US OFFICE PRODUCTS CO, 8-K, 1997-01-09

US OFFICE PRODUCTS CO
8-K, 1997-01-09
CATALOG & MAIL-ORDER HOUSES

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<PAGE>
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

January 9, 1997
-----------------------------------------------
Date of Report (Date of earliest event reported)

U.S. OFFICE PRODUCTS COMPANY
--------------------------------------------------
(Exact name of registrant specified in its charter)

Delaware 0-25372 52-1906050
-----------------------------------------------------------------------------
(State or other Juris- (Commission (I.R.S. Employer
diction of incorporation File No.) 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)

<PAGE>

ITEM 5. OTHER EVENTS

A. The consolidated financial statements of U.S. Office Products Company (the
"Company") as of April 30, 1996 and 1995 and for the years ended April 30, 1996,
1995 and 1994, which have been restated to reflect recent acquisitions accounted
for under the pooling-of-interests method of accounting, and as of October 26,
1996 and for the six months ended October 26, 1996 and October 31, 1995
(unaudited) are set forth below:

2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
U.S. Office Products Company

In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of U.S. Office Products Company and
its subsidiaries at April 30, 1996 and 1995 and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
April 30, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of School Specialty,
Inc. and Re-Print Corporation (wholly owned subsidiaries) which statements
reflect total assets of approximately $44.3 million at December 31, 1994 and
total revenues of $150.5 million, $119.5 million and $21.4 million for the years
ended December 31, 1995, 1994 and 1993, respectively. We also did not audit the
financial statements of Baystate Computer Group, Inc. and Fortran Corp. (wholly
owned subsidiaries) which statements reflect total assets of approximately $20.5
million at March 31, 1995 and total revenues of $83.9 million, $64.0 million and
$37.5 million for the years ended March 31, 1996, 1995 and 1994, respectively.
Those statements were audited by other auditors whose reports thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for School Specialty, Inc., Re-Print Corporation, Baystate
Computer Group, Inc. and Fortran Corp. is based solely on the reports of the
other auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a reasonable
basis for the opinion expressed above.

Price Waterhouse LLP
Minneapolis, Minnesota
May 31, 1996, except as to the third paragraph
of Note 3 which is as of October 26, 1996 and
Note 14, which is as of July 10, 1996

<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors
School Specialty, Inc.

We have audited the accompanying balance sheets of School Specialty, Inc.
(formerly known as EDA Corporation) (the Company) as of December 31, 1995 and
1994, and the related statements of operations, changes in shareholders' deficit
and cash flows for the years then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.

February 2, 1996

4
<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors
The Re-Print Corporation
Birmingham, Alabama

We have audited the accompanying balance sheets of The Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for three years ended December 31, 1995,
1994, and 1993 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for three years ended December 31, 1995, 1994, and 1993 in conformity with
generally accepted accounting principles.

Atlanta, Georgia
February 8, 1996

5
<PAGE>
INDEPENDENT AUDITORS' REPORT

Bay State Computer Group, Inc.
Boston, Massachusetts

We have audited the balance sheets of Bay State Computer Group, Inc. as of
March 31, 1996 and 1995, and the related statements of earnings and retained
earnings, and cash flows for three years ended March 31, 1996, 1995, and 1994
(none of which are presented herein separately). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bay State Computer Group,
Inc. at March 31, 1996 and 1995, and the results of its operations and its cash
flows for three years ended March 31, 1996, 1995, and 1994 in conformity with
generally accepted accounting principles.

May 23, 1996, except for Note N
as to which the date is October 14, 1996

6
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Stockholders
and Board of Directors
Fortran Corp.
Newington, Virginia

We have audited the balance sheet of Fortran Corp. as of March 31, 1996 and
1995, and the related statements of earnings, changes in stockholders' equity,
and cash flows for three years ended March 31, 1996, 1995, and 1994 (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fortran Corp. at March 31,
1996 and 1995, and the results of its operations and its cash flows for three
years ended March 31, 1996, 1995, and 1994 in conformity with generally accepted
accounting principles.

As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.

June 7, 1996, except for Note 9,
as to which the date is October 24, 1996

7
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

CONSOLIDATED BALANCE SHEET

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
APRIL 30,
---------------------- OCTOBER 26,
1995 1996 1996
---------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 19,408 $ 175,386 $ 51,442
Accounts receivable, less allowance for doubtful accounts of $696, $3,386
and $5,872, respectively............................................... 107,701 170,111 294,175
Lease receivables........................................................ 24,808 29,865
Inventories.............................................................. 58,672 113,503 225,616
Prepaid expenses and other current assets................................ 6,172 25,445 38,730
---------- ---------- ------------
Total current assets................................................. 191,953 509,253 639,828
Property and equipment, net................................................ 35,738 75,011 182,222
Intangible assets, net..................................................... 26,111 142,240 541,422
Lease receivables.......................................................... 47,005 46,379
Other assets............................................................... 4,971 18,720 34,380
---------- ---------- ------------
Total assets......................................................... $ 258,773 $ 792,229 $ 1,444,231
---------- ---------- ------------
---------- ---------- ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................................... $ 52,720 $ 120,488 $ 227,571
Accounts payable......................................................... 53,735 98,010 159,632
Accrued compensation..................................................... 10,310 16,126 33,302
Other accrued liabilities................................................ 15,514 26,711 98,517
---------- ---------- ------------
Total current liabilities............................................ 132,279 261,335 519,022
Long-term debt............................................................. 29,939 181,593 383,367
Deferred income taxes...................................................... 4,357 7,056 7,824
Other long-term liabilities................................................ 1,395 1,703 3,123
---------- ---------- ------------
Total liabilities.................................................... 167,970 451,687 913,336
---------- ---------- ------------
Commitments and contingencies
Minority interest.......................................................... 6,024 4,672
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, none
outstanding............................................................
Preferred stock of a pooled company...................................... 1,000
Common stock, $.001 par value 500,000,000 shares authorized, 24,149,288,
39,393,480 and 45,698,248 shares issued and outstanding,
respectively........................................................... 24 39 46
Additional paid-in capital............................................... 50,720 298,120 467,687
Cumulative translation adjustment........................................ (193) 358 4,988
Retained earnings........................................................ 39,252 36,001 53,502
---------- ---------- ------------
Total stockholders' equity........................................... 90,803 334,518 526,223
---------- ---------- ------------
Total liabilities and stockholders' equity........................... $ 258,773 $ 792,229 $ 1,444,231
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

See accompanying notes to consolidated financial statements.

