<PAGE>
SCHEDULE 13E-4
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ISSUER TENDER OFFER STATEMENT
(Pursuant to Section 13(e)(1) of the Securities and Exchange Act of 1934)
U.S. Office Products Company
- --------------------------------------------------------------------------------
(Name of Issuer)
(Name of Person(s) Filing Statement)
5 1/2% Convertible Subordinated Notes due 2001
- --------------------------------------------------------------------------------
(Title of Class of Securities)
912 325 AA5
- --------------------------------------------------------------------------------
(CUSIP Number of Class of Securities)
Thomas Morgan
President and Chief Executive Officer
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.--Suite 600 East
Washington, D.C. 20007
(202) 339-6700
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of the Person(s) Filing Statement)
WITH COPIES TO:
<TABLE>
<S> <C>
George P. Stamas, Esq. Mark D. Director
Wilmer, Cutler & Pickering Executive Vice President--Administration,
2445 M Street, N.W. General Counsel and Secretary
Washington, D.C., 20037 U.S. Office Products Company
(202) 663-6000 1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
(202) 339-6700
</TABLE>
May 1, 1998
- --------------------------------------------------------------------------------
(Date Tender Offer First Published, Sent or Given to Security Holders)
Calculation of Filing Fee
- --------------------------------------------------------------------------------
Transaction Valuation* Amount of Filing Fee
$143,750,000 $28,750
- --------------------------------------------------------------------------------
*Calculation of Filing Fee: The Transaction Valuation is based upon the value of
the 5 1/2% Convertible Subordinated Notes due 2001 to be acquired in exchange
for shares of Common Stock, par value $.001, of the Company.
/X/ Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
<TABLE>
<S> <C>
Amount Previously $42,407
Paid:
Registration No: 333-49531
Filing Party: U.S. Office Products
Company
Form: S-4
Date Filed: April 7, 1997
</TABLE>
<PAGE>
ITEM 1. SECURITY AND ISSUER.
(a) The issuer is U.S. Office Products Company, a Delaware corporation (the
"Company"). The address of its principal executive office is 1025 Thomas
Jefferson Street, N.W., Suite 600 East, Washington, D.C. 20007.
(b) The securities which are the subject of the Exchange Offer are the
5 1/2% Convertible Subordinated Notes due 2001 (the "Notes") of the Company. As
of April 30, 1998, there was $143,750,000 aggregate principal amount of Notes
outstanding. The Company is offering to exchange shares of Common Stock for any
and all Notes at an Exchange Ratio of 61.843 shares per $1,000 principal amount
of Notes. To the best knowledge of the Company, no Notes are being purchased
from any officer, director or affiliate of U.S. Office Products Company.
(c) The information set forth in the Offering Circular/Prospectus dated May
1, 1998 (the "Offering Circular/Prospectus") under the caption "The Terms of the
Exchange Offer--Market and Trading Information" is incorporated herein by
reference.
(d) Not applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
(a) If all Notes are exchanged, the Company will issue approximately
8,890,000 shares of Common Stock in the Exchange Offer.
(b) Not applicable.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS
OF THE ISSUER OR AFFILIATE.
The information set forth in the Offering Circular/Prospectus under the
caption "The Terms of the Exchange Offer--Purpose of the Offer" is incorporated
herein by reference. Upon completion of the Tender Offer, the Company plans to
retire all of the Notes purchased by the Company.
(a)-(g) The information set forth in the Offering Circular/Prospectus under
the captions "Summary-- The Strategic Restructuring Plan" and "The Strategic
Restructuring Plan" is incorporated herein by reference.
(h)-(j) Not applicable.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
Not applicable.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS
WITH RESPECT TO THE ISSUER' SECURITIES.
The information set forth in the Offering Circular/Prospectus under the
caption "The Strategic Restructuring Plan" is incorporated herein by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in the Offering Circular/Prospectus under the
captions "The Terms of the Exchange Offer--Dealer Manager," "--Exchange Agent"
and "--Fees and Expenses" is incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION.
(a) See the Consolidated Financial Statements of U.S. Office Products
Company and the Consolidated Financial Statements of Mail Boxes Etc., attached
hereto.
2
<PAGE>
(b) See the Pro Forma Combined Financial Information of U.S. Office Products
Company attached hereto.
ITEM 8. ADDITIONAL INFORMATION.
(a) The information set forth in the Offering Circular/Prospectus under the
caption "The Strategic Restructuring Plan" is incorporated herein by reference.
(b) Other than compliance with applicable requirements of federal and state
securities laws, U.S. Office Products Company is not aware of any federal or
state regulatory requirements that must be complied with or approvals that must
be obtained in connection with the Exchange Offer.
(c) Not applicable.
(d) None.
(e) Reference is hereby made to the exhibits hereto, including the Offering
Circular/Prospectus, which are incorporated in their entirety herein by
reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<C> <C> <S>
(a) (i) Offering Circular/Prospectus dated May 1, 1998.
(a) (ii) Letter of Transmittal.
(a) (iii) Letter from BancAmerica Robertson Stephens to Brokers, Dealers, Commercial
Banks, Trust Companies and Nominees.
(a) (iv) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees.
(a) (v) Press Release dated May 1, 1998.
(b) None.
(c) (i) Agreement between U.S. Office Products Company and Jonathan J. Ledecky (to be
filed by amendment).
(c) (ii) Investment Agreement dated as of January 12, 1998 as amended, February 3, 1998
between U.S. Office Products Company and CDR-LC Acquisition, L.L.C.
(d) Opinion of Wilmer, Cutler & Pickering regarding tax matters.
(e) See Exhibit (a)(1).
(f) None.
</TABLE>
3
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.
<TABLE>
<S> <C> <C>
U.S. OFFICE PRODUCTS COMPANY
By: /s/ THOMAS MORGAN
-----------------------------------------
Name: Thomas Morgan
Title: President and Chief Executive
Officer
</TABLE>
Dated: May 1, 1998
4
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Introduction to Selected Financial Data................................................................... F-2
Selected Financial Data................................................................................... F-3
Management's Discussion and Analysis of Financial Position and Results of Operations...................... F-5
Pro Forma Combined Financial Information of U.S. Office Products Company
Introduction to Pro Forma Combined Financial Information................................................ F-21
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited)..................................... F-23
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998 (unaudited)........... F-25
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997 (unaudited)........... F-26
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997
(unaudited)........................................................................................... F-27
Notes to Pro Forma Combined Financial Statements........................................................ F-28
Consolidated Financial Statements of U.S. Office Products Company
Report of Price Waterhouse LLP, Independent Accountants................................................. F-32
Report of Ernst & Young LLP, Independent Accountants.................................................... F-33
Report of BDO Seidman, LLP, Independent Accountants..................................................... F-34
Report of KPMG Peat Marwick LLP, Independent Accountants................................................ F-35
Report of KPMG Peat Marwick LLP, Independent Accountants................................................ F-36
Report of Rubin, Koehmstedt and Nadler, Independent Accountants......................................... F-37
Report of Deloitte & Touche LLP, Independent Accountants................................................ F-38
Report of Hertz, Herson & Company, LLP, Independent Accountants......................................... F-39
Report of Hertz, Herson & Company, LLP, Independent Accountants......................................... F-40
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and January 24, 1998 (unaudited)........ F-41
Consolidated Statement of Income for the fiscal years ended April 30, 1995 and 1996, April 26, 1997 and
the nine months ended January 25, 1997 (unaudited) and January 24, 1998 (unaudited)................... F-42
Consolidated Statement of Stockholders' Equity for the fiscal years ended April 30, 1995 and 1996, April
26, 1997 and the nine months ended January 24, 1998 (unaudited)....................................... F-43
Consolidated Statement of Cash Flows for the fiscal years ended April 30, 1995 and 1996, April 26, 1997
and the nine months ended January 25, 1997 (unaudited) and January 24, 1998 (unaudited)............... F-45
Notes to Consolidated Financial Statements.............................................................. F-47
Consolidated Financial Statements of Mail Boxes Etc.
