<PAGE>
PROSPECTUS SUPPLEMENT RULES 424(b)(3) AND 424(c)
TO PROSPECTUS DATED OCTOBER 9, 1996 REGISTRATION NO. 333-13133
AND PROSPECTUS SUPPLEMENT DATED
JULY 15, 1997
[LOGO]
U.S. Office Products Company (the "Company" or "USOP") has prepared this
Prospectus Supplement to update the Company's Prospectus dated October 9, 1996,
as supplemented by Prospectus Supplement dated July 15, 1997, covering
37,651,948 shares of the Company's common stock, $.001 par value (the "Common
Stock").
As previously reported, on May 22, 1997, the Company signed a definitive
agreement (the "Agreement") to acquire Mail Boxes Etc. ("MBE"), the largest
franchisor of business communication and postal service centers with more than
3,300 centers operating worldwide. Under the original terms of the Agreement,
each outstanding share of MBE common stock was to be converted into one share of
the Company's Common Stock, subject to certain conditions and adjustments as set
forth in the Agreement. On October 7, 1997, the Company announced a
three-for-two stock split in the form of a stock dividend (the "stock split")
payable on November 6, 1997 to record holders as of October 23, 1997. To
preserve the economic terms of the acquisition of MBE as originally agreed to by
the Company and MBE prior the declaration of the stock split, the Company and
MBE amended the Agreement as of October 9, 1997 (referred to also as the
"Agreement") so that each outstanding share of MBE common stock will be
converted into 1.5 shares of the Company's Common Stock, subject to certain
conditions and adjustments as set forth in the Agreement. In connection with the
acquisition, the Company and MBE have mailed, as of October 21, 1997, a proxy
statement/prospectus to solicit the approval of MBE shareholders at a special
meeting to be held on November 20, 1997. Assuming all of the conditions to the
acquisition contained in the Agreement are satisfied or waived prior thereto, it
is currently anticipated that the acquisition will be completed as soon as
practicable following the MBE special meeting.
On October 7, 1997 the Company announced a strategic alliance for
telecommunications services with MCI Communications Corporation ("MCI"). The
alliance includes the consolidation through MCI of the major telecommunications
needs of the Company. In addition, the companies have agreed to work together to
market and sell MCI products and services to the Company's customers. The
Company and MCI are negotiating definitive agreements to finalize the terms of
this service marketing arrangement.
Jonathan J. Ledecky, the Company's Chairman of the Board and Chief Executive
Officer, has recently been named the Non-Executive Chairman of U.S.A. Floral
Products, Inc. ("USA Floral"), a company co-founded by Mr. Ledecky in April 1997
to create a national consolidator and operator of floral products distribution
businesses, and Chairman of Consolidation Capital Corporation ("CCC"), a company
founded by Mr. Ledecky in February 1997 to build consolidated enterprises
through the acquisition of businesses in a variety of fragmented industries,
other than the industries in which the Company is currently involved and certain
other industries. U.S.A. Floral recently sold 5.0 million shares in its initial
public offering at a price of $13.00 per share. Mr. Ledecky owns 1.1 million
shares of the common stock of USA Floral. CCC has filed a registration statement
with the Securities and Exchange Commission to register 25 million shares for
sale to the public at a disclosed estimated price of $20.00 per share. Mr.
Ledecky owns approximately 4.4 million shares of the common stock of CCC. CCC
has stated that it intends to hire an executive management team with acquisition
experience.
<PAGE>
The following financial information related to the Company is included as
part of this Prospectus Supplement: (i) the Company's unaudited pro forma
financial information as of July 26, 1997 and for the years ended April 26, 1997
and April 30, 1996 and 1995 and for the three months ended July 26, 1997 and
July 27, 1996, reflecting, among other things, the pending acquisition of MBE;
and (ii) the Company's unaudited financial information as of July 26, 1997 and
April 26, 1997 and for the three months ended July 26, 1997 and July 27, 1996
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" related thereto.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS OCTOBER 22, 1997.
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma financial statements give effect to, where
applicable, acquisitions completed through July 26, 1997, the pending
acquisition of Mail Boxes Etc. at an assumed exchange ratio of 1 on a pre-stock
split basis and 1.5 on a post-stock split basis and, where applicable, the 3:2
stock split declared on October 7, 1997. The unaudited pro forma combined
balance sheet gives effect to the pending acquisition of Mail Boxes Etc., as if
the transaction had occurred as of USOP's most recent balance sheet date, July
26, 1997.
The pro forma combined statement of income for the year ended April 26, 1997
gives effect to (i) the 77 acquisitions completed during fiscal 1997 which were
accounted for under the purchase method of accounting (the "Fiscal 1997
Purchased Companies") as if such acquisitions had been made on May 1, 1996; (ii)
the 15 acquisitions completed in the first quarter of fiscal 1998 which were
accounted for under the purchase method of accounting (the "Fiscal 1998
Purchased Companies") as if all such acquisitions had been made on May 1, 1996;
(iii) the 7 acquisitions completed in the first quarter of fiscal 1998 which
were accounted for under the pooling-of-interests method of accounting as if all
such acquisitions had been made on May 1, 1996 (the "Fiscal 1998 Pooled
Companies"); (iv) the Mail Boxes Etc. acquisition to be accounted for under the
pooling-of-interests method of accounting as if such acquisition had been made
on May 1, 1996; (v) the sales by USOP of 5 1/2% Convertible Subordinated Notes
due 2003 in May and June 1996 (the "May Notes") in the principal amount of $230
million as if such sales had been made on May 1, 1996; (vi) the sale by USOP in
September 1996 (the "September Stock Sale") of 1,250,000 shares of Common Stock
as if such sale had been made on May 1, 1996; and (vii) the sales by USOP in
February and March 1997 of 8,682,331 shares of Common Stock as if such sales had
been made on May 1, 1996.