8
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

CONSOLIDATED STATEMENT OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
FOR THE FISCAL YEAR ENDED APRIL 30, ------------------------
------------------------------------ OCTOBER 31, OCTOBER 26,
1994 1995 1996 1995 1996
---------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues......................................... $ 533,018 $ 723,794 $ 1,149,691 $ 485,546 $ 996,414
Cost of revenues................................. 382,197 534,562 848,003 361,534 716,849
---------- ---------- ------------ ----------- -----------
Gross profit............................... 150,821 189,232 301,688 124,012 279,565
Selling, general and administrative expenses..... 135,526 162,423 256,681 106,852 227,245
Nonrecurring acquisition costs................... 8,057 5,192 5,727
Discontinuation of printing division at
subsidiary..................................... 682
---------- ---------- ------------ ----------- -----------
Operating income........................... 15,295 26,809 36,268 11,968 46,593
Other (income) expense:
Interest expense............................... 4,139 6,182 13,115 4,639 18,643
Interest income................................ (405) (682) (3,750) (662) (5,382)
Foreign currency gain.......................... (3,420)
Other.......................................... (633) (549) (1,063) (718) (476)
---------- ---------- ------------ ----------- -----------
Income before provision for income taxes and
extraordinary item............................. 12,194 21,858 27,966 8,709 37,228
Provision for income taxes....................... 1,947 3,009 6,610 494 13,948
---------- ---------- ------------ ----------- -----------
Income before extraordinary item................. 10,247 18,849 21,356 8,215 23,280
Extraordinary item--loss on early termination of
credit facility, net of income tax benefit..... 612
---------- ---------- ------------ ----------- -----------
Net income....................................... $ 10,247 $ 18,849 $ 21,356 $ 8,215 $ 22,668
---------- ---------- ------------ ----------- -----------
---------- ---------- ------------ ----------- -----------
Weighted average common shares outstanding....... 31,789 28,166 43,622
------------ ----------- -----------
------------ ----------- -----------
Net income per share:
Income before extraordinary item............... $ .67 $ .29 $ .53
Extraordinary item............................. (.01)
------------ ----------- -----------
Net income per share............................. $ .67 $ .29 $ .52
------------ ----------- -----------
------------ ----------- -----------
Unaudited pro forma net income (see Note 8)...... $ 7,463 $ 13,397 $ 14,743 $ 4,767 $ 20,251
---------- ---------- ------------ ----------- -----------
---------- ---------- ------------ ----------- -----------
Unaudited pro forma net income per share:
Pro forma income before extraordinary item..... $ .46 $ .17 $ .47
Extraordinary item............................. (.01)
------------ ----------- -----------
Pro forma net income per share................... $ .46 $ .17 $ .46
------------ ----------- -----------
------------ ----------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

9
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE FISCAL YEARS ENDED APRIL 30, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED OCTOBER 31, 1996

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------------- ------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1993.................................. 1 $ 1,000 15,645,225 $ 15 $ 18,368
Transactions of Combined Companies:
Dividends..............................................
Purchase of treasury stock.............................
Adjustment to conform fiscal year-ends of certain
Combined Companies.....................................
Other.................................................... 512
Dividends of certain Pooled Companies....................
Net income...............................................
-
----------- ------------ --- -----------
Balance at April 30, 1994.................................. 1 1,000 15,645,225 15 18,880
Transactions of Combined Companies:
Issuance of common stock............................... 251
Capital contributed by principal stockholder........... 1,814
Dividends..............................................
Issuance of common stock in conjunction with the
formation of U.S. Office Products...................... 800,000 1
Issuance of common stock in the initial public offering,
net of offering expenses of $4,686..................... 3,737,500 4 32,686
Issuance of common stock to the stockholders of the
Combined Companies..................................... 3,078,000 3 (3)
Distributions to the stockholders of the Combined
Companies..............................................
Issuance of common stock in acquisition.................. 875,000 1 8,749
Adjustment to conform the year-ends of certain Pooled
Companies..............................................
Adjustment to stockholders' equity accounts to reflect
the Mergers............................................ (12,597)
Cumulative translation adjustment........................
Conversion of warrants to equity of certain Pooled
Companies.............................................. 13,563 201
Issuance of stock by certain Pooled Companies............ 739
Dividends of certain Pooled Companies....................
Net income...............................................
-
----------- ------------ --- -----------
Balance at April 30, 1995.................................. 1 1,000 24,149,288 24 50,720

<CAPTION>
CUMULATIVE
TRANSLATION RETAINED TREASURY TOTAL
ADJUSTMENT EARNINGS STOCK EQUITY
------------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Balance at April 30, 1993.................................. $ (400) $ 27,090 $ (5,048) $ 41,025
Transactions of Combined Companies:
Dividends.............................................. (115) (115)
Purchase of treasury stock............................. (2,514) (2,514)
Adjustment to conform fiscal year-ends of certain
Combined Companies..................................... 273 273
Other.................................................... (950) (438)
Dividends of certain Pooled Companies.................... (4,399) (4,399)
Net income............................................... 10,247 10,247

----- ---------- --------- ----------
Balance at April 30, 1994.................................. (400) 32,146 (7,562) 44,079
Transactions of Combined Companies:
Issuance of common stock............................... 251
Capital contributed by principal stockholder........... 1,814
Dividends.............................................. (222) (222)
Issuance of common stock in conjunction with the
formation of U.S. Office Products...................... 1
Issuance of common stock in the initial public offering,
net of offering expenses of $4,686..................... 32,690
Issuance of common stock to the stockholders of the
Combined Companies.....................................
Distributions to the stockholders of the Combined
Companies.............................................. (11,300) (11,300)
Issuance of common stock in acquisition.................. 8,750
Adjustment to conform the year-ends of certain Pooled
Companies.............................................. 2,235 2,235
Adjustment to stockholders' equity accounts to reflect
the Mergers............................................ 5,035 7,562
Cumulative translation adjustment........................ 207 207
Conversion of warrants to equity of certain Pooled
Companies.............................................. 201
Issuance of stock by certain Pooled Companies............ 739
Dividends of certain Pooled Companies.................... (7,491) (7,491)
Net income............................................... 18,849 18,849

----- ---------- --------- ----------
Balance at April 30, 1995.................................. (193) 39,252 90,803
</TABLE>

(Continued)

10
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)

FOR THE FISCAL YEARS ENDED APRIL 30, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED OCTOBER 31, 1996

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
---------------------- ------------------------- PAID-IN TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT
----------- --------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995........................... 1 $ 1,000 24,149,288 $ 24 $ 50,720 $ (193)
Issuance of warrants by Pooled Companies............ 473,750 672
Exercise of warrants by Pooled Companies............ 178,865 784
Options issued by Pooled Companies.................. 296
Issuance of common stock in the second public
offering, net of offering expenses of $3,902...... 4,025,000 4 53,450
Issuance of common stock in the third public
offering, net of offering expenses of $7,594...... 5,543,045 6 121,277
Issuance of common stock in acquisitions............ 3,885,349 4 60,363
Issuance of common stock for stock options
exercised, including tax benefits................. 63,350 1,023
Issuance of common stock to repay indebtedness...... 419,408 3,855
Adjustment to conform fiscal year-ends of certain
Pooled Companies..................................
Capital contribution by former shareholders of
pooled company.................................... 1,154
Conversion of Pooled Company preferred stock upon
acquisition....................................... (1) (1,000) 1,000
Issuance of stock by certain Pooled Companies....... 91,000 2,164
Dividends of certain Pooled Companies............... 564,425 1 1,362
Cumulative translation adjustment................... 551
Net income..........................................
--- --------- ------------ --- ---------- -----------
Balance at April 30, 1996........................... 39,393,480 39 298,120 358
Issuance of common stock in acquisitions............ 4,327,781 4 120,202
Issuance of common stock............................ 1,250,000 1 38,112
Exercise of stock options........................... 152,327 780
Exercise of stock warrants.......................... 166,750 1 1,200
Retirement of treasury stock........................ 68,205 34
Capital contribution by former shareholders of
Pooled Companies.................................. 168,854 1 5,878
Issuance of common stock for stock options
exercised, including tax benefit.................. 77,541 1,633
Issuance of common stock for employee stock purchase
plan, net of expenses of $25...................... 93,310 1,728
Adjustment to conform fiscal year-ends of certain
Pooled Companies..................................
Dividends of certain Pooled Companies...............
Cumulative translation adjustment................... 4,630
Net income..........................................
--- --------- ------------ --- ---------- -----------
Balance at October 26, 1996 (unaudited)............. $ 45,698,248 $ 46 $ 467,687 $ 4,988
--- --------- ------------ --- ---------- -----------
--- --------- ------------ --- ---------- -----------