Report of Ernst & Young LLP, Independent Auditors....................................................... F-74
Consolidated Balance Sheets as of April 30, 1997 and 1996............................................... F-75
Consolidated Statements of Income for the fiscal years ended April 30, 1997, 1996 and 1995.............. F-76
Consolidated Statement of Stockholders' Equity for the fiscal years ended April 30, 1997, 1996 and
1995.................................................................................................. F-77
Consolidated Statements of Cash Flows for fiscal years ended April 30, 1997, 1996 and 1995.............. F-78
Notes to Consolidated Financial Statements.............................................................. F-80
Condensed Consolidated Balance Sheet as of October 31, 1997 (unaudited)................................. F-91
Condensed Consolidated Statements of Operations for three months and six months ended October 31, 1997
(unaudited) and October 31, 1996 (unaudited).......................................................... F-92
Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 1997 (unaudited)
and October 31, 1996 (unaudited)...................................................................... F-93
Notes to Condensed Consolidated Financial Statements (unaudited)........................................ F-94
</TABLE>
F-1
<PAGE>
INTRODUCTION TO SELECTED FINANCIAL DATA
Set forth below is certain selected financial data for U.S. Office Products
Company (the "Company"). The historical Statement of Income Data for the fiscal
years ended April 30, 1995 and 1996 and April 26, 1997 and the Balance Sheet
Data at April 30, 1996 and April 26, 1997 have been derived from the Company's
consolidated audited financial statements and are included elsewhere in this
Proxy Statement. The historical Statement of Income Data for the years ended
April 30, 1993 and 1994 and the Balance Sheet Data at April 30 1993, 1994, and
1995 have been derived from unaudited consolidated financial statements which
are not included elsewhere in this Proxy Statement. The Selected Financial Data
for the nine months ended January 25, 1997 and January 24, 1998 (except pro
forma amounts) have been derived from unaudited consolidated financial
statements that appear elsewhere in this Proxy Statement. These unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the financial position and results of operations for the
periods presented. The financial data have been restated from prior
presentations as a result of the Company's adoption of the Strategic
Restructuring Plan.
The pro forma financial data gives effect, as applicable, to the Strategic
Restructuring Plan, the offer to exchange the 2001 Notes for common stock at a
reduced conversion price (the "2001 Note Offer"), the tender offer for the 2003
Notes (the "2003 Note Tender"), the offering of senior subordinated notes ("Note
Offering") and borrowings under the new senior secured credit facilities (the
"Credit Facility"; borrowings under the Note Offering and the Credit Facility
are referred to as the "New Borrowings") and the acquisitions completed by the
Company after May 1, 1996 for balance sheet purposes as if such transactions had
occurred on January 24, 1998 and for income statement purposes as if such
transactions had occurred at the beginning of the relevant period. In addition,
the pro forma information is based on available information and certain
assumptions and adjustments.
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the
unaudited pro forma financial information, including the notes thereto, and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Proxy Statement.
F-2
<PAGE>
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------------ -----------
PRO FORMA
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25,
1993 1994 1995 1996 1997 1997 (2) 1997
----------- ----------- ----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $ 486,763 $ 523,755 $ 658,494 $1,061,528 $2,115,954 $2,794,009 $1,498,320
Cost of revenues.................. 350,647 377,494 485,955 789,436 1,518,287 1,988,315 1,077,408
----------- ----------- ----------- --------- --------- ----------- -----------
Gross profit.................. 136,116 146,261 172,539 272,092 597,667 805,694 420,912
Selling, general and
administrative expenses......... 124,065 132,320 152,176 231,569 488,215 646,867 344,474
Amortization expense.............. 601 733 801 2,711 12,416 25,138 8,072
Non-recurring acquisition costs... 8,057 8,001 8,001 7,316
Restructuring costs............... 682 4,201 4,201
----------- ----------- ----------- --------- --------- ----------- -----------
Operating income.............. 11,450 13,208 19,562 29,073 84,834 121,487 61,050
Interest expense.................. 2,914 2,519 3,401 8,132 36,047 103,996 27,540
Interest income................... (327) (411) (675) (3,506) (6,857) (6,048)
Other income...................... (1,463) (1,315) (1,456) (684) (4,233) (7,150) (4,073)
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 10,326 12,415 18,292 25,131 59,877 24,641 43,631
Provision for income taxes........ 1,594 1,727 2,800 6,032 27,939 18,481 18,238
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before extraordinary items...... 8,732 10,688 15,492 19,099 31,938 $ 6,160 25,393
-----------
-----------
Income from discontinued
operations, net of income taxes
(3)............................. 2,824 10,953 15,675 15,778 26,800 20,411
----------- ----------- ----------- --------- --------- -----------
Income before extraordinary
items........................... 11,556 21,641 31,167 34,877 58,738 45,804
Extraordinary items, net of income
taxes (4)....................... 701 1,450 612
----------- ----------- ----------- --------- --------- -----------
Net income........................ $ 11,556 $ 21,641 $ 31,167 $ 34,176 $ 57,288 $ 45,192
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Weighted average common shares
outstanding
Basic......................... 44,260 44,260 45,562 67,545 90,026 146,331(5) 85,978
Diluted....................... 44,260 44,260 45,704 68,374 91,761 148,066(5) 87,824
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.30
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.24 0.31 0.24
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.51 $ 0.64 $ 0.53
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.29
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.23 0.29 0.23
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.50 $ 0.62 $ 0.51
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Ratio of earnings to fixed charges
(6)............................. 2.1x 2.3x 2.5x 1.9x 2.0x 1.2x 2.0x
<CAPTION>
PRO FORMA PRO FORMA
JANUARY 24, JANUARY 25, JANUARY 24,
1998 1997 (2) 1998 (2)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $1,930,113 $2,087,861 $2,070,655
Cost of revenues.................. 1,390,855 1,487,711 1,481,421
----------- ----------- -----------
Gross profit.................. 539,258 600,150 589,234
Selling, general and
administrative expenses......... 436,037 483,908 467,356
Amortization expense.............. 13,830 18,415 18,433
Non-recurring acquisition costs... 7,316
Restructuring costs...............
----------- ----------- -----------
Operating income.............. 89,391 90,511 103,445
Interest expense.................. 27,534 77,997 77,997
Interest income................... (1,545)
Other income...................... (6,369) (6,730) (6,711)
----------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 69,771 19,244 32,159
Provision for income taxes........ 32,535 14,433 20,903
----------- ----------- -----------
Income from continuing operations
before extraordinary items...... 37,236 $ 4,811 $ 11,256
----------- -----------
----------- -----------
Income from discontinued
operations, net of income taxes
(3)............................. 25,464
-----------
Income before extraordinary
items........................... 62,700
Extraordinary items, net of income
taxes (4).......................
-----------
Net income........................ $ 62,700
-----------
-----------
Weighted average common shares
outstanding
Basic......................... 114,758 146,331(5) 146,331(5)
Diluted....................... 117,185 148,177(5) 148,757(5)
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.23
Extraordinary items...........
-----------
Net income.................... $ 0.55
-----------
-----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.22
Extraordinary items...........
-----------
Net income.................... $ 0.54
-----------
-----------
Ratio of earnings to fixed charges
(6)............................. 2.5x 1.2x 1.4x
</TABLE>
<TABLE>
<CAPTION>
JANUARY
APRIL 30, 24, 1998
------------------------------------------ APRIL 26, ---------
1993 1994 1995 1996 1997 ACTUAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 13,609 $ 51,344 $ 70,153 $ 274,124 $ 233,986 $ 107,120
Net assets of discontinued operations........................ 19,199 26,879 33,514 33,674 171,122 461,042
Total assets................................................. 130,666 172,656 259,904 805,978 1,706,991 2,469,442
Long-term debt, less current portion......................... 2,414 15,112 18,841 176,230 380,209 381,844
Stockholders' equity......................................... 27,986 77,735 128,512 394,746 921,148 1,472,922
<CAPTION>
PRO FORMA (7)
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 396,609
Net assets of discontinued operations........................
