<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 January 25, 1997
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, N.W.
Suite 600 East
Washington, D.C. 20007
(Address of principal executive offices) (Zip Code)
(202) 339-6700
(Registrant's telephone number, including area code)
(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 March 10, 1997, there were 60,542,444 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
January 25, 1997 (unaudited) and April 30, 1996 (unaudited)
Consolidated Statement of Operations......................................4
For the three months ended January 25, 1997 (unaudited) and January 31,
1996 (unaudited) and for the nine months ended January 25, 1997
(unaudited) and January 31, 1996 (unaudited)
Consolidated Statement of Cash Flows......................................5
For the nine months ended January 25, 1997 (unaudited) and January 31,
1996 (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 6. Exhibits and Reports on Form 8-K....................................17
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)
<TABLE>
<CAPTION>
January 25, April 30,
ASSETS 1997 1996
- ------- ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 56,462 $ 177,635
Accounts receivable, less allowance for doubtful
accounts of $7,857 and $4,304, respectively 336,434 206,140
Inventory 250,795 128,396
Lease receivables 30,442 24,807
Prepaid expenses and other current assets 52,831 28,122
---------- ----------
Total current assets 726,964 565,100
Property and equipment, net 202,678 95,411
Intangible assets, net 585,841 143,452
Lease receivables 44,423 47,005
Other assets, including equity investments 68,401 19,751
---------- ----------
Total assets $1,628,307 $ 870,719
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 367,225 $ 134,590
Accounts payable 172,555 114,871
Accrued compensation 38,966 20,207
Other accrued liabilities 69,342 29,919
--------- ---------
Total current liabilities 648,088 299,587
Long-term debt 389,453 199,504
Deferred income taxes 7,633 7,056
Other long-term liabilities 6,106 2,222
--------- ---------
Total liabilities 1,051,280 508,369
--------- ---------
Commitments and contingencies
Minority interest 4,941 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, 51,352,131 and 44,174,854 shares issued
and outstanding, respectively 51 44
Additional paid-in capital 496,189 299,027
Cumulative translation adjustment (3,772) 418
Retained earnings 79,618 56,837
--------- ---------
Total stockholders' equity 572,086 356,326
--------- ---------
Total liabilities and stockholders' equity $1,628,307 $ 870,719
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
January 25, January 31, January 25, January 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $680,490 $380,089 $1,807,652 $975,128
Cost of revenues 485,831 280,328 1,295,249 719,908
-------- -------- ---------- --------
Gross profit 194,659 99,761 512,403 255,220
Selling, general and
administrative expenses 160,955 78,896 418,516 213,123
Nonrecurring acquisition costs 5,225 824 10,957 6,094
Discontinuation of printing
division at subsidiary 682 682
-------- -------- ---------- --------
Operating income 28,479 19,359 82,930 35,321
Other (income) expense:
Interest expense 12,313 3,820 32,083 9,503
Interest income (902) (639) (6,437) (1,405)
Equity in net income of
affiliate (265) (265)
Foreign currency gain (3,420)
Other (309) (556) (193) (1,402)
-------- -------- ---------- --------
Income before provision for
income taxes and extraordinary
item 17,642 16,734 61,162 28,625
Provision for income taxes 7,465 4,571 24,159 5,226
-------- -------- ---------- --------
Income before extraordinary
item 10,177 12,163 37,003 23,399
Extraordinary item - loss on
early termination of
credit facility, net of
income tax benefit 612
-------- -------- ---------- --------
Net income $ 10,177 $ 12,163 $ 36,391 $ 23,399
-------- -------- ---------- --------
-------- -------- ---------- --------
Earnings per share:
Income before extraordinary
item $ .20 $ .33 $ .74 $ .68
Extraordinary item .01
-------- -------- ---------- --------
Net income $ .20 $ .33 $ .73 $ .68
-------- -------- ---------- --------
-------- -------- ---------- --------
Pro forma net income
(see Note 3) $ 8,698 $ 10,242 $ 30,454 $ 15,557