RETAINED TREASURY TOTAL
EARNINGS STOCK EQUITY
---------- ----------- ----------
<S> <C> <C> <C>
Balance at April 30, 1995........................... $ 39,252 $ 90,803
Issuance of warrants by Pooled Companies............ 672
Exercise of warrants by Pooled Companies............ 784
Options issued by Pooled Companies.................. 296
Issuance of common stock in the second public
offering, net of offering expenses of $3,902...... 53,454
Issuance of common stock in the third public
offering, net of offering expenses of $7,594...... 121,283
Issuance of common stock in acquisitions............ 60,367
Issuance of common stock for stock options
exercised, including tax benefits................. 1,023
Issuance of common stock to repay indebtedness...... 3,855
Adjustment to conform fiscal year-ends of certain
Pooled Companies.................................. (4,410) (4,410)
Capital contribution by former shareholders of
pooled company.................................... 1,154
Conversion of Pooled Company preferred stock upon
acquisition.......................................
Issuance of stock by certain Pooled Companies....... 2,164
Dividends of certain Pooled Companies............... (20,197) (18,834)
Cumulative translation adjustment................... 551
Net income.......................................... 21,356 21,356
---------- ----------- ----------
Balance at April 30, 1996........................... 36,001 334,518
Issuance of common stock in acquisitions............ 120,206
Issuance of common stock............................ 38,113
Exercise of stock options........................... 780
Exercise of stock warrants.......................... 1,201
Retirement of treasury stock........................ (34)
Capital contribution by former shareholders of
Pooled Companies.................................. 5,879
Issuance of common stock for stock options
exercised, including tax benefit.................. 1,633
Issuance of common stock for employee stock purchase
plan, net of expenses of $25...................... 1,728
Adjustment to conform fiscal year-ends of certain
Pooled Companies.................................. 183 183
Dividends of certain Pooled Companies............... (5,316) (5,316)
Cumulative translation adjustment................... 4,630
Net income.......................................... 22,668 22,668
---------- ----------- ----------
Balance at October 26, 1996 (unaudited)............. $ 53,502 $ $ 526,223
---------- ----------- ----------
---------- ----------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>
U.S. OFFICE PRODUCTS COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE SIX
FOR THE FISCAL YEAR ENDED APRIL MONTHS ENDED
30, ------------------------
--------------------------------- OCTOBER 31, OCTOBER 26,
1994 1995 1996 1995 1996
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income...................................................... $ 10,247 $ 18,849 $ 21,356 $ 8,215 $ 22,668
Adjustment to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization expense....................... 7,510 9,283 13,372 5,184 13,974
Deferred income taxes....................................... (165) (51) (264) 156 3,553
Write-off of deferred compensation.......................... (1,501)
Foreign currency gain....................................... (3,420)
Changes in assets and liabilities (net of assets acquired
and liabilities assumed in business combinations):
Accounts receivable....................................... (6,091) (23,948) 1,893 (12,510) (56,018)
Lease receivables......................................... (17,705) (1,394)
Inventory................................................. (2,149) (502) 2,140 (4,675) (2,876)
Prepaid expenses and other current assets................. (2,392) (1,145) (9,412) (4,999) 1,647
Accounts payable.......................................... 3,505 5,674 1,969 10,295 (10,582)
Accrued liabilities....................................... 1,689 5,633 4,462 (584) (8,490)
--------- --------- ----------- ----------- -----------
Net cash provided by (used in) operating activities..... 12,154 13,793 17,811 1,082 (42,439)
--------- --------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment............................. (6,629) (6,873) (14,521) (3,503) (10,277)
Cash used in acquisitions....................................... (18,099) (95,574) (43,406) (273,704)
Investment in affiliate......................................... (5,603)
Deposits........................................................ (74) (77) (256) (3,239) (9,007)
Other........................................................... (265) 344 (543) 216 1,309
--------- --------- ----------- ----------- -----------
Net cash used in investing activities................... (6,968) (24,705) (116,497) (49,932) (291,679)
--------- --------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........................ 3,750 4,220 148,499 2,158 225,098
Payments of long-term debt...................................... (5,929) (7,632) (17,423) (6,546) (145,306)
Increases in short-term debt.................................... 1,504 3,859 (38,105) 6,952 90,285
Proceeds from issuance of common stock.......................... 33,454 176,287 53,454 38,113
Proceeds from exercise of stock options and
warrants...................................................... 597 2,937
Proceeds from issuance of common stock in employee stock
purchase plan................................................. 1,728
Contributions of capital by stockholders of Pooled Companies.... 2,557 1,848 1,802
Payments to stockholders of combined companies.................. (27) (11,330) (42)
Adjustments to conform fiscal year-ends of certain Pooled
Companies..................................................... 230 601 (1,119) (72) 184
Payments of dividends........................................... (4,172) (7,232) (13,844) (8,286) (5,316)
--------- --------- ----------- ----------- -----------
Net cash provided by (used in) financing activities..... (4,644) 18,497 254,850 49,508 209,525
--------- --------- ----------- ----------- -----------
Effect of exchange rates on cash and cash equivalents............. 237 (180) (186) (11) 649
Net increase (decrease) in cash and cash equivalents.............. 779 7,405 155,978 647 (123,944)
Cash and cash equivalents at beginning of period.................. 11,224 12,003 19,408 19,408 175,386
--------- --------- ----------- ----------- -----------
Cash and cash equivalents at end of period........................ $ 12,003 $ 19,408 $ 175,386 $ 20,055 $ 51,442
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
</TABLE>

12
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

(IN THOUSANDS)