Total assets................................................. 2,006,085
Long-term debt, less current portion......................... 1,155,509
Stockholders' equity......................................... 590,792
</TABLE>
F-3
<PAGE>
- ------------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method (the "Purchased Companies") have been included from the dates of
their respective acquisitions. The pro forma financial data reflect purchase
acquisitions completed by the Company through March 20, 1998.
(2) Gives effect to the Strategic Restructuring Plan, the 2001 Note Offer, the
2003 Note Tender, the New Borrowings and the purchase acquisitions completed
by the Company since May 1, 1996 as if such transactions had been made on
May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of the Company's future operating results.
(3) The results of the companies included in the Distributions are reflected as
discontinued operations for all periods presented in the Company's
consolidated statement of income.
(4) Extraordinary items represent the losses associated with the early
terminations of credit facilities, net of the related income tax benefits.
(5) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 25,
1997 and January 24, 1998, see Notes to Pro Forma Combined Financial
Statements included elsewhere in this Proxy Statement.
(6) In computing the ratio of earnings to fixed charges: (i) earnings are based
on income from continuing operations before provision for income taxes and
extraordinary items and fixed charges; and (ii) fixed charges consist of
interest expense from continuing and discontinued operations, amortization
of deferred financing costs and the estimated interest component of rent
expense.
(7) Gives effect to the Strategic Restructuring Plan, the 2001 Note Offer, the
2003 Note Tender, the New Borrowings and the purchase acquisitions completed
by the Company subsequent to January 24, 1998 as if such transactions had
been made on January 24, 1998. The pro forma balance sheet data are not
necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of the Company's future financial position.
F-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. WHEN USED IN THIS PROXY STATEMENT, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," AND "EXPECT" AND SIMILAR
EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION
TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES. 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 BELOW UNDER THE HEADINGS "EFFECTS OF THE
PROPOSED SALE OF EQUITY SECURITIES AND THE STRATEGIC RESTRUCTURING PLAN" WITHIN
THE BODY OF THE PROXY STATEMENT, AND "FACTORS AFFECTING THE COMPANY'S BUSINESS"
BELOW.
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
historical financial statements and the pro forma combined financial statements
of the Company, including the related notes to each thereto, appearing elsewhere
in this Proxy Statement. The discussion of the Company's pro forma results of
operations is based on the assumptions and conditions described in the Pro Forma
Combined Financial Statements and the Notes thereto. The Company's audited
consolidated financial statements have been restated to reflect (i) the results
of the businesses to be spun off to shareholders in the Company's recently
announced Strategic Restructuring Plan as discontinued operations; and (ii) the
change in accounting treatment of the 22 business combinations completed during
the nine months ended January 24, 1998, from the pooling-of-interests method to
the purchase method.
In January 1998, the Company's Board of Directors approved the Strategic
Restructuring Plan. The principal elements of the Strategic Restructuring Plan
are (1) the Tender Offer and the incurrence of debt to pay a portion of the
purchase price in the Tender Offer; (2) after acceptance of shares in the Tender
Offer, the Distributions; and (3) the Equity Investment by Investor following
acceptance of shares in the Tender Offer and the record date for the
Distributions. In conjunction with the Strategic Restructuring Plan, the Company
plans to undertake the 2001 Note Offer, the 2003 Note Tender and the New
Borrowings. (Capitalized terms not defined herein shall have the meaning given
such term in the text of the Proxy Statement.)
As a result of the Strategic Restructuring Plan, the Company's consolidated
financial statements reflect the results of those companies to be owned by the
Spin-Off Companies (and thus included in the Distributions) as discontinued
operations. Assuming completion of the transactions contemplated by the
Strategic Restructuring Plan, the Company's continuing operations will consist
of its North American Office Products Group (which includes office supply,
office furniture, and coffee, beverage, and vending service businesses), its
Mail Boxes Etc. subsidiary (acquired in late November 1997), its operations in
New Zealand and Australia, and its 49% interest in Dudley Stationery Limited, a
U.K. contract stationer ("Dudley"). The Company's North American Office Products
Group operates primarily in the United States; it also includes three coffee and
beverage businesses located in Canada.
Except where specifically noted, the discussion of financial condition and
results of operations that appears below covers only the Company's continuing
operations, assuming completion of the transactions contemplated by the
Strategic Restructuring Plan. For additional information about the results of
discontinued operations, see Note 4 of the Company's Notes to Consolidated
Financial Statements.
The Company's continuing operations derived revenues primarily from the sale
of a wide variety of office supplies, office furniture, and other office
products (including coffee, beverage, and vending products and services) to
corporate, commercial and industrial customers. Cost of revenues represents the
purchase price for office supplies, office furniture and other office products
and includes occupancy and delivery costs and is reduced by rebates and
discounts on purchases.
F-5
<PAGE>
The Company's financial condition and results of operations have changed
dramatically from the Company's inception in October 1994 to January 24, 1998 as
a result of the Company's aggressive acquisition program. The Company completed
165 business combinations (144 related to continuing operations and 21 related
to discontinued operations) from its inception through the end of fiscal 1997,
54 of which were accounted for under the pooling-of-interests method (39 related
to continuing operations and 15 related to discontinued operations). During the
nine months ended January 24, 1998, the Company completed an additional 60
business combinations (40 related to continuing operations and 20 related to
discontinued operations). As a result of the Board's adoption of the Strategic
Restructuring Plan, all 60 business combinations completed during the nine
months ended January 24, 1998 are accounted for under the purchase method. Prior
to the adoption of the Strategic Restructuring Plan, 22 of these 60 business
combinations were accounted for under the pooling-of-interests method (12
related to continuing operations and 10 related to discontinued operations).
Following adoption of the Strategic Restructuring Plan, the Company restated its
historical consolidated financial statements to account for these 22 business
combinations under the purchase method (including the Company's acquisition of
Mail Boxes Etc.) The Company's consolidated financial statements give
retroactive effect to the business combinations accounted for under the
pooling-of-interests method during the fiscal year ended April 26, 1997 and
include the results of companies acquired in business combinations accounted for
under the purchase method from their respective acquisition dates.
Due to the Company's growth through acquisitions, year-to-year comparisons
of the historical results of the Company's operations have been affected
primarily by the addition of acquired companies. In most instances, these dollar
increases in the various revenues and expense components of the Company's
results are due primarily to growth from acquisitions. Neither the magnitude nor
the source of such year-to-year changes is necessarily indicative of changes
that will occur in the future. As a result of the Strategic Restructuring Plan,
the Company expects to focus more on improving and expanding existing
operations, and less on acquisitions as a means of growth. In any event, the
Company expects that the impact of acquisitions on the future results of the
Company's continuing operations will decrease because the size of companies that
it expects to be available for acquisition will be smaller than in prior periods
and the Company's existing operations are larger than in prior years.