-------- -------- ---------- --------
-------- -------- ---------- --------
Pro forma earnings per share:
Pro forma income before
extraordinary item $ .17 $ .28 $ .62 $ .45
Extraordinary item .01
-------- -------- ---------- --------
Pro forma net income $ .17 $ .28 $ .61 $ .45
-------- -------- ---------- --------
-------- -------- ---------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
January 25, January 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 36,391 $ 23,399
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 26,321 9,853
Deferred income taxes 3,600 825
Deferred compensation (1,501)
Foreign currency gain (3,420)
Equity in net income of affiliate (265)
Issuance of common stock in exchange for
services rendered 500
Changes in assets and liabilities (net of assets
acquired and liabilities assumed in purchase
business combinations):
Accounts receivable (36,024) (43,991)
Lease receivables (238)
Inventory 4,395 (1,665)
Prepaid expenses and other current assets (4,184) (7,845)
Accounts payable (32,534) 14,919
Accrued liabilities (17,877) 324
----------- --------
Net cash used in operating activities (24,836) (4,181)
----------- --------
Cash flows from investing activities:
Additions to property and equipment, net of
disposals (23,882) (16,845)
Cash used in acquisitions (332,537) (58,236)
Equity investment in Dudley Stationery Limited (41,291)
Deposits (1,310) (417)
Other (5,214) 158
----------- --------
Net cash used in investing activities (404,234) (75,340)
----------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 221,101 11,388
Payments of long-term debt (160,164) (10,264)
Increases in short-term debt 215,062 35,443
Proceeds from issuance of common stock 38,113 52,537
Proceeds from exercise of stock options and
warrants 3,356
Proceeds from issuance of common stock in employee
stock purchase plan 2,380
Contributions of capital by stockholders of Pooled
Companies 1,970 1,921
Adjustment to conform fiscal year-ends of certain
Pooled Companies 286 (462)
Payment of dividends at Pooled Companies (13,860) (15,587)
----------- --------
Net cash provided by financing activities 308,244 74,976
----------- --------
Effect of exchange rates on cash and cash equivalents (347) 99
Net decrease in cash and cash equivalents (121,173) (4,446)
Cash and cash equivalents at beginning of period 177,635 19,183
----------- --------
Cash and cash equivalents at end of period $ 56,462 $ 14,737
----------- --------
----------- --------
</TABLE>
(Continued)
Page 5
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
January 25, January 31,
1997 1996
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 28,980 $ 6,234
Income taxes paid $ 21,085 $ 5,321
</TABLE>
The Company issued common stock and cash in connection with certain business
combinations completed during the nine month periods ended January 25, 1997 and
January 31, 1996. The fair values of the assets and liabilities at the dates of
the acquisitions are presented as follows:
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
January 25, January 31,
1997 1996
---- ----
<S> <C> <C>
Accounts receivable $ 93,993 $ 30,561
Inventory 126,506 22,442
Lease receivables 870
Prepaid expenses and other current assets 15,159 4,001
Property and equipment 108,705 18,732
Intangible assets 447,202 74,665
Other assets 5,273 1,074
Short-term debt (17,102) (19,928)
Accounts payable (93,436) (21,357)
Accrued liabilities (83,894) (7,285)
Long-term debt (116,807) (9,574)
Other long-term liabilities (8,262) (887)
----------- --------
Net assets acquired $ 478,207 $ 92,444
----------- --------
----------- --------
The acquisitions were funded as follows:
Common stock $ 145,670 $ 34,208
Cash 332,537 58,236
----------- --------
$ 478,207 $ 92,444
----------- --------
----------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 25, 1997
(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"), 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.
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 presentation 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 audited consolidated financial statements
for the year ended April 30, 1996, included in the Company's Current Report on
Form 8-K, dated January 29, 1997.