The Company issued common stock, notes payable and cash in connection with
certain business combinations in fiscal years ended April 30, 1994, 1995 and
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>
FOR THE SIX
MONTHS ENDED
FOR THE FISCAL YEAR ENDED APRIL 30, ------------------------
----------------------------------- OCTOBER 31, OCTOBER 26,
1994 1995 1996 1995 1996
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Accounts receivable............................................. $ -- $ 23,462 $ 72,231 $ 23,576 $ 66,509
Inventories..................................................... 20,074 51,425 17,309 107,086
Prepaid expenses and other current assets....................... 1,779 8,914 3,845 12,111
Property and equipment.......................................... 5,459 34,978 17,105 102,244
Intangible assets............................................... 21,079 118,422 45,451 398,932
Lease receivables............................................... 55,095 870
Other assets.................................................... 339 1,257 872 3,732
Short-term debt................................................. (15,038) (105,814) (16,425) (8,783)
Accounts payable................................................ (15,627) (38,357) (14,384) (73,042)
Accrued liabilities............................................. (4,958) (16,244) (3,485) (99,158)
Long-term debt.................................................. (6,283) (17,949) (7,708) (114,649)
Deferred income taxes........................................... (1,635)
Other long-term liabilities..................................... (437) (247) (825) (1,942)
Minority interest............................................... (5,349)
---------- ---------- ----------- ----------- -----------
Net assets acquired..................................... $ -- $ 29,849 $ 156,727 $ 65,331 $ 393,910
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
The acquisitions were funded as follows:
Common stock.................................................... $ -- $ 8,750 $ 60,367 $ 21,925 $ 120,206
Notes payable................................................... 3,000 786
Cash............................................................ 18,099 95,574 43,406 273,704
---------- ---------- ----------- ----------- -----------
$ -- $ 29,849 $ 156,727 $ 65,331 $ 393,910
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>

Noncash transactions:

- During fiscal 1996, one Pooled Company converted $1,385 of notes payable
to common stock.

- During fiscal 1996, the Company issued 194,447 shares of common stock to
repay $2,470 of indebtedness.

- During fiscal 1996, the Company recorded additional paid-in capital of
approximately $483 related to the tax benefit on stock options exercised.

- During fiscal 1994, one Combined Company issued $1,800 of debt in exchange
for nonvoting shares of common stock.

See accompanying notes to consolidated financial statements.

13
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 1--BUSINESS ORGANIZATION

U.S. Office Products Company ("U.S. Office Products" and the "Company") was
founded in October 1994 with the goal of creating a world-wide office products
supplier, primarily to corporate, commercial and industrial customers.

Concurrent with the closing of its initial public offering (the "IPO") in
February 1995, the Company acquired four companies for a combination of its
common stock and cash which are referred to herein as the "Combined Companies"
and acquired two companies in business combinations accounted for under the
purchase method. The six companies are referred to as the "Founding Companies."

Simultaneously with the closing of the IPO, U.S. Office Products acquired by
merger each of the Combined Companies (the "Mergers"). The accompanying
consolidated financial statements and related notes to consolidated financial
statements are representative of what the financial position, results of
operations and cash flows would have been if U.S. Office Products and the
Combined Companies had been combined on May 1, 1993. The assets and liabilities
of the Combined Companies are reflected at their historical amounts. Capital
stock of the Combined Companies is included in additional paid-in capital. The
Combined Companies previously reported on fiscal years ending other than April
30. Commencing on May 1, 1994, the fiscal year-ends were changed to April 30
which resulted in an adjustment to retained earnings during fiscal 1994 of $273
which resulted from revenues of $8,983 and expenses of $8,710.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products,
the Combined Companies and the companies acquired in business combinations
accounted for under the purchase method (the "Purchased Companies") from their
respective acquisition dates and give retroactive effect to the results of the
companies acquired in business combinations accounted for under the
pooling-of-interests method (the "Pooled Companies") for all periods presented.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

DEFINITION OF FISCAL YEAR

As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1994," "fiscal 1995" and "fiscal
1996" refer to the Company's fiscal years ended April 30, 1994, 1995 and 1996,
respectively.

14
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany transactions
and accounts have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company invests a portion of its cash in highly
rated corporate commercial paper with original maturities of 30 days or less and
in overnight investments collateralized by U.S. government securities.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.

INVENTORIES

Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of product held for
sale.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 5 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases are being amortized over the lesser of their useful lives or their lease
terms.

INTANGIBLE ASSETS

Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Goodwill is amortized on a straight
line basis over an estimated useful life of 40 years. Management periodically
evaluates the recoverability of goodwill, which would be adjusted for a
permanent decline in value, if any, by comparing anticipated undiscounted future
cash flows from operations to net book value.

TRANSLATION OF FOREIGN CURRENCIES

Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholders' equity.

15
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS

The Company's majority owned foreign subsidiary has entered into forward
foreign currency exchange contracts (the "Exchange Contracts") with
counterparties to hedge the exposure to foreign currency fluctuations to the
extent permissible by hedge accounting requirements. At April 30, 1996, the
Exchange Contracts, in the notional amount of $4,616, hedge approximately $5,292
of foreign currency denominated assets. Discounts or premiums on the Exchange
Contracts are amortized over the life of the contracts.

The Company's majority owned foreign subsidiary has also entered into
interest rate swap agreements (the "Swap Agreements") with counterparties to
convert the interest rates associated with certain outstanding debt from
variable rates to fixed rates. The notional amount of the Swap Agreements was
$43,000 at April 30, 1996. The market risks associated with these Swap
Agreements result from short-term fluctuations in interest rates. The credit
risks related to non-performance of the Swap Agreements by the counterparties
are not deemed to be significant; however, non-performance would result in the
Company terminating the Swap Agreements and recognizing a gain or loss,
depending on the fair market value of the Swap Agreements.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosure About Fair Value of Financial Instruments," the Company has
estimated the fair value of its financial instruments using the following
methods and assumptions:

- The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable approximates fair value;

- The fair value of the 5 1/2% Convertible Subordinated Notes due 2001 is
based on quoted market prices;

- The carrying amounts of the Company's debt, other than the 5 1/2%
Convertible Subordinated Notes due 2001, approximates fair value,
estimated by discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". One Combined Company and certain Pooled Companies
were organized as subchapter S corporations prior to being acquired by the
Company and, as a result, the federal tax on their income was the responsibility
of their individual stockholders. The asset and liability approach used in SFAS
109 requires the recognition of deferred tax assets and liabilities for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.

TAXES ON UNDISTRIBUTED EARNINGS

No provision is made for U.S. income taxes on earnings of foreign subsidiary
companies which the Company controls but does not include in the consolidated
federal income tax return since it is management's practice and intent to
permanently reinvest the earnings.

16
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION

Revenue is recognized upon the delivery of office products to customers. The
Company also leases equipment to customers under both short-term and long-term
lease agreements. Revenue related to the short-term leases is recognized on a
monthly basis over the life of the lease. Certain long-term leases qualify as
sales-type leases and accordingly the present value of the future lease payments
are recognized as income upon delivery of the equipment to the customer.

COST OF REVENUES

Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included as an increase to cost of revenues.

NONRECURRING ACQUISITION COSTS

Nonrecurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, investment banking fees,
recognition of transaction related obligations and various other acquisition
related costs.

DISCONTINUATION OF PRINTING DIVISION AT SUBSIDIARY

During fiscal 1996, the Company discontinued the printing division at one of
its subsidiaries and incurred a one time charge of $682, which consisted
primarily of the writedown of printing division assets to their estimated market
value.