F-6
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the fiscal years ended April 30, 1995 and 1996 and April 26, 1997 and for the
nine months ended January 25, 1997 and January 24, 1998, as well as for the
fiscal year ended April 26, 1997 and for the nine months ended January 25, 1997
and January 24, 1998 on a pro forma basis reflecting the Strategic Restructuring
Plan, the 2001 Note Offer, the 2003 Note Tender, the New Borrowings and the
results of the companies acquired between May 1, 1996 and March 20, 1998 in
business combinations accounted for under the purchase method as if such
transactions had occurred on May 1, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25, JANUARY 24, JANUARY 25,
1995 1996 1997 1997 1997 1998 1997
----------- ----------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............. 73.8 74.4 71.8 71.2 71.9 72.1 71.2
----- ----- ----- ----- ----- ----- -----
Gross profit 26.2 25.6 28.2 28.8 28.1 27.9 28.8
Selling, general and
administrative expenses.... 23.1 21.8 23.1 23.2 23.0 22.6 23.2
Amortization expense 0.1 0.3 0.6 0.9 0.5 0.7 0.9
Non-recurring acquisition
costs...................... 0.7 0.4 0.3 0.5 0.3
Restructuring charges........ 0.1 0.1 0.1
----- ----- ----- ----- ----- ----- -----
Operating income........... 3.0 2.7 4.0 4.3 4.1 4.6 4.4
Interest expense, net........ 0.4 0.4 1.4 3.7 1.5 1.3 3.8
Other income (loss).......... (0.2) (0.1) (0.2) (0.3) (0.3) (0.3) (0.3)
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 2.8 2.4 2.8 0.9 2.9 3.6 0.9
Provision for income taxes... 0.4 0.6 1.3 0.7 1.2 1.7 0.7
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before
extraordinary items........ 2.4 1.8 1.5 0.2% 1.7 1.9 0.2%
----- -----
----- -----
Discontinued operations, net
of income taxes............ 2.3 1.5 1.3 1.4 1.3
----- ----- ----- ----- -----
Income before extraordinary
items...................... 4.7 3.3 2.8 3.1 3.2
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes............... 0.1 0.1 0.1
----- ----- ----- ----- -----
Net income................... 4.7% 3.2% 2.7% 3.0% 3.2%
----- ----- ----- -----
----- ----- ----- ----- -----
-----
<CAPTION>
PRO FORMA
JANUARY 24,
1998
-------------
<S> <C>
Revenues..................... 100.0%
Cost of revenues............. 71.5
-----
Gross profit 28.5
Selling, general and
administrative expenses.... 22.6
Amortization expense 0.9
Non-recurring acquisition
costs......................
Restructuring charges........
-----
Operating income........... 5.0
Interest expense, net........ 3.8
Other income (loss).......... (0.3)
-----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 1.5
Provision for income taxes... 1.0
-----
Income from continuing
operations before
extraordinary items........ 0.5%
-----
-----
Discontinued operations, net
of income taxes............
Income before extraordinary
items......................
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes...............
Net income...................
</TABLE>
PRO FORMA RESULTS OF OPERATIONS
The Company's pro forma results of operations for the fiscal year ended
April 26, 1997 and the nine months ended January 25, 1997 and January 24, 1998
reflect significant decreases in net income and net income per share from the
amounts reported in the Company's historical consolidated financial statements.
The significant decreases can be attributed primarily to (i) substantially
higher amortization expenses as compared to prior periods (as a result of
reclassifying 12 business combinations as purchase acquisitions (including the
Company's acquisition of Mail Boxes Etc.), rather than under the pooling-of-
interests method, as the Company had expected when it completed those
acquisitions); (ii) substantially higher interest expense, as a result of
increased borrowing that the Company expects to incur to help finance the cost
of the Tender Offer; and (iii) higher effective income tax rates, due to
increased non-deductible goodwill expense. The pro forma results do not purport
to represent the results the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or of the future results of the Company.
F-7
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Consolidated revenues increased 28.8%, from $1,498.3 million for the nine
months ended January 25, 1997, to $1,930.1 million for the nine months ended
January 24, 1998. This increase was primarily due to acquisitions. Revenues for
the nine months ended January 24, 1998 include revenues from 111 companies
acquired in business combinations accounted for under the purchase method after
the beginning of fiscal 1997 (the "Fiscal 1997 and 1998 Purchased Companies").
Revenues for the nine months ended January 25, 1997 include revenues from 54 of
the Fiscal 1997 and 1998 Purchased Companies for a portion of such period. This
increase was partially offset by the effect on international revenues of the
devaluation of the New Zealand and Australian dollars versus the USD. Because
revenues generated in New Zealand and Australia contributed approximately
one-third of the Company's consolidated revenues during the nine months ended
January 24, 1998, management estimates that currency devaluation had the effect
of reducing the Company's reported consolidated revenues (in U.S. dollar terms)
by approximately 3.8%.
International revenues increased 36.5%, from $488.8 million, or 32.6% of
consolidated revenues, for the nine months ended January 25, 1997, to $667.4
million, or 34.6% of consolidated revenues, for the nine months ended January
24, 1998. The increase in international revenues was primarily due to the
inclusion, in the revenues for the nine months ended January 24, 1998, of
revenues from 31 companies that were acquired in business combinations accounted
for under the purchase method after the beginning of fiscal 1997, the most
significant of which was Whitcoulls Group Limited, which the Company's
wholly-owned subsidiary Blue Star Group Limited acquired in July 1996. Revenues
from 14 of such companies were included in international revenues for a portion
of the nine months ended January 25, 1997. The growth in international revenues
was partially reduced by a decline in the exchange rates of the New Zealand and
Australian dollars against the USD. The following table details the declines in
the average exchange rates of the New Zealand and Australian dollars versus the
USD for the nine months ended January 24, 1998 and January 25, 1997:
<TABLE>
<CAPTION>
AVERAGE EXCHANGE RATES FOR
THE NINE MONTHS ENDED
----------------------------
JANUARY 24, JANUARY 25,
1998 1997 DECLINE
------------- ------------- -----------
<S> <C> <C> <C>
New Zealand dollar............................................................. $ .64 $ .70 $ (.06)
Australian dollar.............................................................. $ .72 $ .79 $ (.07)
</TABLE>
International revenues in New Zealand and Australia, calculated in their
local currencies, increased 49.4% for the nine months ended January 24, 1998, as
compared to the nine months ended January 25, 1997. This increase was due
primarily to the inclusion, in the revenues for the nine months ended January
24, 1998, of revenues from the acquired companies discussed above.
Gross profit increased 28.1%, from $420.9 million for the nine months ended
January 25, 1997, to $539.3 million for the nine months ended January 24, 1998.
Gross profit as a percentage of revenues decreased from 28.1% for the nine
months ended January 25, 1997 to 27.9% for the nine months ended January 24,
1998. The slight decrease in gross profit as a percentage of revenues was due
primarily to a shift in revenue mix, primarily as a result of acquisitions, to
revenues from traditionally lower margin products and services, partially offset
by improved purchasing and rebate programs negotiated with vendors. The Company
expects to continue to negotiate favorable purchasing and rebate programs with
vendors. However, the Company does not believe that it will be able to continue
to improve these programs at the same rates as in the past, as significant
progress has already been made with vendors.
Selling, general and administrative expenses increased 26.6%, from $344.5
million for the nine months ended January 25, 1997, to $436.0 million for the
nine months ended January 24, 1998 primarily due to the inclusion of the results
of the Fiscal 1997 and 1998 Purchased Companies. Selling, general and
administrative expenses as a percentage of revenues decreased from 23.0% for the
nine months ended January 25, 1997 to 22.6% for the nine months ended January
24, 1998. The decrease in selling, general and administrative expenses as a
percentage of revenues was due to several factors, including (i) a shift in
F-8
<PAGE>
revenue mix, primarily as a result of acquisitions, to revenues from products
and services traditionally having lower selling, general and administrative
expenses; (ii) reductions in selling, general and administrative expenses by the
Company through the consolidation of certain redundant facilities and job
functions; and (iii) reductions in the costs of many general and administrative
expenses incurred by the Company through the negotiation of national or other
large-scale contracts with the providers of certain services affecting these
general and administrative expenses.
Amortization expense increased 71.3%, from $8.1 million for the nine months
ended January 25, 1997, to $13.8 million for the nine months ended January 24,
1998. This increase is due exclusively to the increase in the number of purchase
acquisitions, including the 12 acquisitions that were originally planned to be
accounted for under the pooling-of-interests method but were restated as
purchase acquisitions as a result of the Strategic Restructuring Plan, included
in the results for the nine months ended January 24, 1998 versus the nine months
ended January 25, 1997.
The Company incurred non-recurring acquisition costs of approximately $7.3
million during the nine months ended January 25, 1997, in conjunction with
business combinations that were accounted for under the pooling-of-interests
method. These non-recurring acquisition costs included accounting, legal and
investment banking fees, real estate and environmental assessments and
appraisals, various regulatory fees and recognition of transaction related
obligations. 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. In accordance with
generally accepted accounting principles, the Company will be unable to utilize
the pooling-of-interests method to account for acquisitions for a period of up
to 6-9 months following the completion of the Strategic Restructuring Plan.