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 nine months ended January 25, 1997
were as follows:
<TABLE>
<CAPTION>
<S> <C>
Stockholders' equity balance at April 30, 1996 $356,326
Issuance of common stock in connection
with business combinations 145,670
Sale of common stock in private placement 38,113
Issuance of common stock for employee
stock purchase plan, net of expenses 2,380
Issuance of common stock for stock options
exercised, including tax benefits 2,445
Issuance of common stock in exchange for services rendered 500
Issuance of common stock for stock options and
warrants at Pooled Companies 1,980
Contributions of capital at Pooled Companies 6,046
Dividends at Pooled Companies (13,860)
Adjustments to conform fiscal year-ends
of certain Pooled Companies 286
Cumulative translation adjustment (4,191)
Net income 36,391
--------
Stockholders' equity balance at January 25, 1997 $572,086
--------
--------
</TABLE>
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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
January 25, January 31, January 25, January 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income before pro forma
adjustment, per the
consolidated statement of
operations $ 10,177 $ 12,163 $36,391 $23,399
Provision for income taxes 1,479 1,921 5,937 7,842
-------- -------- ------- -------
Pro forma net income $ 8,698 $ 10,242 $30,454 $15,557
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
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 nine months of fiscal 1997, the Company
completed a total of 90 business combinations, 30 accounted for under the
pooling-of-interests method and 60 accounted for under the purchase method. In
the third quarter of fiscal 1997, the Company completed a total of 24 business
combinations, 9 accounted for under the pooling-of-interests method and 15
accounted for under the purchase method.
The Company's consolidated financial statements give retroactive effect to the
acquisitions of the Pooled Companies for all periods presented. The following
data presents the separate results, in each of the periods presented, of U.S.
Office Products (excluding the results of the 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
Products Pooled
Company Companies Combined
----------- --------- --------
<S> <C> <C> <C>
Three months ended
January 25, 1997:
Revenues $ 615,099 $ 65,391 $ 680,490
Net income $ 9,567 $ 610 $ 10,177
Three months ended
January 31, 1996:
Revenues $ 122,875 $257,214 $ 380,089
Net income $ 1,491 $ 10,672 $ 12,163
Nine months ended
January 25, 1997:
Revenues $1,473,192 $334,460 $1,807,652
Net income $ 25,069 $ 11,322 $ 36,391
Nine months ended
January 31, 1996:
Revenues $ 267,837 $707,291 $ 975,128
Net income $ 5,226 $ 18,173 $ 23,399
</TABLE>
Page 8
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Introduction" for an explanation of the impact of the acquisition
of two Pooled Companies that are subject to significant seasonal influences on
the retroactive restatement of the Company's results to reflect business
combinations accounted for under the pooling-of-interests method.
The following presents the unaudited pro forma results of operations of the
Company for the three and nine month periods ended January 25, 1997 and January
31, 1996 as if all 86 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 reflect certain pro forma adjustments including the
amortization of intangible assets and reductions in executive compensation:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
January 25, January 31, January 25, January 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $696,985 $720,976 $2,100,745 $2,031,287
Net income 13,456 12,123 44,731 23,179
Net income per share .26 .23 .86 .45
</TABLE>
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 January 25, 1997 and through March 10, 1997, the Company has
completed ten business combinations for an aggregate purchase price of $19.7
million, consisting of approximately $5.0 million of cash and 473,635
shares of the Company's common stock with an aggregate market value on the dates
of acquisition of approximately $14.7 million.
In February and March 1997, the Company completed the public sale, at a gross
price of $33.00 per share, of 8,682,331 shares of common stock, including the
purchase by the underwriters of 637,000 shares of common stock from their
over-allotment option. The net proceeds to the Company, after deducting
underwriting discounts and commissions and offering expenses, were approximately
$274.5 million and have been used to repay a portion of the outstanding balance
under the Company's bank credit facility.
Page 9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Introduction
The Company's revenues have been derived primarily from the sale of a wide
variety of office supplies, office furniture and other office and educational
products, services and equipment to corporate, commercial, educational and
industrial customers. The cost of revenues represents the cost of the office
supplies, office furniture and other office and educational products, services
and equipment. Cost of revenues includes occupancy and delivery expenses and is
reduced by rebates and discounts on inventory purchases.