NET INCOME PER SHARE

Net income per share for fiscal 1996 is calculated by dividing net income by
the weighted average number of common shares outstanding during the year
including common stock equivalents, if dilutive.

Net income per share for fiscal 1995 and fiscal 1994 has not been presented
as it is not considered meaningful due to the Mergers and the IPO in conjunction
with the formation of the Company during fiscal 1995.

NEW ACCOUNTING PRONOUNCEMENTS

In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation." SFAS 123 establishes a fair value
based method of accounting for employee stock based compensation plans and
encourages companies to adopt that method. However, it also allows companies to
continue to apply the intrinsic value based method currently prescribed under
APB Opinion No. 25, provided certain pro forma disclosures are made. SFAS 123 is
not required to be adopted by the Company until fiscal 1997. The Company
currently intends to continue to apply the accounting method prescribed by APB
Opinion 25 and, accordingly, the adoption of SFAS 123 will not have a material
impact on the Company's operating results. In March, 1995, the Financial
Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement requires that long-lived assets and certain identifiable intangibles
to be held

17
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable. SFAS 121 is not required to be adopted by the Company until fiscal
1997. The Company does not anticipate that SFAS 121 will have a material effect
on the Company's operating results.

UNAUDITED INTERIM FINANCIAL STATEMENTS

In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of October 26, 1996 and the results
of operations and of cash flows for the six months ended October 31, 1995 and
October 26, 1996, as presented in the accompanying unaudited consolidated
financial statements.

NOTE 3--BUSINESS COMBINATIONS

POOLING-OF-INTERESTS METHOD

In fiscal 1996, the Company issued 8,440,852 shares of common stock to
acquire 14 companies in acquisitions accounted for under the
pooling-of-interests method. The Company's consolidated financial statements
give retroactive effect to the acquisitions of the Pooled Companies for all
periods presented. Certain of the Pooled Companies previously reported on fiscal
years ending other than April 30. The results of these Pooled Companies were
previously reported on June 30, September 30 and December 31 year-ends.

The accounts of these Pooled Companies for the years ended December 31, 1993
and 1994, for the years ended June 30, 1994 and 1995 and for the years ended
September 30, 1994 and 1995 have been combined with the accounts of U.S. Office
Products for the years ended April 30, 1994 and 1995, respectively. Commencing
on May 1, 1995, the year-ends of these companies were changed to April 30,
resulting in an increase to retained earnings of $2,235 during fiscal 1995.

Subsequent to April 30, 1996, the Company issued 8,525,976 shares of common
stock to acquire 21 companies in acquisitions accounted for under the
pooling-of-interests method. The Company's consolidated financial statements
give retroactive effect to the acquisitions of the Pooled Companies for all
periods presented. Certain of the Pooled Companies previously reported on fiscal
years ending other than April 30. The results of these Pooled Companies were
previously reported on January 31, March 31, May 31, June 30, August 31 and
December 31 year-ends.

The accounts of these Pooled Companies for the years ended December 31, 1994
and 1995, for the years ended January 31, 1995 and 1996, for the year ended
March 31, 1995 and 1996, for the years ended May 31, 1995 and 1996, for the
years ended June 30, 1995 and 1996, and the years ended August 31, 1995 and 1996
have been combined with the accounts of U.S. Office Products for the years ended
April 30, 1995 and 1996, respectively. Commencing on May 1, 1996, the year-ends
of these Companies were changed to April 30, resulting in a reduction to
retained earnings of $4,410 during fiscal 1996 and an increase of $183 for the
six months ended October 26, 1996.

18
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 3--BUSINESS COMBINATIONS (CONTINUED)
Following is a summary of the results related to the adjustments to retained
earnings for these Pooled Companies:

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR FOR THE SIX MONTHS
ENDED APRIL 30, ENDED
-------------------- OCTOBER 26,
1995 1996 1996
--------- --------- ------------------
<S> <C> <C> <C>
(UNAUDITED)
Revenues................................................................ $ 55,126 $ 84,626 $ (4,740)
Costs and expenses...................................................... 52,891 89,036 (4,923)
--------- --------- -------
Net income (loss)................................................... $ 2,235 $ (4,410) $ 183
--------- --------- -------
--------- --------- -------
</TABLE>

The separate results of operations of U.S. Office Products Company and the
Pooled Companies for periods prior to the mergers are presented below:

<TABLE>
<CAPTION>
U.S. OFFICE POOLED
FOR THE YEAR ENDED APRIL 30, PRODUCTS COMPANIES COMBINED
----------- ----------- ---------
<S> <C> <C> <C>
1996
Revenue................................................... $ 488,670 $ 661,021 $1,149,691
Net income................................................ $ 7,828 $ 13,528 $ 21,356
1995
Revenue................................................... $ 120,479 $ 603,315 $ 723,794
Net income................................................ $ 1,514 $ 17,335 $ 18,849
1994
Revenue................................................... $ 76,541 $ 456,477 $ 533,018
Net income................................................ $ 1,114 $ 9,133 $ 10,247

FOR THE SIX MONTHS ENDED OCTOBER 26, 1996 (UNAUDITED):
Revenue................................................... $ 858,093 $ 138,321 $ 996,414
Net income................................................ $ 15,500 $ 7,168 $ 22,668

FOR THE SIX MONTHS ENDED OCTOBER 31, 1995 (UNAUDITED):
Revenue................................................... $ 146,491 $ 339,055 $ 485,546
Net income................................................ $ 3,734 $ 4,481 $ 8,215
</TABLE>

PURCHASE METHOD

In fiscal 1996, the Company made 27 acquisitions accounted for under the
purchase method for an aggregate purchase price of $156,727 consisting of
$95,574 of cash, $786 of notes payable and 3,885,349 shares of common stock with
a market value of $60,367. The total assets related to these 27 acquisitions
were $342,322, including goodwill of $118,422. The results of these acquisitions
have been included in the Company's results from their respective dates of
acquisition.

In fiscal 1995, in addition to the Mergers, the Company made six
acquisitions accounted for under the purchase method for an aggregate purchase
price of $29,849, consisting of $18,099 of cash, $3,000 of notes payable and
875,000 shares of common stock with a market value of $8,750. The total assets
related to

19
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 3--BUSINESS COMBINATIONS (CONTINUED)
these six acquisitions were $72,192, including goodwill of $21,079. The results
of these acquisitions have been included in the Company's results from their
respective dates of acquisition.

The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 30, 1995 and 1996 as if the purchase
acquisitions described above had been consummated as of the beginning of fiscal
1995. The results presented below include certain pro forma adjustments to
reflect the amortization of intangible assets, adjustments in executive
compensation and the inclusion of a federal income tax provision:

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED APRIL 30,
--------------------------
<S> <C> <C>
1995 1996
------------ ------------
Revenues.......................................................... $ 1,224,371 $ 1,457,645
Net income........................................................ 19,531 24,407
Net income per share.............................................. 0.49 0.63
</TABLE>

The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1995 or the
results which may occur in the future.