The pro forma combined statement of income for the year ended April 26, 1997
includes (i) the audited financial statements of USOP for the year ended April
26, 1997; (ii) the audited financial statements of Mail Boxes Etc. for the year
ended April 30, 1997; (iii) the unaudited financial information for the Fiscal
1997 and the Fiscal 1998 Purchased Companies for the period from May 1, 1996 to
the consummation date; and (iv) the unaudited financial information for the
Fiscal 1998 Pooled Companies for the most recently completed fiscal year.
The pro forma combined statement of income for the three months ended July
26, 1997 includes the unaudited financial information of the Company and gives
effect to the 15 Fiscal 1998 Purchased Companies as if all such acquisitions had
been made on May 1, 1997.
The pro forma combined statement of income for the three months ended July
27, 1996 includes the unaudited financial information of the Company and gives
effect to the Fiscal 1997 and the Fiscal 1998 Purchased Companies as if all such
acquisitions had been made on May 1, 1996.
The pro forma combined statements of income for the years ended April 30,
1996 and 1995 include the historical financial information of USOP and give
effect to the acquisition of Mail Boxes Etc. and the Fiscal 1998 Pooled
Companies as if all such acquisitions had been made on May 1, 1994.
In addition, the pro forma combined income statements give effect to tax
adjustments for certain pooled companies that were S corporations, as if such
earnings had been subject to corporate taxes for all periods presented.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent the results that USOP would have obtained had the transactions, which
are the subject of pro forma adjustments, occurred at the beginning of the
period, as assumed, or the future results of USOP. The pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in the Prospectus Supplement
dated July 15, 1997.
3
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JULY 26, 1997
(000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE
PRODUCTS MAIL BOXES PRO FORMA PRO FORMA PRO FORMA
COMPANY ETC. ADJUSTMENTS SUBTOTAL ADJUSTMENTS(C) COMBINED
------------- ----------- ----------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 52,749 $ 35,464 $ (88,213)(a) -- --
Accounts receivable, net............... 443,775 6,612 450,387 450,387
Inventory.............................. 297,390 454 297,844 297,844
Prepaid expenses and other current
assets............................... 96,261 15,235 111,496 111,496
------------- ----------- ----------- --------- -------------- -----------
Total current assets................. 890,175 57,765 (88,213) 859,727 859,727
Property and equipment, net.............. 283,754 6,503 290,257 290,257
Intangible assets, net................... 720,971 5,154 726,125 726,125
Other assets............................. 119,800 20,863 140,663 140,663
------------- ----------- ----------- --------- -------------- -----------
Total assets......................... $ 2,014,700 $ 90,285 $ (88,213) $2,016,772 $2,016,772
------------- ----------- ----------- --------- -------------- -----------
------------- ----------- ----------- --------- -------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt........................ $ 288,982 $ 442 $ (84,475)(a) $ 204,949 $ 204,949
Accounts payable....................... 212,316 994 213,310 213,310
Accrued compensation................... 50,069 1,678 51,747 51,747
Other accrued liabilities.............. 106,341 10,455 116,796 116,796
------------- ----------- ----------- --------- -------------- -----------
Total current liabilities............ 657,708 13,569 (84,475) 586,802 586,802
Long-term debt........................... 387,300 3,738 (3,738)(a) 387,300 387,300
Deferred income taxes.................... 8,744 8,744 8,744
Other long-term liabilities and minority
interests.............................. 8,008 8,008 8,008
------------- ----------- ----------- --------- -------------- -----------
Total liabilities.................... 1,061,760 17,307 (88,213) 990,854 990,854
Stockholders' equity
Common stock........................... 73 17,479 (17,468)(b) 84 42(c) 126
Additional paid-in capital............. 853,025 17,468(b) 870,493 (42)(c) 870,451
Cumulative translation adjustment...... (44,959) (44,959) (44,959)
Retained earnings...................... 144,801 55,499 200,300 200,300
------------- ----------- ----------- --------- -------------- -----------
Total stockholders' equity........... 952,940 72,978 -- 1,025,918 1,025,918
------------- ----------- ----------- --------- -------------- -----------
Total liabilities and stockholders'
equity............................. $ 2,014,700 $ 90,285 $ (88,213) $2,016,772 $2,016,772
------------- ----------- ----------- --------- -------------- -----------
------------- ----------- ----------- --------- -------------- -----------
</TABLE>
4
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 26, 1997
(000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998 FISCAL 1998
PRODUCTS PURCHASED PURCHASED POOLED PRO FORMA
COMPANY COMPANIES (C) COMPANIES (C) COMPANIES (C) MAIL BOXES ETC. ADJUSTMENTS
----------- ------------- ------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $2,835,875 $ 389,707 $ 148,332 $ 72,834 $ 67,837
Cost of revenues............... 2,031,713 279,988 95,551 49,738 35,696
----------- ------------- ------------- ------- ------- -----------
Gross profit................. 804,162 109,719 52,781 23,096 32,141 --
Selling, general and
administrative expenses...... 655,101 99,225 35,765 19,811 20,279 $ 3,545(d)
(12,388)(e)
Non-recurring acquisition
costs........................ 16,245 (16,245)(f)
Restructuring costs............ 4,395
----------- ------------- ------------- ------- ------- -----------
Operating income............. 128,421 10,494 17,016 3,285 11,862 25,088
Interest expense............... 45,901 3,346 1,650 330 (10,011)(g)
Interest income................ (7,632) (212) (249) (963) 9,056(h)
Other income................... (3,689) (2,173) (282) 441
----------- ------------- ------------- ------- ------- -----------
Income before provision for
income taxes and
extraordinary items.......... 93,841 9,533 15,897 2,514 12,825 26,043
Provision for income taxes..... 35,103 3,164 4,582 1,290 4,834 17,949(i)
----------- ------------- ------------- ------- ------- -----------
Income before extraordinary
items........................ $ 58,738 $ 6,369 $ 11,315 $ 1,224 $ 7,991 $ 8,094
----------- ------------- ------------- ------- ------- -----------
----------- ------------- ------------- ------- ------- -----------
Weighted average common shares
outstanding.................. 61,174
Income per share before
extraordinary items.......... $ 0.96
-----------
-----------
Pro Forma income before
extraordinary items.......... $ 51,143(k)
-----------
-----------
Pro Forma income per share
before extraordinary items... $ 0.84
-----------
-----------
Share and per share amounts
adjusted to reflect 3:2 stock
split:.......................