In reviewing the Company's consolidated financial statements and the discussion
of the Consolidated Results of Operations that appears below, the following
should be taken into consideration. During fiscal 1997, the Company acquired
two school supply companies (the "School Companies") in business combinations
accounted for under the pooling-of-interests method. These School Companies are
subject to significant seasonal influences; their revenues and profitability
typically are highest during the summer and early fall, because of
back-to-school buying. Before being acquired by U.S. Office Products, the
School Companies reported their results on a calendar year basis. Their highest
revenues and profits occur during the July through September period, which was
their third quarter on a calendar year reporting basis. Under Generally
Accepted Accounting Principles ("GAAP"), after U.S. Office Products acquired the
School Companies, U.S. Office Products restated its financial results to include
the financial results of the School Companies. Pursuant to GAAP, the School
Companies' results for the July through September 1995 period (the third quarter
of their fiscal year) were included in U.S. Office Products' results for
November 1995 through January 1996 period (the third quarter of U.S. Office
Products' fiscal year). Beginning with U.S. Office Products' current fiscal
year, the School Companies' fiscal year has been conformed to U.S. Office
Products' fiscal year, in accordance with GAAP. Thus, U.S. Office Products'
fiscal 1997 third quarter includes the School Companies' results for November
1996 through January 1997. The School Companies' results from their
back-to-school season were included in U.S. Office Products' fiscal 1997 second
quarter results. Because the School Companies' highest revenue and profitability
period is included in U.S. Office Products' fiscal 1996 third quarter, but not
in its fiscal 1997 third quarter, the results of the two quarters are not
comparable.
Consolidated Results of Operations
Three Months Ended January 25, 1997 Compared to Three Months Ended
January 31, 1996
Consolidated revenues increased 79.0%, from $380.1 million for the three months
ended January 31, 1996, to $680.5 million for the three months ended January 25,
1997. This increase was primarily due to the inclusion, in the revenues for the
three months ended January 25, 1997, of revenues from 72 companies that were
acquired in business combinations accounted for under the purchase method after
the beginning of the third quarter of fiscal 1996 (the "Purchased Companies").
Revenues for the three months ended January 31, 1996, include revenues from four
Purchased Companies for a portion of such period.
International revenues increased from $12.3 million, or 3.2% of consolidated
revenues, for the three months ended January 31, 1996, to $236.6 million, or
34.7% of consolidated revenues for the three months ended January 25, 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 the three
months ended January 25, 1997, of revenues from 17 companies that were
acquired in business combinations accounted for under the purchase method
after the third quarter of fiscal 1996. International revenues for the third
quarter of fiscal 1997 also include the impact of seasonally high Christmas
holiday revenues from the Company's international operations, including, in
particular, the operations of a chain of retail bookshops throughout New
Zealand and Australia which were acquired by the Company's wholly owned
subsidary, Blue Star Group Limited ("Blue Star"), as part of its acquisition
of Whitcoulls Group Limited in July 1996.
Page 10
<PAGE>
Gross profit increased 95.1%, from $99.8 million, or 26.2% of revenues, for the
three months ended January 31, 1996, to $194.7 million, or 28.6% of revenues,
for the three months ended January 25, 1997. The increase in gross profit as a
percentage of revenues was due primarily to a shift in revenue mix resulting in
a higher proportion of revenues in traditionally higher margin products and
services, such as office coffee services and products sold in New Zealand and
Australia. Gross profit as a percentage of revenues also improved as a result
of improved purchasing and rebate programs negotiated with vendors.
Selling, general and administrative expenses increased 104.0%, from $78.9
million, or 20.8% of revenues, for the three months ended January 31, 1996, to
$161.0 million, or 23.7% of revenues, for the three months ended January 25,
1997. The increase in selling, general and administrative expenses was due
primarily to the inclusion of the Purchased Companies in the results for the
three months ended January 25, 1997. The increase in selling, general and
administrative expenses as a percentage of revenues was due primarily to a shift
in revenue mix resulting in a higher proportion of revenues from products and
services with traditionally higher selling, general and administative expenses,
such as office coffee services and products sold in New Zealand and Australia.
The Company incurred one-time nonrecurring acquisition costs of approximately
$5.2 million and $824,000 during the three months ended January 25, 1997 and
January 31, 1996, 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. GAAP requires the Company to expense all acquisition costs (both
those paid by the Company and those paid by the sellers) related to 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 January 25, 1997, as compared to the three months ended January 31,
1996. The Company expects to incur similar costs in the future as the Company
anticipates additional acquisitions accounted for under the pooling-of-interests
method.
During the three months ended January 31, 1996, the Company also recorded a
one-time charge of $682,000 associated with the discontinuation of the printing
division at one of its subsidiaries, which consisted primarily of the write
down of printing division assets to their estimated fair market values.
