<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 July 26, 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)
N/A
(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 September 9, 1997, there were 73,126,413 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
July 26, 1997 (unaudited) and April 26, 1997
Consolidated Statement of Income . . . . . . . . . . . . . . . . . 4
For the three months ended July 26, 1997 (unaudited)
and July 27, 1996 (unaudited)
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . 5
For the three months ended July 26, 1997 (unaudited)
and July 27, 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. . . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Page 2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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.
Page 3
<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.
Page 4
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
JULY 26, JULY 27,
1997 1996
---------- ----------
<S> <C> <C>
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>
(Continued)
Page 5
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
JULY 26, JULY 27,
1997 1996
--------- ---------
<S> <C> <C>
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
-------------------------
JULY 26, JULY 27,
1997 1996
---------- ----------
<S> <C> <C>
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.
Page 6
<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 (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 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>
Page 7
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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
------------------------
JULY 26, JULY 27,
1997 1996
--------- ---------
<S> <C> <C>
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>
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:
Page 8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
JULY 26, JULY 27,
1997 1996
---------- ----------
<S> <C> <C>
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
Subsequent to July 26, 1997, the Company has 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.
Page 9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Quarterly Report on Form 10-Q 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 "- Factors Affecting the Company's Business." 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 Quarterly Report.
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.
Page 10
<PAGE>
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 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.
Page 11
<PAGE>
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.
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.
Subsequent to July 26, 1997, the Company has 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.
Page 12
<PAGE>
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 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.
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 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. If the Company is unable to use the Company's common stock
as consideration in acquisitions, for example, because it believes that the
market price of the common stock is too low or because the owners of
potential acquisition targets conclude that the market price of the Company's
common stock is too volatile, the Company would need to use cash to make
acquisitions, and, therefore, would be unable to negotiate acquisitions that
it would account for under the pooling-of-interests method of accounting
(which is available only for all-stock acquisitions). This might adversely
affect the pace of the Company's acquisition program and the impact of
acquisitions on the Company's quarterly results. In addition, the
consolidation of the domestic contract stationer industry has reduced the
number of larger companies available for sale, which could lead to higher
prices being paid for the acquisition of the remaining domestic, independent
companies. 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.
Page 13
<PAGE>
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.
USOP has increased the range of products and services it offers through
acquisitions of companies offering products and services that are
complementary to the office products that USOP has offered since it began
operations. USOP's ability to manage an aggressive consolidation program in
markets other than the domestic contract stationer market has not yet been
fully tested. USOP's efforts to sell additional products and services to
existing customers are in their early stages and there can be no assurance
that such efforts will be successful. In addition, USOP expects that certain
of its products and services will not be easily cross-sold and may be
marketed and sold independently of other products and services.
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 administration. The various costs
and possible cost-savings strategies may make historical operating results
not indicative of future performance. There can be no assurance that the
Company's executive management group can continue to oversee the Company and
effectively implement its operating or growth strategies in each of the
markets that it serves. 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 intends to continue to focus significant attention and resources
on international expansion in the future and expects foreign sales to
continue to represent a significant portion of the Company's total sales. 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, regulatory and competitive requirements, difficulties in
staffing and managing foreign operations, risks specific to different
business lines that the Company may enter, and other factors.
The Company operates in a highly competitive environment. In the markets in
which it operates, the Company generally competes with a large number of
smaller, independent companies, many of which are well-established in their
markets. In addition, in the contract stationer market, the Company
currently competes with five large office products companies, each of which
has significant financial resources. Several of its large competitors
operate in many of its geographic and product markets, and other competitors
may choose to enter the Company's geographic and product markets in the
future. No assurances can be give that competition will not have an adverse
effect on the Company's business.
Page 14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Fourth Waiver and Amendment to Credit Facility
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 April 26, 1997 and filed with the Commission on
May 29, 1997 reporting information under Items 5 and 7.
Financial statements filed:
(a) Unaudited pro forma combined financial information of the
Company as of January 25, 1997 and for each of the years
ended April 30, 1996, 1995, and 1994 and for the nine months
ended January 25, 1997 and January 31, 1996.