During this period, the Company will not reflect any non-recurring acquisition
costs in its results of operations, as all costs incurred of this nature would
be related to acquisitions accounted for under the purchase method and would,
therefore, be capitalized as a portion of the purchase consideration.
Consistent with the objectives of the Strategic Restructuring Plan and as
part of the Company's increased focus on operational matters, the Company
expects to undertake cost reduction measures including the elimination of
duplicative facilities, the consolidation of certain operating functions, and
the deployment of common information systems. The implementation of the cost
reduction measures may involve the incurrence by the Company of certain
restructuring costs. However, at the present time, no formal plans to implement
any restructuring have been developed. Once developed, any such plans will
necessarily require review by the Company's senior management and the
implementation of such plans would not be initiated prior to the receipt of
proper authorization of the Company's Board of Directors. Based on the
additional time and resources expected to be involved in the development, review
and approval of any such restructuring plans, the Company cannot presently
predict if a restructuring charge will be incurred and, if incurred, the timing
or overall magnitude of such a charge.
Interest expense, net of interest income, increased 20.9% from $21.5 million
for the nine months ended January 25, 1997, to $26.0 million for the nine months
ended January 24, 1998. This was due primarily to a reduction in interest income
during the nine months ended January 24, 1998. The Company earned interest
income on the proceeds from the issuance of an aggregate of $230.0 million of
convertible subordinated notes in May and June of 1996 (the first quarter of
fiscal 1997). These proceeds were subsequently used to fund a portion of the
cash consideration used in business combinations. Interest expense has remained
relatively consistent, as steadily increasing borrowings and a declining cash
position have been offset by the repayment of debt from the proceeds of a stock
offering in January 1997 and declining interest rates.
Other income increased 56.4%, from $4.1 million for the nine months ended
January 25, 1997, to $6.4 million for the nine months ended January 24, 1998.
Other income for the nine months ended January 24, 1998 of $6.4 million
consisted primarily of a $4.7 million marketing fee, a gain on the sale of an
investment and the Company's 49% share of the net income of the Company's 49%
equity investment in Dudley. The Company acquired its 49% interest in Dudley in
November 1996. Other income for the nine months ended January 25, 1997 of $4.1
million consisted primarily of a foreign currency gain of $3.4 million. Although
management is pursuing additional opportunities to generate other income from
arrangements with third parties that desire access to the Company's distribution
network and customer base, management can not predict whether or when such
opportunities will be realized, or what amount of other income might be
available to the Company.
F-9
<PAGE>
YEAR ENDED APRIL 26, 1997 COMPARED TO THE YEAR ENDED APRIL 30, 1996
Consolidated revenues increased 99.3%, from $1,061.5 million in fiscal 1996,
to $2,116.0 million in fiscal 1997. This increase was primarily due to the
inclusion in fiscal 1997 revenues of revenues from the 91 companies related to
continuing operations that were acquired in business combinations accounted for
under the purchase method during fiscal 1997 (the "Fiscal 1997 Purchased
Companies") from their respective dates of acquisition and revenues from the 31
companies related to continuing operations that were acquired in business
combinations accounted for under the purchase method during fiscal 1996 (the
"Fiscal 1996 Purchased Companies") for the entire year. Revenues in fiscal 1996
include revenues from the Fiscal 1996 Purchased Companies from their respective
dates of acquisition.
International revenues increased from $84.8 million, or 8.0% of consolidated
revenues, in fiscal 1996, to $708.4 million, or 33.5% of consolidated revenues
in fiscal 1997. International revenues consisted primarily of revenues from New
Zealand and Australia, with the balance from Canada. The increase in
international revenues was primarily due to the inclusion, in the revenues for
fiscal 1997, of revenues from 15 companies that were acquired in business
combinations accounted for under the purchase method during fiscal 1997. Fiscal
1996 international revenues include the results of two companies for the entire
year and the results of two companies acquired in fiscal 1996 in business
combinations accounted for under the purchase method.
Gross profit increased 119.7%, from $272.1 million, or 25.6% of revenues, in
fiscal 1996, to $597.7 million, or 28.2% of revenues, in fiscal 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, primarily as a result of the
increase in products sold in New Zealand and Australia and as a result of
improved purchasing and rebate programs negotiated with vendors. The Company
expects to continue to negotiate favorable purchasing and rebate programs with
vendors. However, the Company does not believe that it will be able to continue
to improve these programs at the same rates as in the past, as significant
progress has already been made with vendors.
Selling, general and administrative expenses increased 110.8%, from $231.6
million, or 21.8% of revenues, in fiscal 1996, to $488.2 million, or 23.1% of
revenues, in fiscal 1997. The increase in selling, general and administrative
expenses as a percentage of revenues was due primarily to a shift in revenue mix
resulting in a higher proportion of revenues from products and services with
traditionally higher selling, general and administrative expenses, such as
products sold in New Zealand and Australia.
The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interests in the
Company, which also has the effect of more closely aligning their interests with
the interests of stockholders of the Company. As a result, if the Company had
recorded compensation expense based upon the fair market value of the stock
options on the dates of grant under the methodology prescribed by SFAS 123, the
Company's income from continuing operations for the fiscal year ended April 26,
1997 would have been reduced by approximately $12.6 million or 39.6%. The
Company believes that the adjustments to the employee stock options as a result
of the Strategic Restructuring Plan will result in a significant increase in the
number of stock options outstanding which may limit the number of stock options
available for grant to employees in the future. The Company believes that it
offers its employees market competitive compensation packages and does not
expect that a reduction in the number of stock options available to employees in
the future will have a material impact on the Company's ability to retain and
attract qualified employees.
Amortization expense increased from $2.7 million in fiscal 1996 to $12.4
million in fiscal 1997. This increase is due exclusively to the increase in the
number of purchase acquisitions included in the results for fiscal 1997 versus
fiscal 1996.
The Company incurred non-recurring acquisition costs of $8.1 million and
$8.0 million during fiscal 1996 and 1997, respectively, in conjunction with
business combinations accounted for under the pooling-of-interests method. The
non-recurring acquisition costs reflect the completion of 14 and 25 business
combinations accounted for under the pooling-of-interests method during fiscal
1996 and fiscal 1997, respectively. The non-recurring acquisition costs in
fiscal 1996 included a charge of approximately $4.7
F-10
<PAGE>
million related to one business combination which included the payment of
significant transaction-related compensation obligations.
The Company also incurred restructuring costs of approximately $682,000 and
$4.2 million during fiscal 1996 and 1997, respectively. These costs represent
the external costs and liabilities to close redundant Company facilities,
severance costs related to the Company's employees and other costs associated
with the Company's restructuring plans. The Company expects to incur similar
costs in the future as the Company continues to review its operations. On a
regional level, the Company is implementing regional consolidation and
integration plans for its office supply, office coffee and beverage services and
office furniture divisions through which the Company has established and expects
to continue to establish district fulfillment centers ("DFCs"). The DFCs are
intended to enable certain operational activities, such as inventory management,
purchasing, accounting and human resources, to be shared among hubs and spokes
located within the same geographic area. This regional approach is intended to
permit the elimination of duplicative facilities and costs and promote
integration of the operations within each region.
Interest expense, net of interest income, increased 531.0%, from $4.6
million in fiscal 1996, to $29.2 million in fiscal 1997. This increase was due
primarily to the increase in the Company's borrowings through the issuance of an
aggregate of $373.75 million of 5 1/2% Convertible Subordinated Notes (the
"Notes") during the fourth quarter of fiscal 1996 and the first quarter of
fiscal 1997 and an increase in the outstanding balance under the Company's
credit facility. The proceeds from the issuance of the Notes and the additional
borrowings under the credit facility were used primarily to fund the cash
portion of the consideration in certain business combinations accounted for
under the purchase method and to refinance indebtedness assumed in business
combinations.
Other income increased 518.9%, from $684,000 in fiscal 1996, to $4.2 million
in fiscal 1997. Fiscal 1997 other income consists primarily of foreign currency
gains and equity in the net income of the Company's 49% investment in Dudley,
the largest independent office products dealer in the United Kingdom. The
Company anticipates that the income from its equity investment will increase as
the fiscal 1997 amount represented earnings from November 14, 1996, the date of
the Company's investment, through April 26, 1997.