Interest expense, net of interest income, increased 258.7%, from $3.2 million
for the three months ended January 31, 1996, to $11.4 million for the three
months ended January 25, 1997. This increase was due primarily to the increase
in the Company's borrowings through the issuance of an aggregate of $373.75
million of 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 to refinance indebtedness assumed in such business combinations.
Equity in net income of affiliate of $265,000 represents the Company's 49%
equity investment in Dudley Stationery Limited ("Dudley"), which is being
accounted for under the equity method. The Company acquired 49% of Dudley, the
largest independent office products dealer in the United Kingdom, in November
1996.
Page 11
<PAGE>
Provision for income taxes increased from $4.6 million for the three months
ended January 31, 1996, to $7.5 million for the three months ended January 25,
1997, reflecting effective income tax rates of 27.3% and 42.3%, respectively.
The low effective income tax rate for the three months ended January 31, 1996,
compared to the federal statutory rate of 35.0% plus state, local and foreign
taxes, is primarily due to the fact that several companies included in the
results for such three month period, which were acquired in business
combinations accounted for under the pooling-of-interests method, were not
subject to federal income taxes on a corporate level as they had elected to be
treated as subchapter S corporations prior to being acquired by the Company.
The higher effective rate for the three months ended January 25, 1997, is due
primarily to increased nondeductible expenses, including amortization of
goodwill related to acquisitions accounted for under the purchase method and
nonrecurring acquisition costs related to acquisitions accounted for under the
pooling-of-interests method. This was partially offset by the impact of the
completion of business combinatons accounted for under the pooling-of-interests
method, during the third quarter of fiscal 1997, of companies that had elected
to be treated as subchapter S corporations prior to being acquired by the
Company.
Nine Months Ended January 25, 1997 Compared to Nine Months Ended
January 31, 1996
Consolidated revenues increased 85.4%, from $975.1 million for the nine months
ended January 31, 1996, to $1,807.7 million for the nine months ended January
25, 1997. This increase was primarily due to the inclusion, in the revenues for
the nine months ended January 25, 1997, of revenues from the 86 companies that
were acquired in business combinations accounted for under the purchase method
since the beginning of fiscal 1996 ("Fiscal 1996 and 1997 Purchased Companies").
Revenues from 18 of such Fiscal 1996 and 1997 Purchased Companies were included
in revenues for a portion of the nine months ended January 31, 1996.
International revenues increased from $34.0 million, or 3.5% of consolidated
revenues, for the nine months ended January 31, 1996, to $488.8 million, or
27.0% of consolidated revenues, for the nine months ended January 25, 1997.
This increase was primarily due to the inclusion, in the revenues for the nine
months ended January 25, 1997, of revenues from 17 companies that were acquired
in business combinations accounted for under the purchase method after the
beginning of the fourth quarter of fiscal 1996.
Gross profit increased 100.8%, from $255.2 million, or 26.2% of revenues, for
the nine months ended January 31, 1996, to $512.4 million, or 28.3% of revenues,
for the nine months ended January 25, 1997. The increase in gross profit as a
percentage of revenues was due primarily to a shift in revenue mix resulting in
a higher proportion of revenues in traditionally higher margin products and
services such as office coffee services and products sold in New Zealand and
Australia. The Company's gross profit as a percentage of revenue also improved
as a result of improved purchasing and rebate programs negotiated with vendors.
Selling, general and administrative expenses increased 96.4%, from $213.1
million, or 21.9% of revenues, for the nine months ended January 31, 1996, to
$418.5 million, or 23.2% of revenues, for the nine months ended January 25,
1997. The increase in selling, general and administrative expenses was due
primarily to the inclusion of the Fiscal 1996 and 1997 Purchased Companies in
the results for the nine months ended January 25, 1997. The increase in
selling, general and administrative expenses as a percentage of revenues was due
primarily to a shift in revenue mix resulting in a higher proportion of revenues
from products and services with traditionally higher selling, general and
administative expenses, such as office coffee services and products sold in New
Zealand and Australia.