(b) Financial statements of Data Business Forms Limited as of
December 31, 1996 and March 31, 1997 (unaudited) and for the
year ended December 31, 1996 and for the three months ended
March 31, 1997 and 1996 (unaudited).
(c) Financial statements of United Envelope Co., Inc. and its
affiliate, Rex Envelope Co., Inc., as of December 31, 1996
and March31, 1997 and 1996 (unaudited) and for the year ended
December 31, 1996 and for the three months ended March 31,
1997 and 1996 (unaudited).
(d) Financial statements of Huxley Envelope Corporation as of
December 31, 1996 and March 31, 1997 (unaudited) and for the
year ended December 31, 1996 and for the three months ended
March 31, 1997 and 1996 (unaudited).
(e) Financial statements of Mail Boxes Etc. ("MBE") as of
April 30, 1996 and 1995 and for the years ended April 30,
1996, 1995 and 1994 and as of January 31, 1997 and for the
nine months ended January 31, 1997 (unaudited) incorporated
by reference from MBE's report on Form 10-K for the fiscal
year ended April 30, 1996 and MBE's report on Form 10-Q for
the interim period ended January 31, 1997 (File No. 0-14821).
ii. Form 8-K dated July 17, 1997 and filed with the Commission on
July 21, 1997 reporting information under Items 5 and 7:
Page 15
<PAGE>
Financial statements filed:
(a) Financial Statements of MBE as of April 30, 1997 and 1996
and for the years ended April 30, 1997, 1996 and 1995
incorporated by reference from MBE's report on Form 10-K for
its fiscal year ended April 30, 1997.
Page 16
<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
September 9, 1997 By: /s/ Jonathan J. Ledecky
- ----------------------------- -----------------------
Date Jonathan J. Ledecky
Chief Executive Officer
September 9, 1997 By: /s/ Donald H. Platt
- ----------------------------- -----------------------
Date Donald H. Platt
Chief Financial Officer
Page 17
<PAGE>
EXHIBIT INDEX
No. Exhibit Page
10.1 Fourth Waiver and Amendment to Credit Facility
11.1 Statement regarding computation of net income per share
27 Financial Data Schedule
Page 18
<PAGE>
EXHIBIT 10.1
FOURTH WAIVER AND AMENDMENT
FOURTH WAIVER AND AMENDMENT (the "Amendment"), dated as of June 17, 1997,
among U.S. OFFICE PRODUCTS COMPANY, a Delaware corporation (the "Borrower"), the
institutions party to the Credit Agreement referred to below (the "Banks") and
BANKERS TRUST COMPANY, as Agent (the "Agent"). All capitalized terms used
herein and not otherwise defined shall have the respective meanings provided
such terms in the Credit Agreement referred to below.
WITNESSETH:
WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit
Agreement dated as of August 21, 1996 (as amended, modified or supplemented to
date, the "Credit Agreement");
WHEREAS, the parties hereto wish to amend the Credit Agreement as herein
provided;
NOW, THEREFORE, it is agreed:
1. Section 6.05(c) of the Credit Agreement is hereby amended by (x)
deleting the text "5%" appearing therein and inserting in lieu thereof the text
"10%" and (y) deleting the text "$40,000,000" appearing therein and inserting in
lieu thereof the text "$100,000,000."
2. Section 8.02 of the Credit Agreement is hereby amended by (I)
inserting immediately after the reference to "except that the following"
appearing in the last line of the initial paragraph of such Section the text
"(and agreements to do any of the following)", (II) inserting immediately after
the first reference to "Acquired Business" appearing in clause (f) thereof the
text "(x)", (III) inserting immediately after the second reference to Subsidiary
Guarantor appearing in clause (f) thereof the text "or (y) a new Wholly-Owned
Subsidiary of the Borrower so long as the requirements of Section 8.12 are
satisfied with respect to such new Wholly-Owned Subsidiary", (IV) inserting
immediately following the word "or" in the third parenthetical contained in
clause (f) thereof the text "(A)" and (V) inserting immediately following the
text "$200,000,000" appearing in clause (f) thereof the following new language:
"or (B) in the case of the Borrower's acquisition of Mail Boxes, Etc.,
so long as at least 90% of such total consideration paid in connection
therewith consists of common stock of the Borrower, $348,000,000,
provided that up to $5,000,000 of Indebtedness may be assumed by the
Borrower and/or any Subsidiary in connection with such acquisition".