Provision for income taxes increased from $6.0 million in fiscal 1996 to
$27.9 million in fiscal 1997, reflecting effective income tax rates of 24.0% and
46.7%, respectively. The low effective income tax rate in fiscal 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 year, 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. In fiscal 1997, this effect was offset by the increase in
nondeductible expenses, including amortization of goodwill and non-recurring
acquisition costs.
Income from discontinued operations increased 69.9% from $15.8 million in
fiscal 1996 to $26.8 million in fiscal 1997. See Note 4 of the Company's Notes
to Consolidated Financial Statements.
During fiscal 1997, the Company incurred extraordinary items totaling $1.5
million, which represent the aggregate expenses, net of the expected tax
benefit, associated with the early termination of the Company's $50 million
credit facility with First Bank National Association and the early termination
of credit facilities at two companies acquired in transactions accounted for
under the pooling-of-interests method during fiscal 1997.
YEAR ENDED APRIL 30, 1996 COMPARED TO THE YEAR ENDED APRIL 30, 1995
Consolidated revenues increased 61.2%, from $658.5 million in fiscal 1995,
to $1,061.5 million in fiscal 1996. This increase was primarily due to the
inclusion in the revenues for fiscal 1996 of revenues from the Fiscal 1996
Purchased Companies from their respective dates of acquisition and revenues from
five companies that were acquired in business combinations accounted for under
the purchase method during fiscal 1995 (the "Fiscal 1995 Purchased Companies")
for the entire year. Revenues in fiscal 1995 include revenues from the Fiscal
1995 Purchased Companies from their respective dates of acquisition.
F-11
<PAGE>
International revenues increased from $35.7 million, or 5.4% of consolidated
revenues, in fiscal 1995, to $84.8 million, or 8.0% of consolidated revenues, in
fiscal 1996. This increase was primarily due to the inclusion in the revenues
for fiscal 1996 of revenues from two companies for the entire year and two
companies that were acquired in business combinations accounted for under the
purchase method during fiscal 1996.
Gross profit increased 57.7%, from $172.5 million, or 26.2% of revenues, in
fiscal 1995, to $272.1 million, or 25.6% of revenues, in fiscal 1996. The
decrease in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix, primarily resulting from acquisitions, to revenues in
traditionally lower gross margin products and services.
Selling, general and administrative expenses increased 52.2%, from $152.2
million, or 23.1% of revenues, in fiscal 1995, to $231.6 million, or 21.8% of
revenues, in fiscal 1996. The decrease in selling, general and administrative
expenses as a percentage of revenues was due primarily to a shift in revenue
mix, primarily resulting from acquisitions, to revenues in products and services
traditionally lower in selling, general and administrative expenses.
Amortization expense increased 238.5%, from $801,000 in fiscal 1995 to $2.7
million in fiscal 1996. This increase is due exclusively to the increase in the
number of purchase acquisitions included in the results for fiscal 1996 versus
fiscal 1995.
The Company incurred non-recurring acquisition costs of approximately $8.1
million in fiscal 1996, in conjunction with 14 business combinations accounted
for under the pooling-of-interests method. The non-recurring acquisition costs
in fiscal 1996 included a charge of approximately $4.7 million related to one
business combination which included the payment of significant
transaction-related compensation obligations. During fiscal 1996, the Company
also recorded restructuring charges of $682,000 related to the discontinuation
of the printing division at one subsidiary.
Interest expense, net of interest income, increased 69.7% from $2.7 million,
in fiscal 1995, to $4.6 million in fiscal 1996. This increase was due primarily
to the increase in the Company's borrowings through the issuance of $143.75
million of Notes during the fourth quarter of fiscal 1996 and an increase in the
outstanding balance on the Company's credit facility. The proceeds from the
issuance of the Notes and the additional borrowings from the credit facility
were used to fund the cash portion of the consideration in business combinations
and to refinance indebtedness assumed in such business combinations.
Provision for income taxes increased from $2.8 million in fiscal 1995 to
$6.0 million in fiscal 1996 reflecting effective income tax rates of 15.3% and
24.0%, respectively. The low effective income tax rates in fiscal 1995 and 1996,
compared to the federal statutory rate of 35.0%, are primarily due to the fact
that several companies included in the results for fiscal 1995 and 1996, 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.
Income from discontinued operations increased from $15.7 million in fiscal
1995 to $15.8 million in fiscal 1996.
During fiscal 1996, the Company incurred an extraordinary item of $701,000,
which represented the aggregate expenses, net of the expected tax benefit,
associated with the early termination of a credit facility at a company acquired
in a business combination accounted for under the pooling-of-interests method.
Basic and diluted income from continuing operations per share decreased $.06
from fiscal 1995 to fiscal 1996. These decreases are primarily the result of the
fact that U.S. Office Products began operations in February 1995 and the
majority of the results included prior to that date represented the results of
companies acquired in business combinations accounted for under the
pooling-of-interests method, many of which were subchapter S corporations. This
resulted in an effective income tax rate of 15.3% in fiscal 1995 versus 24.0% in
fiscal 1996. In addition, the Company incurred $8.1 million in non-recurring
acquisition costs and $682,000 in restructuring costs during fiscal 1996
compared to no such costs in fiscal 1995.
F-12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On a pro forma as adjusted basis, at January 24, 1998, the Company had
working capital of $396.6 million, long-term debt of $1,155.5 million and
capitalization of $1.7 billion. Such pro forma amounts give effect to the
Strategic Restructuring Plan, the 2001 Note Offer, the 2003 Note Tender and the
New Borrowings to be undertaken in conjunction with the Strategic Restructing
Plan and purchase acquisitions completed subsequent to January 24, 1998, and
through March 20, 1998, as if such transactions had occurred on January 24,
1998.
The Company anticipates that after the Strategic Restructuring Plan is
completed, its cash on hand, cash flow from operations and borrowings available
from its expected refinancing of its existing bank credit facility will be
sufficient to meet its liquidity requirements for its operations and capital
expenditures and for its additional debt service obligations for the remainder
of the calendar year. The Company does not currently anticipate that any
possible restructuring costs related to the Company's planned cost reduction
measures, coupled with the effects of such cost reduction measures, would have a
significant adverse effect on the Company's financial position, liquidity or
cash flows. The Company anticipates capital expenditures of approximately $40.0
million in both fiscal 1999 and fiscal 2000.
The existing credit facility provides the Company with a $500 million line
of credit, 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%. At March 20, 1998, the Company had
approximately $362.0 million outstanding under the Credit Facility, at an annual
interest rate of approximately 6.5%, and $138.0 million available under the
Credit Facility for acquisition and working capital purposes. Because certain
elements of the Strategic Restructuring Plan would violate covenants in the
Credit Facility, that facility will either have to be modified with the lenders'
consent or refinanced. The Company currently expects to finance the aggregate
cost of purchasing shares in the Tender Offer with the proceeds of the Equity
Investment, additional senior secured bank debt, and the net proceeds from the
issuance of subordinated debt securities. In connection with the completion of
the Strategic Restructuring Plan, the Company expects to incur approximately
$500 million of additional indebtedness. The Company also expects to incur
significant transaction (including financing) costs and expenses.