Page 12
<PAGE>
The Company incurred one-time nonrecurring acquisition costs of approximately
$11.0 million and $6.1 million during the nine months ended January 25, 1997 and
January 31, 1996, respectively, in conjunction with business combinations
accounted for under the pooling-of-interests method. The nonrecurring
acquisition costs for the nine months ended January 25, 1997 represented costs
associated with 30 business combinations accounted for under the
pooling-of-interests method compared to six such business combinations during
the nine months ended January 31, 1996. The nonrecurring acquisition costs for
the nine months ended January 31, 1996 included a charge of approximately $4.7
million related to one business combination which included the payment of
significant transaction related compensation obligations. During the nine
months ended January 31, 1996 the Company also recorded a one-time charge of
$682,000 associated with the discontinuation of the printing division at one of
its subsidiaries.
Interest expense, net of interest income, increased 216.7% from $8.1 million for
the nine months ended January 31, 1996 to $25.6 million for the nine months
ended January 25, 1997. This increase was due primarily to the increase in the
Company's borrowings through the issuance of an aggregate of $373.75 million of
Notes during the fourth quarter of fiscal 1996 and the first quarter of fiscal
1997 and an increase in the outstanding balance on the Company's credit
facility. The proceeds from the issuance of the Notes and the additional
borrowings from the credit facility were used to fund the cash portion of the
consideration in business combinations and to refinance indebtedness assumed in
such business combinations. For the nine months ended January 25, 1997, other
(income) expense also included a foreign currency gain of $3.4 million, which
represented the effect of the change in the exchange rate between the New
Zealand and U.S. dollars on short-term loans between the Company and Blue Star.
Provision for income taxes increased from $5.2 million, for the nine months
ended January 31, 1996, to $24.2 million, for the nine months ended January 25,
1997, reflecting effective income tax rates of 18.3% and 39.5%, respectively.
The low effective income tax rate for the nine months ended January 31, 1996,
compared to the federal statutory rate of 35.0% plus state, local and foreign
taxes, is primarily due to the fact that several companies included in the
results for such nine month period, which were acquired in business combinations
accounted for under the pooling-of-interests method, were not subject to federal
income taxes on a corporate level as they had elected to be treated as
subchapter S corporations prior to being acquired by the Company. The higher
effective income tax rate for the nine months ended January 25, 1997, is due
primarily to increased nondeductible expenses, including amortization of
goodwill related to acquisitions accounted for under the purchase method and
nonrecurring acquisition costs related to acquisitions accounted for under the
pooling-of-interests method. This was partially offset by the impact of the
completion of business combinatons accounted for under the pooling-of-interests
method, during the first three quarters of fiscal 1997, of companies that had
elected to be treated as subchapter S corporations prior to being acquired by
the Company.
During the nine months ended January 25, 1997, the Company incurred an
extraordinary item of $612,000, which represents the aggregate expenses, net of
the expected tax benefit, associated with the early termination of the Company's
$50 million credit facility with First Bank National Association due to the
Company entering into a new $500 million credit facility in August 1996 with a
syndicate of banks led by Bankers Trust Company (the "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.
Liquidity and Capital Resources
At January 25, 1997, the Company had cash of $56.5 million and working capital
of $78.9 million. The Company's capitalization, defined as the sum of long-term
debt and stockholders' equity, at January 25, 1997 was $961.5 million.
Page 13
<PAGE>
During the nine months ended January 25, 1997, net cash used in operating
activities was $24.8 million which resulted primarily from the increase in
accounts receivable due to seasonality and revenue growth and a decrease in
accounts payable due to the Company's aggressive policy of taking recently
negotiated cash discounts. Net cash used in investing activities was $404.2
million, including $332.5 million used for acquisitions, $23.9 million used for
additions to property and equipment and $41.3 million used to make an equity
investment in Dudley. Net borrowings increased $276.0 million during the nine
months ended January 25, 1997 primarily to fund acquisitions, including the
repayment of higher interest rate debt assumed in business combinations.
During the nine months ended January 31, 1996, net cash used in operating
activities was $4.2 million. Net cash used in investing activities was $75.3
million, including $58.2 million used for acquisitions and $16.8 million used
for additions to property and equipment. Net borrowings increased $36.6
million during the nine months ended January 31, 1996. The Company also
received $53.5 million in cash as a result of the sale of common stock during
the period.