Weighted average common
shares outstanding.........
Income per share before
extraordinary items........
<CAPTION>
PRO FORMA
COMBINED
-----------
<S> <C>
Revenues....................... $3,514,585
Cost of revenues............... 2,492,686
-----------
Gross profit................. 1,021,899
Selling, general and
administrative expenses...... 821,338
Non-recurring acquisition
costs........................ --
Restructuring costs............ 4,395
-----------
Operating income............. 196,166
Interest expense............... 41,216
Interest income................
Other income................... (5,703)
-----------
Income before provision for
income taxes and
extraordinary items.......... 160,653
Provision for income taxes..... 66,922
-----------
Income before extraordinary
items........................ $ 93,731
-----------
-----------
Weighted average common shares
outstanding.................. 85,807(j)
Income per share before
extraordinary items.......... $ 1.09
-----------
-----------
Pro Forma income before
extraordinary items..........
Pro Forma income per share
before extraordinary items...
Share and per share amounts
adjusted to reflect 3:2 stock
split:.......................
Weighted average common
shares outstanding......... 128,711
Income per share before
extraordinary items........ $ 0.73
-----------
-----------
</TABLE>
5
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE QUARTER ENDED JULY 26, 1997
(000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL
U.S. OFFICE 1998
PRODUCTS PURCHASED MAIL BOXES PRO FORMA PRO FORMA
COMPANY COMPANIES ETC. ADJUSTMENTS COMBINED
----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues.............................................. $ 863,595 $ 18,790 $ 15,680 -- $ 898,065
Cost of revenues...................................... 620,336 12,619 7,403 -- 640,358
----------- ----------- ----------- ------ -----------
Gross profit........................................ 243,259 6,171 8,277 -- 257,707
Selling, general and administrative expenses.......... 193,571 4,153 6,388 69(d) 204,181
Non-recurring acquisition costs....................... 4,405 -- -- (4,405)(f) --
Restructuring costs................................... -- -- -- -- --
----------- ----------- ----------- ------ -----------
Operating income.................................... 45,283 2,018 1,889 4,336 53,526
Interest expense...................................... 10,504 183 -- 383(g) 10,304
Interest income....................................... (629) (12) (322) 963(h)
Other income.......................................... (1,482) 53 -- -- (1,429)
----------- ----------- ----------- ------ -----------
Income before provision for income taxes and
extraordinary items................................. 36,890 1,794 2,211 3,756 44,651
Provision for income taxes............................ 15,948 406 1,122 1,471(i) 18,947
----------- ----------- ----------- ------ -----------
Income before extraordinary items..................... $ 20,942 $ 1,388 $ 1,089 $ 2,285 $ 25,704
----------- ----------- ----------- ------ -----------
----------- ----------- ----------- ------ -----------
Weighted average common shares outstanding............ 73,440 85,872(j)
Income per share before extraordinary items........... $ 0.29 $ 0.30
----------- -----------
----------- -----------
Pro Forma income before extraordinary items........... 20,613(k)
-----------
-----------
Pro Forma income per share before extraordinary
items............................................... $ 0.28
-----------
-----------
Share and per share amounts adjusted to reflect 3:2
stock split: .......................................
Weighted average common shares outstanding.......... 128,808
Income per share before extraordinary items......... $ 0.20
-----------
-----------
</TABLE>
6
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE QUARTER ENDED JULY 27, 1996
(000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASED PURCHASED MAIL BOXES PRO FORMA PRO FORMA
COMPANY COMPANIES (C) COMPANIES (C) ETC. ADJUSTMENTS COMBINED
----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 568,502 $ 240,166 $ 39,749 $ 14,779 $ 863,196
Cost of revenues........................ 409,642 167,065 25,508 7,649 609,864
----------- ------------- ------------- ----------- ----------- -----------
Gross profit.......................... 158,860 73,101 14,241 7,130 -- 253,332
Selling, general and administrative
expenses.............................. 128,626 64,681 8,964 3,985 (4,482)(d) 204,379
2,605(e)
Non-recurring acquisition costs......... 1,656 (1,656)(f) --
Restructuring costs..................... --
----------- ------------- ------------- ----------- ----------- -----------
Operating income...................... 28,578 8,420 5,277 3,145 3,533 48,953
Interest expense........................ 8,832 2,518 376 (1,422)(g) 10,304
Interest income......................... (4,439) (124) (72) (256) 4,891(h)
Other income............................ (169) (554) (53) (776)
----------- ------------- ------------- ----------- ----------- -----------
Income before provision for income taxes
and extraordinary items............... 24,354 6,580 5,026 3,401 64 39,425
Provision for income taxes.............. 7,789 2,776 1,508 1,331 3,057(i) 16,461
----------- ------------- ------------- ----------- ----------- -----------
Income before extraordinary items....... $ 16,565 $ 3,804 $ 3,518 $ 2,070 $ (2,993) $ 22,964