3. Section 8.05 of the Credit Agreement is hereby amended by adding the
following new clause (c) at the end thereof:
1
<PAGE>
"(c) Notwithstanding anything to the contrary contained in
clauses (a) and (b) above, the Borrower may make additional
Consolidated Capital Expenditures during the fiscal year
ending on or about April 25, 1998 (w) in connection with
Blue Star's acquisition of printing presses to service Blue
Star's existing printing contract with Telcom New Zealand,
in an aggregate amount not to exceed $13,000,000, (x) in
connection with the refurbishment and remodeling of the
Borrower's Whitcoulls retail stores, in an aggregate amount
not to exceed $5,000,000, (y) in connection with Blue Star's
investment in new computer systems, in an aggregate amount
not to exceed $8,500,000 and (z) in connection with North
American Office Products' investment in new computer
systems, in an aggregate amount not to exceed $8,000,000."
4. The Borrower hereby acknowledges that it has failed to comply with the
covenant set forth in Section 8.05(a) of the Credit Agreement as it relates to
the Borrower's fiscal year ending on or about April 25, 1997. The Banks hereby
waive compliance by the Borrower with Section 8.05(a) of the Credit Agreement
solely for such fiscal year ended on or about April 25, 1997, and any Default or
Event of Default that may exist solely as a result of the failure to comply with
such covenant for such fiscal year ended on or about April 25, 1997. The
parties hereto further agree that no Default or Event of Default arising as a
result of a failure to comply with Section 8.05(a) of the Credit Agreement,
solely in respect of such fiscal year of the Borrower ended on or about April
25, 1997, shall be deemed to exist under Section 5.03 of the Credit Agreement or
with respect to any misrepresentation arising in connection with a Notice of
Borrowing in respect of Section 8.05(a) of the Credit Agreement as it relates to
the Borrower's fiscal year ended on or about April 25, 1997.
5. In order to induce the Banks to enter into this Amendment, the
Borrower (x) represents and warrants that no Default or Event of Default exists
on the Fourth Amendment Effective Date (as hereinafter defined) and (y) makes
each of the representations, warranties and agreements contained in the Credit
Agreement and the other Credit Documents on and as of the Fourth Amendment
Effective Date, in each case both before and after giving effect to this
Amendment (it being understood that any representation or warranty which by its
terms is made as of a specified date shall be required to be true and correct in
all material respects as of such date).
6. This Amendment (including, without limitation, the waiver contained in
Paragraph 4 hereof) is limited as specified and shall not constitute a
modification acceptance or waiver of any other provision of the Credit Agreement
or any other Credit Document.
7. This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Agent.
2
<PAGE>
8. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF
NEW YORK.
9. This Amendment shall become effective on the first date (the "Fourth
Amendment Effective Date") on which each of the Borrower and the Required Banks
shall have signed a copy hereof (whether the same or different copies and shall
have delivered (including by way of telecopier) the same to the Agent at its
Notice Office;
10. At all times on and after the Fourth Amendment Effective Date, all
references in the Credit Agreement and each of the Credit Documents to the
Credit Agreement shall be deemed to be references to the Credit Agreement after
giving effect to this Amendment.
* * *
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
U.S. OFFICE PRODUCTS COMPANY
By:
------------------------------
Title:
BANKERS TRUST COMPANY,
Individually and as Agent
By:
------------------------------
Title:
3
<PAGE>
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY, Individually and as Co-Agent
By:
------------------------------
Title:
CORESTATES BANK, N.A.