In February and March 1997, the Company completed the public sale, at a gross
price of $33.00 per share, of 8,682,331 shares of common stock, including the
purchase by the underwriters of 637,000 shares of common stock from their
over-allotment option. The net proceeds to the Company, after deducting
underwriting discounts and commissions and offering expenses, were approximately
$274.5 million and have been used to repay a portion of the outstanding balance
on the Credit Facility. At March 10, 1997, the Company had $95.0 million
outstanding under the Credit Facility at an annual interest rate of
approximately 7.1%.
In October 1996, the Company refinanced $180 million in high interest rate debt
outstanding in New Zealand and Australia with the $180 million that was
available under the Credit Facility solely for purposes of such refinancing.
The average annual interest rate on such debt prior to such refinancing was
approximately 11.0%.
In September 1996, the Company sold 1,250,000 shares of common stock to Quantum
Partners LDC in a private placement. The Company received proceeds of
approximately $38.1 million as a result of the sale. The proceeds were used to
repay a portion of the then outstanding balance under the Credit Facility.
In August 1996, the Company entered into an agreement under which a syndicate of
financial institutions, led by Bankers Trust Company, as Agent (the "Bank"), is
providing the Company with the $500 million Credit Facility bearing interest, at
the Company's option, at the Bank's base rate plus an applicable margin of up to
1.25%, or a eurodollar rate plus an applicable margin of up to 2.5%. The
availability under the Credit Facility is subject to certain sublimits including
$100 million for working capital loans and $400 million for acquisition loans,
with $180 million of the acquisition loan sublimit available solely to refinance
certain outstanding indebtedness of the Company in Australia and New Zealand.
The Credit Facility is secured by a majority of the assets of the Company and
its subsidiaries and contains customary covenants, including financial covenants
with respect to the Company's consolidated leverage and interest coverage
ratios, capital expenditures, payment of dividends and purchases and sales of
assets, and customary default provisions, including provisions related to
non-payment of principal and interest, default under other debt agreements and
bankruptcy. The Company is currently in negotiations with the Bank to amend the
Credit Facility to eliminate the $180 million acquisition sublimit.
In May and June 1996, the Company completed the 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.
Page 14
<PAGE>
Subsequent to January 25, 1997 and through March 10, 1997, the Company has
completed ten business combinations for an aggregate purchase price of $19.7
million, consisting of approximately $5.0 million of cash and 473,635
shares of the Company's common stock with an aggregate market value on the dates
of acquisition of approximately $14.7 million.
The Company plans to continue to consolidate and modernize its distribution
facilities and systems with the creation of district fulfillment centers and the
consolidation of existing facilities into such centers. The Company expects to
incur capital expenditures of approximately $20 million to $30 million over the
next fiscal year for this and other purposes.
The Company anticipates that its current cash on hand, cash flow from operations
and additional financing available under the Credit Facility will be sufficient
to meet the Company's liquidity requirements for its operations through the
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.
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, general economic conditions, and the retroactive restatement
of the Company's consolidated financial statements for acquisitions accounted
for under the pooling-of-interests method. 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 three 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:
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
January 25, 1997, the Company made 138 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.
Page 15
<PAGE>
The Company depends upon acquisitions and organic growth to increase its
earnings. There can be no assurance that the Company will complete acquisitions
in a manner that coincides with the end of its fiscal quarters. The failure to
complete acquisitions on a timely basis could have a material adverse effect on
the Company's quarterly results. Likewise, delays in implementing planned
integration strategies and activities also could adversely affect the Company's
quarterly earnings. In addition, there can be no assurance that acquisitions
will occur at the same pace as in prior periods 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. The Company's results
could adversely be affected by the fact that 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 or 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 intends to continue to focus significant attention and resources
on international expansion. The Company believes, however, that international
revenues, as a percentage of total revenues, will not exceed their current
levels, although no assurances can be made in this regard. 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.