----------- ------------- ------------- ----------- ----------- -----------
----------- ------------- ------------- ----------- ----------- -----------
Weighted average common shares
outstanding........................... 57,484 85,951(j)
Income per share before extraordinary
items................................. $ 0.29 $ .27
----------- -----------
----------- -----------
Pro Forma income before extraordinary
items................................. 12,780(k)
-----------
-----------
Pro Forma income per share before
extraordinary items................... $ 0.22
-----------
-----------
Share and per share amounts adjusted to
reflect 3:2 stock split:
Weighted average common shares
outstanding......................... 128,927
Income per share before extraordinary
items............................... $ 0.18
-----------
-----------
</TABLE>
7
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO-FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1996
(000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE
PRODUCTS FISCAL 1998 PRO FORMA PRO FORMA
COMPANY MAIL BOXES ETC. POOLINGS SUBTOTAL ADJUSTMENT COMBINED
----------- --------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... $1,686,430 $ 59,107 $ 53,254 $1,798,791 $1,798,791
Cost of revenues............................... 1,246,647 31,071 33,852 1,311,570 1,311,570
----------- ------- ----------- --------- ----------- ---------
Gross profit................................. 439,783 28,036 19,402 487,221 487,221
Selling, general and administrative expenses... 372,180 14,361 16,480 403,021 403,021
Non-recurring acquisition costs................ 8,057 8,057 8,057
Restructuring costs............................ 3,214 3,214 3,214
----------- ------- ----------- --------- ----------- ---------
Operating income............................. 56,332 13,675 2,922 72,929 72,929
Interest expense............................... 20,123 400 20,523 20,523
Interest income................................ (4,425) (674) (136) (5,235) (5,235)
Other income................................... (1,730) 1,111 (619) (619)
----------- ------- ----------- --------- ----------- ---------
Income before provision for income taxes and
extraordinary items.......................... 42,364 14,349 1,547 58,260 58,260
Provision for income taxes..................... 7,487 5,620 734 13,841 $ 10,306(k) 24,147
----------- ------- ----------- --------- ----------- ---------
Income before extraordinary items.............. $ 34,877 $ 8,729 $ 813 $ 44,419 $ (10,306) $ 34,113
----------- ------- ----------- --------- ----------- ---------
----------- ------- ----------- --------- ----------- ---------
Weighted average common shares outstanding..... 45,583 59,781(j) 59,781(j)
Income per share before extraordinary items.... $ 0.77 $ 0.74 $ 0.57
----------- --------- ---------
----------- --------- ---------
Pro forma income before extraordinary items.... $ 21,945(k)
-----------
-----------
Pro forma income per share before extraordinary
items........................................ $ 0.48
-----------
-----------
Share and per share amounts adjusted to reflect
3:2 stock split:
Weighted average common shares outstanding... 89,672
Income per share before extraordinary
items...................................... $ 0.38
---------
---------
</TABLE>
8
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO-FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED APRIL 30, 1995
(000'S)
<TABLE>
<CAPTION>
U.S. OFFICE
PRODUCTS FISCAL 1998 PRO FORMA PRO FORMA
COMPANY MAIL BOXES ETC. POOLINGS SUBTOTAL ADJUSTMENT COMBINED
----------- --------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $1,041,304 $ 50,351 $ 52,329 $1,143,984 $1,143,984
Cost of revenues....................... 762,724 27,109 31,418 821,251 821,251
----------- ------- ----------- --------- ----------- -----------
Gross profit......................... 278,580 23,242 20,911 322,733 322,733
Selling, general and administrative
expenses............................. 237,864 12,508 19,140 269,512 269,512
Nonrecurring acquisition costs......... --
Restructuring costs.................... --
----------- ------- ----------- --------- ----------- -----------
Operating income..................... 40,716 10,734 1,771 53,221 53,221
Interest expense....................... 8,319 (447) 523 8,395 8,395
Interest income........................ (1,135) (104) (1,239) (1,239)
Other income........................... (1,389) 483 (906) (906)
----------- ------- ----------- --------- ----------- -----------
Income before provision for income
taxes and extraordinary items........ 34,921 11,181 869 46,971 46,971
Provision for income taxes............. 3,754 4,411 361 8,526 $ 10,913(k) 19,439
----------- ------- ----------- --------- ----------- -----------
Income before extraordinary items...... $ 31,167 $ 6,770 $ 508 $ 38,445 $ (10,913) $ 27,532
----------- ------- ----------- --------- ----------- -----------
----------- ------- ----------- --------- ----------- -----------
Pro forma income before extraordinary
items................................ $ 20,359(k)
-----------
-----------
</TABLE>
9
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE NUMBERS IN THOUSANDS)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect the reduction in short-term and long-term debt of
Mail Boxes Etc. and existing short-term debt of USOP.
(b) Adjustment to reflect issuance of Common Stock to effect the acquisition
of Mail Boxes Etc. at an assumed exchange ratio of 1.
