of dividends and purchases and sales of assets, and
customary default provisions, including provisions related to non-payment of
principal and interest, default under other debt agreements and bankruptcy.
In October 1996, the Company refinanced $180 million in high interest rate debt
outstanding in New Zealand and Australia with the $180 million that was
available under the Credit Facility solely for purposes of such refinancing.
The average annual interest rate on such debt prior to such refinancing was
approximately 11.0%. At October 26, 1996, the Company had $215 million
outstanding on the Credit Facility at an annual interest rate of approximately
7.2%.
In September 1996, the Company sold 1,250,000 shares of common stock in a direct
equity investment to Quantum Partners LDC. The Company received proceeds of
approximately $38.1 million as a result of the sale. The proceeds were used to
repay a portion of the then outstanding balance on the Credit Facility.
During the six months ended October 26, 1996, net cash used in operating
activities was $42.4 million which resulted primarily from the increase in
accounts receivable in the Company's school supply and school furniture
business and a decrease in accounts payable due to the Company's aggressive
policy of taking recently negotiated cash discounts. Accounts receivable
increased in the Company's school supply and school furniture business due
primarily to the seasonality of such business. Net cash used in investing
activities was $291.7 million, including $273.7 million used for
acquisitions, $10.3 million used for additions to property and equipment and
deposits of $9.0 million. Net borrowings increased $170.1 million during the
six months ended October 26, 1996 primarily to fund acquisitions, including
the repayment of higher interest rate debt assumed in business combinations.
The Company also received $38.1 million in cash as a result of the sale of
common stock during the period.
Page 12
<PAGE>
During the six months ended October 31, 1995, net cash provided by operating
activities was $1.1 million. Net cash used in investing activities was $49.9
million, including $43.4 million used for acquisitions, $3.5 million used for
additions to property and equipment and deposits of $3.2 million. Net
borrowings increased $2.6 million during the six months ended October 31, 1995.
The Company also received $53.5 million in cash as a result of the sale of
common stock during the period.
Subsequent to October 26, 1996, the Company has completed eight business
combinations for an aggregate purchase price of $70.4 million, consisting of
approximately $60.8 million of cash and 303,134 shares of the Company's
common stock with an aggregate market value on the dates of acquisition of
approximately $9.6 million. This includes the acquisition of a 49% equity
interest in Dudley Stationery Limited ("Dudley"), the largest independent
office products dealer in the United Kingdom. Under the terms of the
agreement, the Company agreed to invest approximately $80 million of working
capital into Dudley over a two-year period. In addition, Dudley plans to
raise approximately an additional $80 million in debt financing. The Company
has currently invested approximately $41.3 million of the total $80 million
in Dudley.
The Company anticipates that its current cash on hand, cash flow from
operations and additional financing available under the Credit Facility will
be sufficient to meet the Company's liquidity requirements for its operations
through the end of fiscal 1997. 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.
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. In addition, quarterly results also may
be materially affected by the timing of acquisitions, the timing and
magnitude of costs related to such acquisitions, variations in the prices
paid by the Company for the products it sells, the mix of products sold and
general economic conditions. Therefore, results for any quarter are not
necessarily indicative of the results that the Company may achieve for any
subsequent fiscal quarter or for a full fiscal year.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1996 or the first two quarters of fiscal
1997.
FACTORS AFFECTING THE COMPANY'S BUSINESS
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
Page 13
<PAGE>
The Company has an aggressive acquisition strategy that has involved, and is
expected to continue to involve, the acquisition of a significant number of
additional companies in related lines of businesses. From its inception
through October 26 , 1996, the Company made 114 acquisitions. In addition to
completing additional acquisitions since that date, the Company currently
has, and from time to time expects to enter into, letters of intent and
agreements in principle with respect to the acquisition of additional office
and educational products and equipment businesses, both in the United States
and internationally, consistent with its strategy of pursuing an aggressive
acquisition program.