Individually and as Co-Agent
By:
------------------------------
Title:
HELLER FINANCIAL, INC.,
Individually and as Co-Agent
By:
------------------------------
Title:
NATIONSBANK, N.A.,
Individually and as Co-Agent
By:
------------------------------
Title:
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST,
Individually and as Co-Agent
By:
------------------------------
Title:
FIRST UNION NATIONAL BANK OF
VIRGINIA, MARYLAND AND
WASHINGTON D.C.
By:
------------------------------
Title:
IBM CREDIT CORPORATION
By:
------------------------------
Title:
4
<PAGE>
BHF-BANK AKTIENGESELLSCHAFT
By:
------------------------------
Title:
By:
------------------------------
Title:
CAISSE NATIONALE de CREDIT
AGRICOLE
By:
------------------------------
Title:
HIBERNIA NATIONAL BANK
By:
------------------------------
Title:
NATIONAL BANK OF CANADA
By:
------------------------------
Title:
RIGGS BANK, N.A.
By:
------------------------------
Title:
5
<PAGE>
SOUTHERN PACIFIC THRIFT & LOAN
ASSOCIATION
By:
------------------------------
Title:
UNITED STATES NATIONAL BANK OF
OREGON
By:
------------------------------
Title:
THE BANK OF NEW YORK
By:
------------------------------
Title:
CITY NATIONAL BANK
By:
------------------------------
Title:
FIRST NATIONAL BANK OF
COMMERCE
By:
------------------------------
Title:
NATIONAL CITY BANK
By:
------------------------------
Title:
6
<PAGE>
BANK OF AMERICA-ILLINOIS
By:
------------------------------
Title:
BANK OF BOSTON
By:
------------------------------
Title:
BANK POLSKA KASA OPIEKI, S.A.
By:
------------------------------
Title:
BANQUE WORMS CAPITAL
CORPORATION
By:
------------------------------
Title:
CHANG HWA COMMERCIAL BANK,
LTD., NEW YORK BRANCH
By:
------------------------------
Title:
7
<PAGE>
CHIAO TUNG BANK, CO. LTD., NY
AGENCY
By:
------------------------------
Title:
FIRST NATIONAL BANK OF CHICAGO
By:
------------------------------
Title:
THE SANWA BANK, LIMITED,
NEW YORK BRANCH
By:
------------------------------
Title:
SUNTRUST BANK, CENTRAL
FLORIDA, N.A.
By:
------------------------------
Title:
8
<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:
Three Months Ended
-------------------------
July 26, July 27,
1997 1996
---------- ----------
Net income $ 20,942 $ 16,565
---------- ----------
---------- ----------
Weighted average common shares outstanding 72,218 56,183
Common stock equivalents from stock options 1,222 1,301
---------- ----------
Total weighted average shares outstanding 73,440 57,484
---------- ----------
---------- ----------
Net income per share $ .29 $ .29
---------- ----------
---------- ----------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated balance sheet and consolidated statement of income 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> 3-MOS
<FISCAL-YEAR-END> APR-25-1998
<PERIOD-START> APR-27-1997
<PERIOD-END> JUL-26-1997
<CASH> 52,749
<SECURITIES> 0
<RECEIVABLES> 455,264
<ALLOWANCES> 11,489
<INVENTORY> 297,390
<CURRENT-ASSETS> 890,175
<PP&E> 283,754
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,014,700
<CURRENT-LIABILITIES> 657,708
<BONDS> 387,300
0
0
<COMMON> 73
<OTHER-SE> 952,867
<TOTAL-LIABILITY-AND-EQUITY> 2,014,700
<SALES> 863,595
<TOTAL-REVENUES> 863,595
<CGS> 620,336
<TOTAL-COSTS> 197,976<F1>
<OTHER-EXPENSES> (1,482)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,875
<INCOME-PRETAX> 36,890
<INCOME-TAX> 15,948
<INCOME-CONTINUING> 20,942
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,942
<EPS-PRIMARY> .29
<EPS-DILUTED> 0
<FN>
<F1>The costs include $4,405 of non-recurring acquisition costs incurred in
business combinations accounted for under the pooling-of-interests method.
</FN>
</TABLE>