(c) Adjustment to reflect issuance of Common Stock to effect the acquisition
of Mail Boxes Etc. at an assumed exchange ratio of 1.5 and the 3:2 stock split
announced on October 7, 1997.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(c) Includes the following with respect to Fiscal 1997 and 1998 Purchased
companies and Fiscal 1998 Pooled Companies for the periods presented, which
represent the results of the acquired companies from May 1, 1996 to consummation
date:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 26, 1997
FISCAL 1998
FISCAL 1997 PURCHASED COMPANIES FISCAL 1998 PURCHASED COMPANIES POOLED COMPANIES
----------------------------------------- ----------------------------------------- -----------------
SIGNIFICANT SIGNIFICANT SIGNIFICANT
ACQUISITIONS- INDIVIDUALLY ACQUISITIONS- INDIVIDUALLY ACQUISITIONS-
WHITCOULLS GROUP INSIGNIFICANT WHITCOULLS GROUP INSIGNIFICANT WHITCOULLS GROUP
LIMITED ACQUISITIONS TOTAL LIMITED ACQUISITIONS TOTAL LIMITED
----------------- ----------- --------- ----------------- ----------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue......... $ 98,905 $ 290,802 $ 389,707 N/A $ 148,332 $ 148,332 N/A
Gross Profit.... 37,888 71,831 109,719 N/A 52,781 52,781 N/A
Operating
Income........ 6,922 3,572 10,494 N/A 17,016 17,016 N/A
<CAPTION>
INDIVIDUALLY
INSIGNIFICANT
ACQUISITIONS TOTAL
------------- ---------
<S> <C> <C>
Revenue......... $ 72,834 $ 72,834
Gross Profit.... 23,096 23,096
Operating
Income........ 3,285 3,285
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 27, 1996
<S> <C> <C> <C> <C> <C>
FISCAL 1997 PURCHASED COMPANIES FISCAL 1998 PURCHASED COMPANY
----------------------------------------- --------------------------------
<CAPTION>
SIGNIFICANT SIGNIFICANT
ACQUISITIONS- INDIVIDUALLY ACQUISITIONS- INDIVIDUALLY
WHITCOULLS GROUP INSIGNIFICANT WHITCOULLS GROUP INSIGNIFICANT
LIMITED ACQUISITIONS TOTAL LIMITED ACQUISITIONS
----------------- ----------- --------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue.............................................. $ 98,905 $ 141,261 $ 240,166 N/A $ 39,749
Gross Profit......................................... 37,888 35,213 73,101 N/A 14,241
Operating Income..................................... 6,922 1,498 8,420 N/A 5,277
<CAPTION>
<S> <C>
TOTAL
---------
<S> <C>
Revenue.............................................. $ 39,749
Gross Profit......................................... 14,241
Operating Income..................................... 5,277
</TABLE>
(d) Adjustments to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1997 and Fiscal
1998 Purchased Companies. The goodwill is being amortized over an estimated life
of 40 years.
(e) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations of
executive compensation agreements resulting from certain acquisitions.
(f) Adjustment to reflect the elimination of non-recurring acquisition costs
relating to pooling-of-interests business combinations.
(g) Adjustment to reflect the decrease in interest expense resulting from
the utilization of the proceeds from the September Stock Sale and the sales by
USOP in February and March 1997 of 8,682 shares of Common Stock to repay
outstanding indebtedness as if such sales had been made on May 1, 1994.
(h) Adjustment to reflect the decrease in interest income resulting from the
utilization of excess cash to repay outstanding indebtedness.
10
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS AND SHARE NUMBERS IN THOUSANDS)
(i) Adjustment to calculate the provision for income taxes on the combined
pro forma results at an effective income tax rate of approximately 42%. The
difference between the effective tax rate of 42% and the federal statutory tax
rate of 35% relates primarily to state income taxes and non-deductible goodwill.
(j) The weighted average shares outstanding used to calculate pro forma
earnings per share is comprised of the following:
<TABLE>
<CAPTION>
APRIL 26, 1997 JULY 27, 1996 JULY 26, 1997
--------------- ------------- -------------
<S> <C> <C> <C>
Historical weighted average common shares outstanding................. 61,174 56,183 72,218
Shares assumed outstanding for the entire period related to issues for
(i) the Fiscal 1997 and 1998 Purchased Companies and (ii) September
Stock Sale and February and March 1997 Stock Sales.................. 11,696 16,687 652
Shares to be issued for the acquisition of Mail Boxes Etc............. 11,300 11,300 11,300
USOP and Mail Boxes Etc. common stock Equivalents..................... 1,637 1,781 1,702
------ ------ ------
Total............................................................... 85,807 85,951 85,872
------ ------ ------
------ ------ ------
</TABLE>
The weighted average shares outstanding used to calculate pro forma earnings
per share, as adjusted to reflect the 3:2 stock split, is comprised of the
following:
<TABLE>
<CAPTION>
APRIL 26,
1997 JULY 27, 1996 JULY 26, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Historical weighted average common shares outstanding................. 91,761 84,275 108,327
Shares assumed outstanding for the entire period related to issues for
(i) the Fiscal 1997 and 1998 Purchased Companies and (ii) September
Stock Sale and February and March 1997 Stock Sales.................. 17,544 25,030 978
Shares to be issued for the acquisition of Mail Boxes Etc. ........... 16,950 16,950 16,950
USOP and Mail Boxes Etc. common stock Equivalents..................... 2,456 2,672 2,553
------------- ------------- -------------
Total............................................................... 128,711 128,927 128,808
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Net income per share for fiscal 1995 has not been presented as it is not
considered meaningful due to the acquisitions of the Combined Companies and
USOP's initial public offering in conjunction with the formation of USOP during
fiscal 1994.