There can be no assurance, however, that acquisitions will occur at the
same pace or be available to the Company on favorable terms, if at all. For
example, if the price of a share of common stock declines for a prolonged
period, the owners of potential acquisition targets may not be willing to
receive shares of common stock in exchange for their businesses, thereby
adversely affecting the pace of the Company's acquisition program. Such an
effect on the pace of the Company's acquisition program could further reduce
the price of a share of common stock, to the further detriment of the Company's
acquisition strategy. In addition, the consolidation of the U.S. contract
stationer industry has reduced the number of larger companies available for
sale in the Company's core contract stationer business, which could lead to
higher prices being paid to acquire such companies in such market. The failure
to acquire additional businesses and to acquire such businesses on favorable
terms in accordance with the Company's growth strategy could have a material
adverse impact on future sales and profitability.
The Company's acquisition strategy has resulted in a significant increase
in sales, employees, facilities and distribution systems. While the Company's
decentralized management strategy, together with operating efficiencies
resulting from the elimination of duplicative functions and economies of scale,
may present opportunities to reduce costs, such strategies may initially
necessitate costs and expenditures to expand operational and financial systems
and corporate management and administration. These various costs and possible
cost-savings strategies may make historical operating results not indicative of
future performance. In addition, there can be no assurance that the pace of the
Company's acquisitions, or the diversification of its business outside of its
core contract stationer operations, will not adversely affect the Company's
efforts to implement its cost-savings and integration strategies and to manage
its acquisitions profitability.
The Company operates in a highly competitive environment. Some of the
Company's current and potential competitors are larger than the Company and have
greater financial resources. No assurances can be given that competition will
not have an adverse effect on the Company's business.
The Company expects to continue to focus significant attention and resources
on future international expansion. In addition to the factors described above
that may impact the Company's domestic operations, the Company's operations in
foreign markets are subject to a number of inherent risks, including currency
exchange rates, new and different legal and regulatory requirements,
difficulties in staffing and managing foreign operations, risks specific to
different business lines that the Company may enter, and other factors.
Page 14
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the Company's stockholders was held on August 20,
1996. All nominees for Director were elected pursuant to the following votes:
<TABLE>
<CAPTION>
AUTHORITY BROKER
NOMINEE FOR WITHHELD NON-VOTE
------- --- --------- --------
<S> <C> <C> <C>
Jonathan J. Ledecky 29,964,295 161,746 0
Jack L. Becker, Jr. 29,964,295 161,746 0
John K. Burgess 29,964,295 161,746 0
David C. Copenhaver 29,964,295 161,746 0
Timothy J. Flynn 29,964,295 161,746 0
David C. Gezon 29,964,295 161,746 0
Milton H. Kuyers 29,964,295 161,746 0
Allon H. Lefever 29,964,295 161,746 0
Edward J. Mathias 29,964,295 161,746 0
Clifton B. Phillips 29,964,295 161,746 0
John A. Quelch 29,964,295 161,746 0
Thomas J. Reaser 29,964,295 161,746 0
Mark A. Sorgenfrei 29,964,235 161,806 0
</TABLE>
The stockholders approved an amendment to Article Four of the Company's Restated
Certificate of Incorporation (the "Certificate of Incorporation") to increase
the number of shares of the Company's common stock authorized for issuance from
100,000,000 shares to 500,000,000 shares, with a conforming increase in the
number of shares of all classes of stock the Company has authority to issue from
100,500,000 shares to 500,500,000 shares and (ii) to restate the Certificate of
Incorporation to reflect the foregoing amendment.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
<S> <C> <C> <C>
25,349,704 4,314,181 255,904 206,270
</TABLE>
The stockholders approved an amendment to the U.S. Office Products Company