NOTE 4--PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED APRIL 30,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
Land.................................................................. $ 2,515 $ 4,339
Buildings............................................................. 13,809 25,617
Furniture and fixtures................................................ 19,720 39,612
Warehouse equipment................................................... 22,986 31,462
Equipment under capital leases........................................ 4,175 7,264
Leasehold improvements................................................ 7,238 7,978
---------- ----------
70,443 116,272
Less: Accumulated depreciation........................................ (34,705) (41,261)
---------- ----------
Net property and equipment............................................ $ 35,738 $ 75,011
---------- ----------
---------- ----------
</TABLE>

Depreciation expense for the fiscal years ended April 30, 1994, 1995 and
1996 was $5,987, $7,763 and $9,876, respectively.

20
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 5--INTANGIBLE ASSETS

Intangible assets and accumulated amortization consist of the following:

<TABLE>
<CAPTION>
APRIL 30,
--------------------- OCTOBER 26,
1995 1996 1996
--------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill................................................. $ 22,634 $ 141,382 $ 544,486
Other.................................................... 8,309 8,184 7,677
--------- ---------- ------------
30,943 149,566 552,163
Less: Accumulated amortization........................... (4,832) (7,326) (10,741)
--------- ---------- ------------
$ 26,111 $ 142,240 $ 541,422
--------- ---------- ------------
--------- ---------- ------------
</TABLE>

Other intangible assets consist primarily of non-compete arrangements which
are amortized over the term of the agreements. Amortization expense for the
fiscal years ended April 30, 1994, 1995 and 1996 was $1,523, $1,520 and $3,496,
respectively.

NOTE 6--LEASE RECEIVABLES

Lease receivables represent the present value of future lease payments
related to equipment sold to customers as sales type leases. The future minimum
lease payments to be received are as follows:

<TABLE>
<S> <C>
1997.............................................................. $ 34,146
1998.............................................................. 29,885
1999.............................................................. 17,181
2000.............................................................. 5,800
2001 and thereafter............................................... 1,647
---------
Total lease receivable............................................ 88,659
Less: Amounts representing interest............................... (16,846)
---------
Present value of net lease receivable............................. $ 71,813
---------
---------
</TABLE>

21
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 7--CREDIT FACILITIES

SHORT-TERM DEBT

Short-term debt consists of the following:

<TABLE>
<CAPTION>
APRIL 30,
---------------------
<S> <C> <C>
1995 1996
--------- ----------
Bank lines of credit, secured by accounts receivable and
inventory,interest rates ranging from prime to prime plus 2.25% (9.0%
to 10.0% at April 30, 1996).......................................... $ 43,666 $ 14,428
Annual renewal loans provided by banks and other financial institutions
of foreign subsidiary secured by lease receivables of foreign
subsidiary. Interest rates ranging from 7.8% to 10.2% at April 30,
1996................................................................. 80,949
Bank lines of credit of foreign subsidiary operations secured by assets
of those operations. Interest rates ranging from 9.2% to 9.8% at
April 30, 1996....................................................... 12,731
Other.................................................................. 1,813 2,249
Current maturities of long-term debt................................... 7,241 10,131
--------- ----------
Total short-term debt.............................................. $ 52,720 $ 120,488
--------- ----------
--------- ----------
</TABLE>

LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
APRIL 30,
---------------------
<S> <C> <C>
1995 1996
--------- ----------
Notes payable, secured by certain assets of the Company, interest rates
ranging from 8.0% to 10.0%, maturities from October 1996 through
2003................................................................. $ 13,378 $ 2,768
Convertible Subordinated Notes due 2001, interest at 5 1/2%,
convertible into shares of common stock at any time prior to maturity
at a conversion price of $28.50 per share, subject to adjustment in
certain events....................................................... 143,750
Debt facility payable over five years secured by lease receivables of
the Company's foreign subsidiaries. Interest rates ranging from 11.0%
to 12.0% at April 30, 1996........................................... 8,943
Other.................................................................. 22,421 31,134
Capital lease obligations.............................................. 1,381 5,129
--------- ----------
37,180 191,724
Less: Current maturities of long-term debt............................. (7,241) (10,131)
--------- ----------
Total long-term debt............................................... $ 29,939 $ 181,593
--------- ----------
--------- ----------
</TABLE>

22
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 7--CREDIT FACILITIES (CONTINUED)
The 5 1/2% Convertible Subordinated Notes due 2001 (the "Notes") are
redeemable, in whole or in part, at the Company's option at specified redemption
prices on or after February 3, 1998, but may not be redeemed prior to February
2, 1999 unless the closing price of the common stock is at least 150% of the
conversion price for a period of time prior to the notice of redemption. Costs
incurred in connection with the issuance of the Notes are included in other
assets and are being amortized over the five year period of maturity. The fair
value of the Notes at April 30, 1996, based upon quoted market prices, totaled
$211,313.

MATURITIES OF LONG-TERM DEBT

Maturities on long-term debt, including capital lease obligations, are as
follows:

<TABLE>
<S> <C>
1997.............................................................. $ 10,131
1998.............................................................. 13,881
1999.............................................................. 12,661
2000.............................................................. 1,786
2001.............................................................. 144,504
Thereafter........................................................ 8,761
---------
$ 191,724
---------
---------
</TABLE>

NOTE 8--INCOME TAXES

U.S. Office Products will file a consolidated federal income tax return for
periods subsequent to the Mergers described in Note 3. Each of the Combined
Companies and Pooled Companies will file "short-period" federal tax returns
through the dates of the Mergers and business combinations.

The provision for income taxes consists of:

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED APRIL 30,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Income taxes currently payable:
Federal........................................................ $ 1,805 $ 1,722 $ 5,679
State.......................................................... 307 529 359
Foreign taxes currently payable.................................. 809 836
--------- --------- ---------
2,112 3,060 6,874
--------- --------- ---------
Deferred income tax expense (benefit)............................ (165) (51) (264)
--------- --------- ---------
Total provision for income taxes............................. $ 1,947 $ 3,009 $ 6,610
--------- --------- ---------
--------- --------- ---------
</TABLE>

23
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 8--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:

<TABLE>
<CAPTION>
APRIL 30,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Current deferred tax assets:
Inventory.............................................................. $ 178 $ 291
Allowance for doubtful accounts........................................ 95 826
Accrued liabilities.................................................... 445 4
--------- ---------
Total current deferred tax assets.................................... 718 1,121
--------- ---------
Long-term deferred tax liabilities:
Property and equipment................................................. (1,028) (2,701)
Internal Revenue Service tax assessment................................ (3,383) (3,383)
Other.................................................................. 54 (972)
--------- ---------
Total long-term deferred tax liabilities............................. (4,357) (7,056)
--------- ---------
Net deferred tax asset (liability)................................... $ (3,639) $ (5,935)
--------- ---------
--------- ---------
</TABLE>

The Internal Revenue Service ("IRS") tax assessment relates to the deferral
of a gain on the sale of land and building by a subsidiary of the Company. The
IRS has determined that a portion of the gain recorded by the subsidiary does
not qualify for deferral and has required that the Company pay additional taxes.
The subsidiary has recorded a deferred tax liability as a result of the
assessment and the related interest. The Company has filed an appeal with the
IRS relating to the above assessment; however, the IRS has not yet responded to
the appeal.