(k) Adjustment to reflect the federal income taxes for certain acquisitions
accounted for under the pooling-of-interest market which were taxed as
subchapter S corporations as if these companies had been subject to taxation as
C corporations. As a result of being subchapter S corporations, any tax
liabilities prior to acquisitions were the responsibility of the individual
company stockholders.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE FISCAL YEAR ENDED
------------------------------------- ------------------------
APRIL 30, APRIL 30, APRIL 26, JULY 27, JULY 26,
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income before extraordinary items.............................. $ 31,167 $ 34,877 $ 58,738 $ 16,565 $ 20,942
Pro forma income tax provision adjustment...................... 10,805 12,932 7,595 3,785 329
----------- ----------- ----------- ----------- -----------
Pro forma income tax before extraordinary items................ $ 20,359 $ 21,945 $ 51,143 $ 12,780 $ 20,613
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
11
<PAGE>
U.S. OFFICE PRODUCTS QUARTERLY FINANCIAL INFORMATION
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 26, APRIL 26,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 52,749 $ 46,633
Accounts receivable, less allowance for doubtful accounts of $11,489 and $10,383,
respectively...................................................................... 443,775 384,742
Inventories......................................................................... 297,390 285,756
Prepaid expenses and other current assets........................................... 96,261 104,090
------------ ------------
Total current assets.............................................................. 890,175 821,221
Property and equipment, net......................................................... 283,754 246,700
Intangible assets, net.............................................................. 720,971 647,225
Other assets........................................................................ 119,800 121,770
Total assets...................................................................... $ 2,014,700 $ 1,836,916
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt..................................................................... $ 288,982 $ 151,248
Accounts payable.................................................................... 212,316 208,678
Accrued compensation................................................................ 50,069 43,152
Other accrued liabilities........................................................... 106,341 90,487
------------ ------------
Total current liabilities......................................................... 657,708 493,565
Long-term debt...................................................................... 387,300 393,842
Deferred income taxes............................................................... 8,744 8,676
Other long-term liabilities and minority interests.................................. 8,008 9,734
------------ ------------
Total liabilities................................................................. 1,061,760 905,817
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, none outstanding
Common stock, $.001 par value, 500,000,000 shares authorized, 72,870,162 and
71,372,104 shares issued and outstanding, respectively............................ 73 71
Additional paid-in capital.......................................................... 853,025 812,725
Cumulative translation adjustment................................................... (44,959) (5,583)
Retained earnings................................................................... 144,801 123,886
Total stockholders' equity........................................................ 952,940 931,099
------------ ------------
Total liabilities and stockholders' equity........................................ $ 2,014,700 $ 1,836,916
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
JULY 26, JULY 27,
1997 1996
---------- ----------
<S> <C> <C>
Revenues.................................................................................. $ 863,595 $ 568,502
Cost of revenues.......................................................................... 620,336 409,642
---------- ----------
Gross profit.............................................................................. 243,259 158,860
Selling, general and administrative expenses.............................................. 193,571 128,626
Non-recurring acquisition costs........................................................... 4,405 1,656
---------- ----------
Operating income.......................................................................... 45,283 28,578
Other (income) expense:
Interest expense.......................................................................... 10,504 8,832
Interest income........................................................................... (629) (4,439)
Other..................................................................................... (1,482) (169)
---------- ----------
Income before provision for income taxes.................................................. 36,890 24,354
Provision for income taxes................................................................ 15,948 7,789
---------- ----------
Net income................................................................................ $ 20,942 $ 16,565
---------- ----------
---------- ----------
Net income per share...................................................................... $ .29 $ .29
---------- ----------
---------- ----------
Pro forma net income (see Note 3)......................................................... $ 20,613 $ 12,780
---------- ----------
---------- ----------
Pro forma net income per share............................................................ $ .28 $ .22
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
<S> <C> <C>
JULY 26, JULY 27,
1997 1996
---------- ----------
Cash flows from operating activities:
Net income.............................................................................. $ 20,942 $ 16,565
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 16,862 8,076
Non-recurring acquisition costs....................................................... 4,405 1,657
Equity in net income of affiliate..................................................... (425)
Other................................................................................. (1,467) 2,941
Changes in current assets and liabilities (net of assets acquired and liabilities
assumed in business combinations accounted for under the purchase method):
Accounts receivable................................................................. (42,239) (22,428)
Inventory........................................................................... (429) (1,665)
Prepaid expenses and other current assets........................................... 7,874 (1,543)
Accounts payable.................................................................... (3,635) 6,275
Accrued liabilities................................................................. 7,113 6,096
---------- ----------
Net cash provided by operating activities............................................. 9,001 15,974
---------- ----------
Cash flows from investing activities:
Cash used in acquisitions, net of cash received......................................... (109,086) (205,458)
Additions to property and equipment, net of disposals................................... (16,508) (12,607)
Cash received on sale of assets......................................................... 8,409
Payments of non-recurring acquisition costs............................................. (2,651) (1,657)
Other................................................................................... 1,625 (2,404)
---------- ----------
Net cash used in investing activities................................................. (118,211) (222,126)
---------- ----------
Cash flows from financing activities:
Increases (decreases) in short-term debt................................................ 119,608 (31,900)
Payments of long-term debt.............................................................. (5,762) (57,736)
Proceeds from issuance of long-term debt................................................ 419 225,555
Proceeds from exercises of stock options and warrants................................... 1,975 2,433
Proceeds from issuance of common stock in Employee Stock Purchase Plan.................. 832 1,149
Payments of dividends at Pooled Companies............................................... (1,319) (5,126)
Contributions of capital at Pooled Companies............................................ 1,208
Net change in cash due to conforming fiscal year-ends of certain Pooled Companies....... (28) 301
---------- ----------
Net cash provided by financing activities........................................... 115,725 135,884
---------- ----------
Effect of exchange rates on cash and cash equivalents..................................... (399) 155
Net increase (decrease) in cash and cash equivalents...................................... 6,116 (70,113)
Cash and cash equivalents at beginning of period.......................................... 46,633 186,987
---------- ----------
Cash and cash equivalents at end of period................................................ $ 52,749 $ 116,874
---------- ----------
---------- ----------
</TABLE>
14
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
<S> <C> <C>
JULY 26, JULY 27,
1997 1996
----------- -----------
Supplemental disclosures of cash flow information:
Interest paid............................................................................ $ 2,854 $ 3,393
Income taxes paid........................................................................ $ 9,833 $ 2,811
</TABLE>
The Company issued common stock and cash in connection with certain business
combinations accounted for under the purchase method during the three months
ended July 26, 1997 and July 27, 1996. The fair values of the assets and
liabilities of the acquired companies at the dates of the acquisitions are
presented as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
<S> <C> <C>
JULY 26, JULY 27,
1997 1996
---------- ----------
Accounts receivable....................................................................... $ 21,918 $ 51,941
Inventory................................................................................. 17,773 84,987
Prepaid expenses and other current assets................................................. 2,686 5,706
Property and equipment.................................................................... 39,513 74,144
Intangible assets......................................................................... 104,189 252,250
Other assets.............................................................................. 1,164 2,027
Short-term debt........................................................................... (4,417) (65,695)
Accounts payable.......................................................................... (13,293) (56,886)
Accrued liabilities....................................................................... (10,575) (9.668)
Long-term debt............................................................................ (14,795) (73,622)
Other long-term liabilities and minority interest......................................... (1,086) (2,721)
---------- ----------
Net assets acquired..................................................................... $ 143,077 $ 262,463
---------- ----------
---------- ----------
The acquisitions were funded as follows:
Common stock............................................................................ $ 33,991 $ 57,005
Cash.................................................................................... 109,086 205,458
---------- ----------
Totals................................................................................ $ 143,077 $ 262,463
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
U. S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 26, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(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 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 Annual Report on Form 10-K for the fiscal year ended April
26, 1997.