U.S. Office Products has agreed to and accepted a commitment letter from The
Chase Manhattan Bank, Bankers Trust Company, and Merrill Lynch Capital
Corporation, as agents, and Chase Securities Inc., BT Alex. Brown Incorporated
and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as co-arrangers, for a
new bank loan facility that will provide for an aggregate principal amount of
$1,225.0 million, consisting of (i) seven-year term loan facilities totaling up
to $300.0 million, (ii) an eight-year term loan in the principal amount of
$675.0 million, and (iii) a revolving credit facility in the principal amount of
$250.0 million. U.S. Office Products and the banks may agree to alter the
allocated principal amount of two or more of the loan facilities before signing
definitive documents depending on market conditions. The loan facilities will be
guaranteed by U.S. Office Products' material domestic subsidiaries and secured
by substantially all of the assets of U.S. Office Products and its material
domestic subsidiaries. U.S. Office Products will be required to enter into
arrangements to insure that the effective interest rate paid by U.S. Office
Products on at least 50% of its outstanding bank and subordinated debt will not
go above a certain rate. The loan documents will likely include financial and
other covenants. These will include, among others, restrictions on U.S. Office
Products' ability to incur additional indebtedness, sell assets, pay dividends
or engage in certain other transactions, and requirements that U.S. Office
Products maintain certain financial ratios, and other provisions customary for
loans to highly leveraged companies, including representations by U.S. Office
Products, conditions to funding, cost and yield protections, restricted payment
provisions, transfer provisions, amendment provisions and indemnification
provisions. The loan facilities will be subject to mandatory prepayment in a
variety of circumstances, including upon certain asset sales and financing
transactions. The commitment will terminate unless definitive loan documents are
entered into, and the Strategic Restructuring Plan and Financing Transactions
are completed, by June 30, 1998. As a result of the Company's increased
indebtedness, a portion of the cash flows from the Company's international
operations, will be required to service debt and interest payments. The Company
expects that it will incur additional costs with respect to accessing cash flows
from international operations including
F-13
<PAGE>
such items as New Zealand and Australian withholding and other taxes and foreign
currency hedging costs. In addition, the results of operations could be further
impacted by fluctuations in the New Zealand and Australian exchange rates as a
result of the structure of certain financing alternatives being evaluated by the
Company. The Company also expects to issue $400.0 million principal amount
senior subordinated notes in a private placement but has not received any
commitment with respect to such issuance.
The Company expects that the indenture governing the senior subordinated
notes will also place restrictions on the Company's ability to incur
indebtedness, to make certain payments, investments, loans and guarantees and to
sell or otherwise dispose of a substantial portion of its assets to, or merge or
consolidate with, another entity.
On a historical basis, the Company's working capital was $286.0 million at
April 26, 1997 and $134.0 million at January 24, 1998. Long-term debt was $380.2
million and $381.8 million at April 26, 1997 and January 24, 1998, respectively.
The decline in working capital was due primarily to an increase in the Company's
borrowings under its Credit Facility from $140.1 million at April 26, 1997 to
$330.0 million at January 24, 1998. The increase in the borrowings under the
Credit Facility was primarily to fund the purchase price of acquisitions and to
repay higher-cost debt assumed in acquisitions. Long-term debt increased during
the fiscal year ended April 26, 1997 as a result of the sales, in an offshore
offering and in a concurrent private placement in the United States, of the 2003
Notes in the principal amount of $230.0 million. The net proceeds were used for
working capital and acquisition purposes. In addition, the Company completed the
public sale, at a gross price of $22.00 per share, of approximately 13.0 million
shares of common stock. The net proceeds to the Company were approximately
$275.7 million and were used to repay a portion of the balance outstanding under
the Company's Credit Facility.
During the nine months ended January 24, 1998, the New Zealand and
Australian dollars weakened against the USD. The New Zealand exchange rate
declined from $0.69 USD at April 27, 1997 to $0.58 USD at January 24, 1998. The
Australian exchange rate declined from $0.78 USD at April 27, 1997 to $0.66 USD
at January 24, 1998. This resulted in a reduction in stockholders' equity,
through a cumulative translation adjustment, of approximately $105.5 million,
reflecting the impact of the declining exchange rate on the Company's
investments in its New Zealand and Australian subsidiaries. In addition, the
devaluation has adversely affected the return on the Company's investment in its
New Zealand and Australian operations. If the exchange rates stabilize at
current rates or continue to decline, the Company's return on assets and equity
from its New Zealand and Australian operations will continue to be depressed.
Subsequent to April 26, 1997 and through March 20, 1998, the Company
completed 67 business combinations (45 related to continuing operations and 22
related to discontinued operations) for an aggregate purchase price of $774.7
million, consisting of approximately $190.8 million of cash and 27.8 million
shares of the Company's common stock with an aggregate market value on the dates
of acquisition of approximately $583.9 million.
During the nine months ended January 24, 1998, net cash provided by
operating activities was $34.9 million. Net cash used in investing activities
was $97.6 million, including $33.6 million used for acquisitions, $28.2 million
used for additions to property and equipment and $40.8 million paid to Dudley to
satisfy the remaining commitment related to the Company's 49% equity investment
in Dudley. Net borrowings increased $62.6 million during the nine months ended
January 24, 1998, primarily to fund the purchase prices of acquisitions, to
repay higher-cost debt assumed in acquisitions and to fund the remaining equity
investment in Dudley. Discontinued operations used $3.8 million of cash during
the nine months ended January 24, 1998.
During the nine months ended January 25, 1997, net cash used in operating
activities was $9.2 million which resulted primarily from a decrease in accounts
payable due to the Company's aggressive policy of taking negotiated cash
discounts. Net cash used in investing activities was $390.5 million, including
$323.8 million used for acquisitions, $15.9 million used for additions to
property and equipment and $41.3 million paid to Dudley as the initial payment
related to the Company's 49% equity investment in Dudley. Net borrowings
increased $244.7 million during the nine months ended January 25, 1997,
primarily to fund the purchase prices of acquisitions, to repay higher-cost debt
assumed in acquisitions and to fund the initial equity investment in Dudley. The
Company also received $41.9 million in cash as a result of the sale of common
stock during the period. Discontinued operations used $3.2 million of cash
during the nine months ended January 25, 1997.
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<PAGE>
During fiscal 1997, net cash provided by operating activities was $15.8
million. Net cash provided by operating activities was impacted by the Company's
aggressive cash payment policies related to bringing current the accounts
payable balances at all acquired companies and earning all available cash
discounts offered by vendors for paying balances on reduced payment terms. Net
cash used in investing activities was $424.0 million, including $345.3 million
for acquisitions, $34.0 million for additions to property and equipment and
$41.3 million to make an equity investment in Dudley. Net cash provided by
financing activities was $277.4 million. The Company received net proceeds from
the sale of shares of its common stock of $318.9 million and approximately
$225.4 million from the issuance of the Notes. These net proceeds were used
primarily to fund acquisitions and repay higher interest rate debt assumed in
acquisitions. Net cash used in discontinued operations was $8.2 million.
During fiscal 1996, net cash provided by operating activities was $19.2
million. Net cash used in investing activities was $120.1 million, including
$89.2 million used for acquisitions and $17.9 million used for additions to
property and equipment. Net cash provided by financing activities was $257.8
million. The Company received net proceeds from the sale of shares of its common
stock of $180.2 million and net proceeds from the issuance of the Notes of
approximately $139.0 million. These net proceeds were used primarily to fund
acquisitions, including the repayment of higher interest rate debt assumed in
business combinations. Net cash provided by discontinud operations was $1.7
million.
During fiscal 1995, net cash provided by operating activities was $7.7
million. Net cash used in investing activities was $26.2 million, including
$16.0 million used for acquisitions and $11.0 million used for additions to
property and equipment. Net cash provided by financing activities was $22.3
million, representing net proceeds from the initial public offering, partially
offset by the payment of $11.3 million to the stockholders of four of the
companies acquired simultaneously with the completion of the Company's initial
public offering and the payment of dividends to certain of the companies
acquired in business combinations accounted for under the pooling-of-interests
method of $7.7 million. Net cash provided by discontinued operations was $3.5
million.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
seasonality of the core office products business, however, is expected to be
impacted by the seasonality of the Company's other operations, which have
expanded through acquisitions. For example, the revenues and profitability of
the Company's 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.
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.
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 in
accordance with generally accepted accounting principles of the Company's
consolidated financial statements for acquisitions accounted for under the
pooling-of-interests method. Moreover, the operating margins of companies
acquired by the Company may differ substantially from those of the Company,
which could contribute to the further fluctuation in its quarterly operating
results. 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.