The Company's ability to manage an aggressive consolidation program in markets
other than the domestic contract stationer market has not yet been fully
tested. In addition, there can be no assurance that companies that have been
acquired or that may be acquired in the future will achieve sales and
profitability levels that justify the investment therein. Acquisitions may
involve a number of special risks that could have a material adverse effect on
the Company's operations and financial performance, including adverse
short-term effects on the Company's reported operating results; diversion of
management's attention; difficulties with the retention, hiring and training
of key personnel; risks associated with unanticipated problems or legal
liabilities; and amortization of acquired intangible assets.
Page 16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11.1 Statement regarding computation of net income 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 October 25, 1996 and filed with the Commission on
November 5, 1996 reporting information under Items 2, 5 and 7.
ii. Form 8-K/A dated October 25, 1996 and filed with the Commission on
December 9, 1996 reporting information under Items 5 and 7:
Financial statements filed:
(a) Unaudited pro forma financial statements of U.S. Office
Products Company as of July 27, 1996 and for the three months
ended July 27, 1996 and July 31, 1995 and for the years ended
April 30, 1996, 1995 and 1994.
(b) The audited financial statements of Fortran Corp. as of March
31, 1996 and for the year then ended and the unaudited
financial statements as of June 30, 1996 and 1995 and for the
three months ended June 30, 1996 and 1995.
(c) The audited financial statements of PC Direct Limited as of
March 31, 1996 and for the year then ended.
(d) The audited financial statements of Bay State Computer Group,
Inc. as of March 31, 1996 and 1995 and for the years then ended
and unaudited financial statements as of June 30, 1996 and 1995
and for the three months then ended.
iii. Form 8-K dated January 9, 1997 and filed with the Commission on
January 9, 1997 reporting information under Items 5 and 7.
Financial statements filed:
(a) Audited consolidated financial statements of U.S. Office
Products Company as of April 30, 1996 and 1995 and for the
years ended April 30, 1996, 1995 and 1994, and the unaudited
consolidated financial statements as of October 267, 1996 and
for the six months ended October 26, 1996 and October 31, 1995.
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
March 11, 1997 By: /s/ Jonathan J. Ledecky
- ------------------------------ -----------------------------------
Date Jonathan J. Ledecky
Chief Executive Officer
March 11, 1997 By: /s/ Donald H. Platt
- ------------------------------ -----------------------------------
Date Donald H. Platt
Chief Financial Officer
Page 18
<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 Nine Months Ended
------------------------ ------------------------
January 25, January 31, January 25, January 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before extraordinary item.............................. $ 10,177 $ 12,163 $ 37,003 $ 23,399
Extraordinary item--loss on early termination of credit
facility.................................................... 612
----------- ----------- ----------- -----------
Net income.................................................... $ 10,177 $ 12,163 $ 36,391 $ 23,399
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding........................... 50,901 36,277 48,509 34,008
Common stock equivalents from stock options................... 1,232 654 1,250 387
----------- ----------- ----------- -----------
Total weighted average shares outstanding..................... 52,133 36,931 49,759 34,395
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share:
Income before extraordinary item.............................. $ .20 $ .33 $ .74 $ .68
Extraordinary item............................................ .01
Net income.................................................... $ .20 $ .33 $ .73 $ .68
</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
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-26-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JAN-25-1997
<CASH> 56,462
<SECURITIES> 0
<RECEIVABLES> 344,291
<ALLOWANCES> (7,857)
<INVENTORY> 250,795
<CURRENT-ASSETS> 726,964
<PP&E> 202,678
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,628,307
<CURRENT-LIABILITIES> 648,088
<BONDS> 389,453
0
0
<COMMON> 51
<OTHER-SE> 572,035
<TOTAL-LIABILITY-AND-EQUITY> 1,628,307
<SALES> 1,807,656
<TOTAL-REVENUES> 1,807,656
<CGS> 1,295,249
<TOTAL-COSTS> 1,714,407<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,083
<INCOME-PRETAX> 61,162
<INCOME-TAX> 24,159
<INCOME-CONTINUING> 37,003
<DISCONTINUED> 0
<EXTRAORDINARY> 612
<CHANGES> 0
<NET-INCOME> 36,391
<EPS-PRIMARY> .73
<EPS-DILUTED> 0
<FN>
<F1>The costs include $10,957 of nonrecurring acquisition costs incurred in business
combinations accounted for under the pooling-of-interests method.
</FN>
</TABLE>