The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED APRIL
30,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
U.S. federal statutory rate........................................... 34.0% 34.0% 35.0%
State income taxes, net of federal income tax benefit................. 4.0 4.1 5.4
Subchapter S corporation income not subject to corporate level
taxation............................................................ (25.0) (26.9) (24.0)
Foreign earnings not subject to U.S. taxes............................ (.6)
Minority interest in foreign taxes.................................... 2.5
Nondeductible goodwill................................................ 1.4 2.6
Other................................................................. 3.0 1.2 2.7
--------- --------- ---------
Effective tax rate.................................................... 16.0% 13.8% 23.6%
--------- --------- ---------
--------- --------- ---------
</TABLE>

One Combined Company and certain Pooled Companies were organized as
subchapter S corporations prior to the closing of their acquisitions by the
Company and, as a result, the federal tax on their income was the responsibility
of their individual stockholders. Accordingly, the Combined Company and the
specific Pooled Companies provided no federal income tax expense prior to these
acquisitions by the Company.

24
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 8--INCOME TAXES (CONTINUED)
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the Combined Company and the specific Pooled
Companies had been subject to federal income taxes for the entire periods
presented.

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR SIX MONTHS ENDED
ENDED APRIL 30, ------------------------
------------------------------- OCTOBER 31, OCTOBER 26,
1994 1995 1996 1995 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net income per consolidated statement of income........ $ 10,247 $ 18,849 $ 21,356 $ 8,215 $ 22,668
Pro forma income tax provision adjustment.............. 2,784 5,452 6,613 3,448 2,417
--------- --------- --------- ----------- -----------
Pro forma net income................................... $ 7,463 $ 13,397 $ 14,743 $ 4,767 $ 20,251
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>

NOTE 9--LEASE COMMITMENTS

The Company leases various types of retail, warehouse and office space and
equipment, furniture and fixtures under noncancellable lease agreements which
expire at various dates. Future minimum lease payments under noncancellable
capital and operating leases are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
1997.................................................................... $ 1,922 $ 14,102
1998.................................................................... 1,390 11,410
1999.................................................................... 743 10,179
2000.................................................................... 446 9,248
2001.................................................................... 320 7,920
Thereafter.............................................................. 2,541 27,438
--------- -----------
Total minimum lease payments............................................ 7,362 $ 80,297
-----------
-----------
Less: Amounts representing interest..................................... (2,233)
---------
Present value of net minimum lease payments............................. $ 5,129
---------
---------
</TABLE>

Rent expense for all operating leases for the fiscal years ended April 30,
1994, 1995 and 1996 was $10,409, $11,731 and $17,379, respectively.

NOTE 10--COMMITMENTS AND CONTINGENCIES

LITIGATION

The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position or results of
operations or cash flows of the Company.

25
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
POSTEMPLOYMENT BENEFITS

The Company has entered into employment agreements with several employees
that would result in payments to these employees upon change of control or
certain other events. No amounts have been accrued at April 30, 1995 or 1996
related to these agreements.

NOTE 11--EMPLOYEE BENEFIT PLANS

Certain subsidiaries of the Company have qualified defined contribution
benefit plans, which allow for voluntary pre-tax contributions by the employees.
The subsidiaries pay all general and administrative expenses of the plans and in
some cases make matching contributions on behalf of the employees. For the
fiscal years ended April 30, 1994, 1995 and 1996, the subsidiaries incurred
expenses totaling $220, $451 and $683, respectively, related to these plans.

One Combined Company entered into agreements with three officers which
provided for future compensation to those officers subsequent to termination of
employment with the Combined Company for a period of five years. The future
compensation would not be received, however, in the event that an officer
received payment under that Company's Restricted Stock Purchase Plan (the
"Purchase Plan") in excess of the purchase price of the stock paid by the
officer. No compensation expense was recorded with respect to the agreement
related to two of the officers, as it was probable that they would receive
payment under the Restricted Stock Purchase Plan. Future compensation expense of
approximately $1,030 was being recognized as expense for the third officer over
the estimated term of the officer's service to the Company of approximately
eleven years. The compensation expense equaled $95 in fiscal 1994 and $71 in
fiscal year 1995. The agreements were terminated upon closing of the Merger.

The Purchase Plan was considered to be compensatory, for the benefit of
certain officers. Two of these officers each purchased 1,000 shares of stock for
$1 under the Purchase Plan. The stock was restricted and could only be purchased
by the Combined Company at specified prices that varied upon the occurrence of
certain events. As a result, the Combined Company's future compensation expense
of $1,398, under this Purchase Plan, was being recognized as expense over the
expected periods of the officers' future service to the Combined Company of 20
and 28 years. Compensation expense of approximately $60 and $45 was recognized
in fiscal 1994 and fiscal 1995, respectively. The Plan was terminated upon
closing of the Merger.

NOTE 12--STOCKHOLDERS' EQUITY

LONG-TERM COMPENSATION PLAN

In October 1994, the Board of Directors and the Company's stockholders
approved the Company's 1994 Long-Term Compensation Plan (the "Plan"). The
purpose of the Plan is to provide directors, officers, key employees and
consultants with additional incentives by increasing their ownership interests
in the Company. The maximum number of options to purchase Common Stock granted
in any calendar or fiscal year under the Plan is equal to the greater of 855,000
shares or 15% of the aggregate number of shares of the Common Stock outstanding
at the time an award is granted, less, in each case, the number of shares
subject to previously outstanding awards under the Plan.

26
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
Under the provisions of the Plan, non-qualified stock options and other
stock awards are granted at prices not less than fair market value at the date
of grant. A summary of option transactions follows:

<TABLE>
<CAPTION>
OPTION PRICE
NUMBER RANGE PER EXPIRATION
OF SHARES SHARE DATE
---------- --------------- -----------
<S> <C> <C> <C>
Outstanding at April 30, 1994......................................... -- -- --
Granted............................................................. 629,500 $8.00-$10.00 2004
Canceled............................................................ (7,000) $10.00 2004
---------- --------------- -----------
Outstanding at April 30, 1995......................................... 622,500 $8.00-$10.00 2004
Granted............................................................. 2,764,591 $11.31-$31.75 2004-2006
Exercised........................................................... (63,350) $8.00-$10.00 2004
Canceled............................................................ (16,200) $10.00-$17.13 2004-2005
---------- --------------- -----------
Outstanding at April 30, 1996......................................... 3,307,541 $8.00-$31.75 2004-2006
---------- --------------- -----------
---------- --------------- -----------
Exercisable at April 30, 1996......................................... 132,867 $8.00-$10.00 2004
---------- --------------- -----------
---------- --------------- -----------
</TABLE>

Non-qualified options are generally exercisable beginning one year from the
date of grant in cumulative yearly amounts of 25% of the shares under option and
generally expire ten years from the date of grant.

Subsequent to year-end, the Company granted options to purchase 1,132,050
shares of common stock at exercise prices ranging from $36.00 to $44.875 per
share.