NOTE 2--STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the three months ended July 26, 1997
were as follows:
<TABLE>
<S> <C>
Stockholders' equity balance at April 26, 1997.................................... $ 931,099
Issuance of common stock in connection with business combinations............... 33,991
Issuance of common stock for employee stock purchase plan, net of expenses...... 832
Issuance of common stock for stock options exercised, including tax benefits.... 2,947
Contributions of capital at Pooled Companies prior to closing................... 2,533
Adjustments to conform fiscal year-ends of certain Pooled Companies............. (28)
Cumulative translation adjustment............................................... (39,376)
Net income...................................................................... 20,942
---------
Stockholders' equity balance at July 26, 1997..................................... $ 952,940
---------
---------
</TABLE>
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
--------------------
<S> <C> <C>
JULY 26, JULY 27,
1997 1996
--------- ---------
Net income before pro forma adjustment, per the consolidated statement of income............ $ 20,942 $ 16,565
Provision for income taxes.................................................................. 329 3,785
--------- ---------
Pro forma net income........................................................................ $ 20,613 $ 12,780
--------- ---------
--------- ---------
</TABLE>
16
<PAGE>
U. S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 26, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOTE 4--BUSINESS COMBINATIONS
In fiscal 1997, the Company completed a total of 117 business combinations,
40 accounted for under the pooling-of-interests method and 77 accounted for
under the purchase method. During the first quarter of fiscal 1998, the Company
completed a total of 22 business combinations, 7 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 July 26, 1997:
Revenues................................................................... $ 846,960 $ 16,635 $ 863,595
Net income................................................................. $ 23,740 $ (2,798) $ 20,942
Three months ended July 27, 1996:
Revenues................................................................... $ 316,351 $ 252,151 $ 568,502
Net income................................................................. $ 6,034 $ 10,531 $ 16,565
</TABLE>
The following presents the unaudited pro forma results of operations of the
Company for the three month periods ended July 26, 1997 and July 27, 1996 as if
all 92 of the companies acquired in business combinations accounted for under
the purchase method, completed since the beginning of fiscal 1997, had been
consummated at the beginning of fiscal year 1997. The pro forma results of
operations include certain pro forma adjustments including the amortization of
intangible assets and reductions in executive compensation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
<S> <C> <C>
JULY 26, JULY 27,
1997 1996
---------- ----------
Revenues.................................................................................. $ 882,386 $ 848,418
Net income................................................................................ 24,540 20,858
Net income per share...................................................................... .33 .28
</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 year 1997 or the results which
may occur in the future.
NOTE 5--SUBSEQUENT EVENTS
From July 26, 1997 to September 9, 1997, the Company completed three
business combinations for an aggregate purchase price of $8.0 million,
consisting of approximately $3.9 million of cash and 138,508 shares of the
Company's common stock with a market value of approximately $4.1 million.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
This quarterly financial information contains forward-looking statements
that involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate," "intend," "may," "will," "expect" and similar expressions
as they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed under the heading "Risk Factors" in the
Prospectus Supplement dated July 15, 1997. The Company does not undertake any
obligation to revise these forward-looking statements to reflect any future
events or circumstances.
INTRODUCTION
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto appearing elsewhere
in this Prospectus Supplement.
The Company's financial condition and results of operations have changed
dramatically from its inception in October 1994 to July 26, 1997 as a result of
its acquisition program. The Company completed 165 business combinations from
its inception through the end of fiscal 1997. During the three months ended July
26, 1997, the Company completed an additional 22 business combinations, 15 of
which were accounted for under the purchase method and seven of which were
accounted for under the pooling-of-interests method. The Company's consolidated
financial statements give retroactive effect to the business combinations
accounted for under the pooling-of-interests method and include the results of
companies acquired in business combinations accounted for under the purchase
method from their respective acquisition dates.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 26, 1997 COMPARED TO THREE MONTHS ENDED JULY 27, 1996
Historical revenues increased 51.9%, from $568.5 million for the three
months ended July 27, 1996 to $863.6 million for the three months ended July 26,
1997. This increase was primarily due to the inclusion in the revenues for the
three months ended July 26, 1997 of revenues from 92 companies acquired in
business combinations accounted for under the purchase method after the
beginning of fiscal 1997 (the "Purchased Companies"). Revenues for the three
months ended July 27, 1996 include revenues from 17 of the Purchased Companies
for a portion of such period.
International revenues increased from $93.0 million, or 16.4% of
consolidated revenues, for the three months ended July 27, 1996, to $257.6
million, or 29.8% of consolidated revenues, for the three months ended July 26,
1997. International revenues consisted primarily of revenues from New Zealand
and Australia, with the balance from Canada and the United Kingdom. The increase
in international revenues was primarily due to the inclusion, in the revenues
for the three months ended July 26, 1997, of revenues from 20 companies that
were acquired in business combinations accounted for under the purchase method
on or after July 27, 1996, the most significant of which was Whitcoulls Group
Limited, which the Company's wholly-owned subsidiary Blue Star Group Limited
acquired on July 27, 1996.