Amended and Restated 1994 Long-Term Incentive Plan to (i) increase the annual
per-employee limitation on the number of shares of common stock relating to
option grants and other awards from 250,000 to 750,000, (ii) eliminate the
requirement that the option price for stock options must be at least equal to
the fair market value of the common stock on the date of grant, and (iii)
increase the limitation on the number of shares of common stock that may be
subject to outstanding awards from 15% to 20% of the total outstanding shares.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- ---------
<S> <C> <C> <C>
18,162,827 7,477,954 255,454 4,229,824
</TABLE>
The stockholders approved the U.S. Office Products Company Executive Deferred
Compensation Plan.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
<S> <C> <C> <C>
24,397,347 707,772 801,215 4,219,725
</TABLE>
Page 15
<PAGE>
The stockholders approved the U.S. Office Products Company 1996 Non-Employee
Directors' Stock Plan.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- ---------
<S> <C> <C> <C>
23,667,571 2,023,397 269,067 4,160,019
</TABLE>
The stockholders approved an amendment to the U.S. Office Products Company
Employee Stock Purchase Plan to increase the number of shares of common stock
available for issuance under the plan from 500,000 to 1,000,000.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- ---------
<S> <C> <C> <C>
25,889,916 27,115 43,009 4,166,019
</TABLE>
The stockholders ratified the Board of Directors' selection of Price Waterhouse
LLP as the Company's independent accountants to audit the Company's consolidated
financial statements for the fiscal year ending April 26, 1997.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
<S> <C> <C> <C>
30,083,790 2,579 39,690 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
11.1 Statement regarding computation of net income (loss) per
share
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
During the period covered by this report, the Company filed the
following Current Reports on Form 8-K:
I. Form 8-K dated July 26, 1996, filed with the Commission on
August 12, 1996 and amended on Form 8-K/A on August 13, 1996
reporting information under Items 2 and 7.
FINANCIAL STATEMENTS FILED:
(a) Financial statements of Whitcoulls Group Limited as
of June 30, 1995, 1994 and 1993 and for the years
then ended and for the six month periods ended
December 31, 1995 and 1994 (unaudited).
(b) Financial statements of Mile High Office Supply,
Co. as of December 31, 1995 and 1994 and for the
years then ended and as of March 31, 1996 and for
the three months ended March 31, 1996 and 1995
(unaudited).
(c) Financial statements of American Loose Leaf/
Business Products, Inc. as of September 30, 1995
and for the year then ended and as of March 31,
1996 and for the six months ended March 31, 1996
and 1995 (unaudited).
(d) Unaudited pro forma financial information as of
April 30, 1996 and for the years ended April 30,
1996, 1995 and 1994.
Page 16
<PAGE>
ii. Form 8-K dated August 20, 1996 and filed with the
Commission on September 4, 1996 reporting information under
Item 8.
iii. Form 8-K dated September 23, 1996 and filed with the
Commission on September 26, 1996 reporting information under
Items 5 and 7.
FINANCIAL STATEMENTS FILED:
(a) Audited consolidated financial statements of the
Company as of April 30, 1996 and 1995 and for the
years ended April 30, 1996, 1995 and 1994 and
unaudited consolidated financial statements as of
July 27, 1996 and for the three months ended
July 27, 1996 and July 31, 1995.
(b) Unaudited pro forma financial information as of
July 27, 1996 and for the years ended April 30,
1996, 1995 and 1994 and for the three months ended
July 27, 1996 and July 31, 1995.
(c) Financial statements of Raleigh Office Supply
Company, Inc. as of August 31, 1995 and for the
year then ended and as of February 28, 1996 and
for the six months ended February 28, 1996 and 1995
(unaudited).
(d) Financial statements of Emmons-Napp Office
Products, Inc. - Commercial Division as of
December 31, 1995 and 1994 and for the years then
ended.
(e) Consolidated financial statements of American Loose
Leaf/Business Products, Inc. and subsidiary as of
September 30, 1995 and for the year then ended and
as of June 30, 1996 and for the nine months ended
June 30, 1996 and 1995 (unaudited).