COMMON STOCK

In November 1994, the Board of Directors of the Company approved a one
thousand-for-one split of the Company's common stock and changed the par value
of common stock from $1 per share to $.001 per share. The consolidated financial
statements have been adjusted to reflect the stock split. In February 1996, the
stockholders approved the amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock from 25,000,000 to 100,000,000 shares.

27
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
Revenues........................................... $ 214,481 $ 271,065 $ 316,621 $ 347,524 $ 1,149,691
Gross profit....................................... 54,980 69,032 81,848 95,828 301,688
Operating income................................... 2,078 9,890 15,887 8,413 36,268
Net income......................................... 1,637 6,578 9,224 3,917 21,356
Pro forma net income (loss) (see Note 8)........... (1,734) 4,446 8,306 3,725 14,743
Net income per share............................... .07 .21 .29 .10 .67
Pro forma net income (loss) per share.............. (.07) .14 .26 .10 .46
</TABLE>

<TABLE>
<CAPTION>
FISCAL 1995 QUARTERS
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ----------
Revenues............................................. $ 137,546 $ 161,044 $ 216,548 $ 208,656 $ 723,794
Gross profit......................................... 37,174 43,094 58,637 50,326 189,232
Operating income..................................... 3,472 6,074 14,584 2,678 26,809
Net income........................................... 2,113 4,218 11,794 724 18,849
Pro forma net income (loss) (see Note 8)............. 1,194 3,239 9,153 (189) 13,397
</TABLE>

NOTE 14--SUBSEQUENT EVENTS

BUSINESS COMBINATIONS SUBSEQUENT TO YEAR-END

Between April 30, 1996 and July 10, 1996, the Company acquired 14 companies
and the remaining 49% of Blue Star in business combinations accounted for under
the purchase method for $65,333, consisting of 1,663,692 shares of common stock
with a market value of $44,149 and cash of $21,184. In addition, the Company
considers the consummation to be probable of a total of 46 additional businesses
(the "Pending Acquisitions"). The Pending Acquisitions provide for consideration
of $286,740, consisting of 7,206,323 shares of common stock with a market value
of $254,659 and cash of $32,081.

The following presents the unaudited pro forma results of operations of the
Company for fiscal 1996 as if the acquisitions described above had been
consummated as of the beginning of fiscal 1996. The results presented below
include certain pro forma adjustments to reflect the amortization of intangible
assets, reductions in executive compensation, the inclusion of a federal income
tax provision and the removal of certain restructuring costs:

<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
APRIL 30, 1996
----------------
<S> <C>
Revenues.................................................................... $ 1,869,254
Net income.................................................................. 34,112
Net income per share........................................................ .80
</TABLE>

28
<PAGE>
U.S. OFFICE PRODUCTS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 14--SUBSEQUENT EVENTS (CONTINUED)
ISSUANCE OF CONVERTIBLE SUBORDINATED NOTES

In May 1996, the Company completed an offshore offering and a concurrent
private placement of $230,000, principal amount of 5 1/2% Convertible
Subordinated Notes due 2003, including the underwriters' over-allotment option
of $30,000. The underwriters exercised their over-allotment option in June 1996.
The net proceeds to the Company, after deducting underwriting discounts and
commissions and offering expenses, were approximately $223,000.

NOTE 15--SUBSEQUENT EVENTS (UNAUDITED)

During the first six months of fiscal 1997, the Company completed a total of
66 business combinations, 21 accounted for under the pooling-of-interests method
and 45 accounted for under the purchase method. In the second quarter of fiscal
1997, the Company completed a total of 38 business combinations, 11 accounted
for under the pooling-of-interests method and 27 accounted for under the
purchase method.

In August 1996, the Company entered into an agreement with Bankers Trust
Company (the "Bank"), whereby the Bank, or a syndicate of financial institutions
including the Bank, will provide a $500,000 revolving credit facility (the
"Credit Facility") bearing interest, at the Company's option, at the Bank's base
rate plus an applicable margin of up to 1.25%, or a eurodollar rate plus an
applicable margin of up to 2.5%. The availability under the Credit Facility is
subject to certain sublimits including $100,000 for working capital loans and
$400,000 for acquisition loans, with $180,000 of the acquisition loan submit
available and expected to be used to refinance certain outstanding indebtedness
of the Company in Australia and New Zealand. The Credit Facility is secured by a
majority of the assets of the Company and contains customary covenants,
including financial covenants with respect to the Company's leverage and
interest coverage ratios, capital expenditures, payment of dividends and
purchases and sales of assets, and customary default provisions, including
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy.

In August 1996, at the Company's Annual Meeting of Stockholders, the
stockholders approved, among other things, a proposal by the Board of Directors
of the Company to adopt an amendment to Article Four of the Company's Restated
Certificate of Incorporation to increase the number of shares of the Company's
Common Stock, par value $.001 per share, authorized for issuance from
100,000,000 shares to 500,000,000 shares.

On August 20, 1996, the Company's Board of Directors approved a change in
the Company's fiscal year-end, effective for the 1997 fiscal year, from April 30
to the last Saturday of April.

Subsequent to October 26, 1996, the Company has completed 17 business
combinations for an aggregate purchase price of $97,100, consisting of
approximately $62,200 of cash and 1,090,861 shares of the Company's common stock
with an aggregate market value on the dates of acquisition of approximately
$34,900. This includes the acquisition of a 49% equity interest in Dudley
Stationery Limited ("Dudley"), an independent office products dealer in the
United Kingdom. Under the terms of the agreement, the Company agreed to invest
approximately $80,000 of working capital into Dudley over a two-year period. In
addition, Dudley plans to raise approximately an additional $80,000 in debt
financing. The Company has currently invested approximately $41,300 of the total
$80,000 in Dudley.

----------

B. On January 9, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission to register for sale in a public offering
10 million shares, including 4 million shares to be offered for sale by
selling stockholders.

The Company's revenues and net income for the month of November 1996 were
$187.8 million and $2.7 million, respectively.

29
<PAGE>

ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS

(a) Financial Statements of Business Acquired

Not applicable.

(b) Pro Forma Financial Information

Not applicable.

(i) Consent of Price Waterhouse LLP

30
<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 hereunto duly authorized.

U.S. OFFICE PRODUCTS COMPANY

Dated: January 8, 1997 By: /s/Donald H. Platt
----------------------------
Donald H. Platt
Senior Vice President,
Chief Financial Officer
and Treasurer

31
<PAGE>

EXHIBIT INDEX

Exhibit

23.1 Consent of Price Waterhouse LLP

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (333-01574) and (333-12789), on Form S-3 (333-14025)
and (333-10383) and on Form S-4 (333-13133) of U.S. Office Products Company
of our report dated May 31, 1996, except as to the third paragraph of Note 3,
which is as of October 26, 1996 and Note 14, which is as of July 10, 1996
relating to the consolidated financial statements of U.S. Office Products
Company which appears in the Current Report on Form 8K.

PRICE WATERHOUSE LLP
Minneapolis, Minnesota
January 7, 1997