Gross profit increased 53.1%, from $158.9 million, or 27.9% of revenues, for
the three months ended July 27, 1996, to $243.3 million, or 28.2% of revenues
for the three months ended July 26, 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 and as a result of improved purchasing and rebate programs negotiated
with vendors.
Selling, general and administrative expenses increased 50.5%, from $128.6
million, or 22.6% of revenues, for the three months ended July 27, 1996, to
$193.6 million, or 22.4% of revenues for the three
18
<PAGE>
months ended July 27, 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 July 26, 1997.
The Company incurred non-recurring acquisition costs of $4.4 million and
$1.7 million during the three months ended July 26, 1997 and July 27, 1996,
respectively, in conjunction with business combinations accounted for under the
pooling-of-interests method. These non-recurring acquisition costs included
accounting and legal fees, investment banking fees, recognition of transaction
related obligations and various other acquisition related costs. Generally
accepted accounting principles require the Company to expense all acquisition
costs (both those paid by the Company and those paid by the sellers of the
acquired companies) related to business combinations accounted for under the
pooling-of-interests method. The Company expects to incur similar costs in the
future, as the Company anticipates completing additional acquisitions accounted
for under the pooling-of-interests method, including the planned acquisition of
Mail Boxes Etc.
Interest expense, net of interest income, increased 124.8%, from $4.4
million for the three months ended July 27, 1996, to $9.9 million for the three
months ended July 26, 1997. This increase in interest expense is primarily the
result of increased borrowings under the Company's credit facility and the
issuance of $230 million of convertible subordinated notes during May and June
1996 to fund the cash portion of acquisitions and to repay debt assumed in such
acquisitions completed since the beginning of fiscal 1997. See "Liquidity and
Capital Resources."
Other income increased 773.5%, from $170,000 for the three months ended July
27, 1996, to $1.5 million for the three months ended July 26, 1997. Other income
for the three months ended July 26, 1997 consisted primarily of a gain on the
sale of an investment and equity in the net income of the Company's 49%
investment in Dudley Stationery Limited ("Dudley"), the largest independent
office products dealer in the United Kingdom. The Company acquired its 49%
interest in Dudley in November 1996.
Provision for income taxes increased from $7.8 million for the three months
ended July 27, 1996 to $15.9 million for the three months ended July 26, 1997,
reflecting effective income tax rates of 32.0% and 43.2%, respectively. The low
effective income tax rate for the three months ended July 27, 1996, compared to
the federal statutory rate of 35.0%, was primarily due to the fact that several
of the companies included in the results for such 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.
During the three months ended July 26, 1997, the high effective rate, compared
to the federal statutory rate of 35.0%, was primarily due to the incurrence of
non-deductible expenses, including amortization of goodwill and non-recurring
acquisition costs. The Company expects to continue to incur such non-deductible
expenses in the future, as the Company anticipates completing additional
acquisitions, which could have the effect of increasing the Company's effective
income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At July 26, 1997, the Company had cash of $52.7 million and working capital
of $232.5 million. The Company's capitalization, defined as the sum of long-term
debt and stockholders' equity, at July 26, 1997, was approximately $1.3 billion.
During the three months ended July 26, 1997, net cash provided by operating
activities was $9.0 million. The net cash provided by operating activities was
negatively impacted by the increase in accounts receivable in the Company's
Educational Supplies and Products Division as a result of seasonally high
revenues during the period. Net cash used in investing activities was $118.2
million, including $109.1 million used for acquisitions and $16.5 million used
for additions to property and equipment. Net borrowings increased $114.3 million
during the three months ended July 26, 1997, primarily to fund the purchase
prices of acquisitions and to repay higher-cost debt assumed in acquisitions.
19
<PAGE>
During the three months ended July 27, 1996, net cash provided by operating
activities was $16.0 million. The net cash provided by operating activities was
negatively impacted by the increase in accounts receivable in the Company's
Educational Supplies and Products Division as a result of seasonally high
revenues during the period. Net cash used in investing activities was $222.1
million, including $205.5 million used for acquisitions and $12.6 million used
for additions to property and equipment. Net borrowings increased $135.9 million
during the three months ended July 27, 1996, primarily to fund the purchase
prices of acquisitions and to repay higher-cost debt assumed in acquisitions.
At July 26, 1997, the Company had approximately $261.4 million outstanding
under its $500.0 million credit facility (the "Credit Facility"), at an annual
interest rate of approximately 7.1%, and $143.6 million and $95.0 million
available under the Credit Facility for acquisition and working capital
purposes, respectively.
During the three months ended July 26, 1997, the New Zealand dollar weakened
against the U.S. dollar ("USD"), with the exchange rate declining from $0.69 USD
at April 27, 1997 to $0.65 USD at July 26, 1997. This resulted in a reduction in
stockholders' equity, through a cumulative translation adjustment, of $39.7
million.
From July 26, 1997 to September 9, 1997, the Company completed three
business combinations for an aggregate purchase price of $8.0 million,
consisting of approximately $3.9 million of cash and 138,508 shares of the
Company's common stock with a market value of approximately $4.1 million.
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 fiscal 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 the issuance by the Company of shares
of its common stock. To the extent that the Company elects to pursue
acquisitions involving the payment of significant amounts of cash (to fund the
purchase price of such acquisitions and the repayment of assumed indebtedness),
the Company is likely to require additional sources of financing to fund such
non-operating cash needs. Based on discussions with the agent for the syndicate
of banks providing the Credit Facility (the "Agent"), the Company believes that
it would be able to negotiate an amendment to the Credit Facility providing
additional financing through an increase in the borrowing limit under the Credit
Facility (or through a new bank borrowing facility provided by the Agent
together with some or all of the banks that are members of the syndicate for the
Credit Facility). There can be no assurance, however, that such additional
financing would be made available to the Company, or would be provided on terms
that the Company considers acceptable or desirable.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
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
20
<PAGE>
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 1997 or the first quarter of fiscal 1998.
21