(f) Consolidated financial statements of Pear
Commercial Interiors, Inc. and subsidiary as of
December 31, 1995 and for the year then ended and
as of June 30, 1996 and for the six months ended
June 30, 1996 and 1995 (unaudited).
(g) Financial statements of International Interiors,
Inc. as of September 30, 1995 and 1994 and for the
years then ended and as of March 31, 1996 and for
the six months ended March 31, 1996 and 1995
(unaudited).
(h) Financial statements of The Office Furniture Store,
Inc. as of December 31, 1995 and for the year then
ended and as of June 30, 1996 and for the six
months ended June 30, 1996 and 1995 (unaudited).
(I) Financial statements of Ausdoc Office Pty Ltd as of
June 30, 1996 and 1995 and for the years then
ended.
(j) Financial statements of H & P Stationery Pty Ltd as
of June 30, 1996 and 1995 and for the years then
ended.
(k) Financial statements of Canberra Wholesale
Stationers Pty Ltd as of June 30, 1996 and 1995 and
for the years then ended.
(l) Financial statements of Perth Stationery Supplies
Pty Ltd as of June 30, 1996 and 1995 and for the
years then ended.
Page 17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. OFFICE PRODUCTS COMPANY
December 10, 1996 By: /s/ Jonathan J. Ledecky
- ---------------------- --------------------------------
Date Jonathan J. Ledecky
Chief Executive Officer
December 10, 1996 By: /s/ Donald H. Platt
- ---------------------- --------------------------------
Date Donald H. Platt
Chief Financial Officer
Page 18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. EXHIBIT PAGE
- --- ------- ----
<S> <C> <C>
11.1 Statement regarding computation of net income per share 21
27 Financial Data Schedule
</TABLE>
Page 19
<PAGE>
EXHIBIT 11.1
U.S. OFFICE PRODUCTS COMPANY
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Primary earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
October 26, October 31, October 26, October 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before extraordinary item $ 13,059 $ 6,578 $ 23,280 $ 8,215
Extraordinary item - loss on early
termination of credit facility 612 612
--------- --------- --------- ---------
Net income $ 12,447 $ 6,578 $ 22,668 $ 8,215
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding 44,188 30,593 42,513 27,964
Common stock equivalents from stock options 1,053 275 1,109 202
--------- --------- --------- ---------
Total weighted average shares outstanding 45,241 30,868 43,622 28,166
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share:
Income before extraordinary item $ .29 $ .21 $ .53 $ .29
Extraordinary item .01 .01
--------- --------- --------- ---------
Net income $ .28 $ .21 $ .52 $ .29
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Page 20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated statement of operations found on
pages 3 and 4 of the Company's Quarterly Report on Form 10-Q, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-26-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> OCT-26-1996
<EXCHANGE-RATE> 1
<CASH> 51,442
<SECURITIES> 0
<RECEIVABLES> 300,047
<ALLOWANCES> (5,872)
<INVENTORY> 225,616
<CURRENT-ASSETS> 639,828
<PP&E> 182,222
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,444,231
<CURRENT-LIABILITIES> 519,022
<BONDS> 383,367
0
0
<COMMON> 46
<OTHER-SE> 526,177
<TOTAL-LIABILITY-AND-EQUITY> 1,444,231
<SALES> 996,414
<TOTAL-REVENUES> 996,414
<CGS> 716,849
<TOTAL-COSTS> 940,543<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,643
<INCOME-PRETAX> 37,228
<INCOME-TAX> 13,948
<INCOME-CONTINUING> 23,280
<DISCONTINUED> 0
<EXTRAORDINARY> 612
<CHANGES> 0
<NET-INCOME> 22,668
<EPS-PRIMARY> .52
<EPS-DILUTED> 0
<FN>
<F1>The costs include $5,727 of non-recurring acquisition costs incurred in
business combinations accounted for under the pooling-of-interests method.
</FN>
</TABLE>