The following tables set forth certain unaudited consolidated quarterly
financial data for the fiscal years ended April 30, 1996 and April 26, 1997 and
the fiscal year ending April 25, 1998 (in thousands, except for per share
amounts). The information has been derived from unaudited consolidated financial
F-15
<PAGE>
statements that in the opinion of management reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of such
quarterly information.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit....................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................... 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items.............................. 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations......... 3,387 5,550 7,727 (886) 15,778
Net income......................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.24
Net income..................................... 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.23
Net income..................................... 0.08 0.15 0.20 0.07 0.50
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
Gross profit....................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................... 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items.............................. 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations................ 9,475 8,933 2,003 6,389 26,800
Net income......................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.31
Net income..................................... 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.29
Net income..................................... 0.20 0.20 0.12 0.12 0.62
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 614,814 $ 649,340 $ 665,959 $ 1,930,113
Gross profit....................................... 170,782 179,256 189,220 539,258
Operating income................................... 23,802 28,300 37,289 89,391
Income from continuing operations before
extraordinary items.............................. 9,035 12,770 15,431 37,236
Income from discontinued operations................ 10,951 11,428 3,085 25,464
Net income......................................... 19,986 24,198 18,516 62,700
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.09 0.12 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.03 0.23
Net income..................................... 0.19 0.22 0.15 0.55
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.02 0.22
Net income..................................... 0.18 0.21 0.14 0.54
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1995, 1996 or 1997 or during the nine months
ended January 24, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. SFAS No. 128 requires restatement of all prior
period EPS data presented. The Company has adopted SFAS No. 128 during the nine
months ended January 24, 1998 and has restated all prior period EPS data.
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company intends to adopt SFAS
No. 130 in the fiscal year ending April 24, 1999.
FACTORS AFFECTING THE COMPANY'S BUSINESS
A number of factors, including those discussed below, may affect the
Company's future operating results. Where indicated, the following discussion
addresses factors that management believes will be applicable to the Company's
business upon completion of the Strategic Restructuring Plan.
Historically, U.S. Office Products has grown substantially through
acquisitions. U.S. Office Products' aggressive acquisition program has produced
a significant increase in sales, employees, facilities and
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<PAGE>
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 require additional costs and expenditures to expand operational
and financial systems and corporate management administration. Because of the
various costs and possible cost-savings strategies, historical operating results
may not be indicative of future performance. There also can be no assurance that
the pace of the Company's acquisitions will not adversely affect efforts to
implement cost-savings and integration strategies and to manage operations and
acquisitions profitably. Additionally, attempts to achieve economies of scale
through cost cutting and lay-offs of existing personnel may, at least in the
short term, have an adverse impact upon U.S. Office Products. Delays in
implementing planned integration and consolidation strategies, or the failure of
such strategies to achieve anticipated cost savings, also could adversely affect
the Company's results. In addition, there can be no assurance that U.S. Office
Products' management and financial controls, personnel, computer systems and
other corporate support systems will be adequate to manage the continuing
increase in the size and scope of the Company's operations and acquisition
activity.
U.S. Office Products intends to pursue future acquisition opportunities;
however, no assurance can be given that U.S. Office Products will identify,
finance and complete additional suitable acquisitions on acceptable terms, or
that future acquisitions, if completed, will be successful. U.S. Office Products
will likely incur additional debt to finance any additional acquisitions. In
addition, acquired companies may not achieve future sales and profitability
levels that justify the prices that U.S. Office Products paid to acquire them.
Acquisitions also may involve a number of special risks that could have a
material adverse effect on future operations and financial performance,
including diversion of management's attention; unanticipated declines in
revenues or profitability following acquisitions; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated business problems or legal liabilities; and the amortization of
acquired intangible assets, such as goodwill. Tax considerations may also
restrict the amount of stock that U.S. Office Products can use for acquisitions.
See "Effect of the Proposed Sale of Equity Securities and the Strategic
Restructuring Plan--We may be Unable to Issue Additional Stock in Some
Circumstances."
As a result of the Tender Offer and the Distributions, U.S. Office Products
will be precluded from completing business combinations under the
pooling-of-interests accounting method for a period up to 6-9 months. Any
business combinations that U.S. Office Products completes during this period
will have to be accounted for under the purchase method. Under the purchase
method of accounting, U.S. Office Products will have to record goodwill for each
such acquisition, in an amount equal to any excess of the purchase price paid
for the acquired company over the fair market value of the acquired company's
net assets. Under the pooling-of-interests method, no goodwill is recorded in
connection with the acquisition of a pooled company, and there is no
corresponding expense associated with the amortization of such goodwill.
Approximately $917.0 million, or 45.7% of the Company's pro forma total
assets as of January 24, 1998, represents intangible assets, the substantial
majority of which is goodwill. This amount will increase to the extent that U.S.
Office Products acquires additional companies under the purchase method of
accounting. The Company amortizes goodwill on a straight-line method over a
period of up to 40 years. The amount amortized in a particular fiscal period is
a non-cash expense that reduces the Company's net income. As a result of the
accounting for the acquisition of Mail Boxes Etc. ("MBE") under the purchase
method (rather than the pooling-of-interests method that had been intended at
the time of the acquisition), the Company's amortization charge will increase by
approximately $6.5 million annually. The substantial majority of goodwill also
is not a deductible expense for U.S. federal income tax purposes. The Company
expects that its effective tax rate will be higher than the federal statutory
rate, because its net earnings will be reduced by a significant amount of
non-deductible goodwill charges.
The Company is currently reviewing the year 2000 compliance of software that
it uses in its business. The Company's Trinity system, which it is currently
installing throughout its North American Office Products Group operations as the
core operations system, is year 2000 compliant. However, the Company's
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<PAGE>
operating subsidiaries are, in some cases, using billing or other software that
is not year 2000 compliant. Based upon information that the Company has
collected from its operating subsidiaries, it expects to be able to achieve year
2000 compliance in 1999 and does not expect that the cost of making necessary
adaptations will be material to the Company. If the Company cannot make the
necessary adaptations on a timely basis, or if the costs are greater than
expected, the Company's business could be adversely affected.
Management intends to continue to focus significant attention and resources
on international operations and expects foreign sales to continue to represent a
significant portion of U.S. Office Products' total sales. The factors described
in this section that apply to U.S. Office Products' domestic operations also may
affect U.S. Office Products' foreign operations. In addition, U.S. Office
Products' foreign operations are subject to a number of other risks, including
currency exchange rates; new and different legal and regulatory requirements in
local jurisdictions; tariffs and trade barriers; potential difficulties in
staffing and managing local operations; credit risk of local customers and
distributors; potential difficulties in protecting intellectual property,
potential imposition of restrictions on investments; potentially adverse tax
consequences, including imposition or increase of withholding and other taxes on
remittances and other payments by subsidiaries; and local economic, political
and social conditions, including the possibility of hyper-inflationary
conditions, in certain countries. There can be no assurance that one or a
combination of these factors will not have a material adverse impact on U.S.
Office Products' ability to maintain or increase its foreign sales or on its
business, financial condition or results of operations. See "Managements'
Discussion and Analysis of Financial Position and Results of
Operations--Liquidity and Capital Resources."
U.S. Office Products expects to incur substantial additional borrowings in
connection with the Tender Offer. See Note 1 of the Company's Notes to
Consolidated Financial Statements and "--Liquidity and Capital Resources." This
substantial increase in U.S. Office Products' leverage could have material
consequences to U.S. Office Products and the holders of common stock, including,
but not limited to, the following: (i) U.S. Office Products' ability to obtain
additional financing in the future for acquisitions, working capital, capital
expenditures, and general corporate or other purposes may be impaired, (ii) a
substantial portion of U.S. Office Products' cash flow will be required for debt
service and, as a result, will not be available for other purposes; and (iii)
U.S. Office Products' level of indebtedness could make it more vulnerable to
economic downturns, limit its ability to withstand competitive pressures and
reduce its flexibility in responding to changing business and economic
conditions. In addition, it is expected that the Company's financing agreements
will contain covenants that may restrict its ability to take certain actions
(such as buying or selling assets, paying dividends, making capital
expenditures, or engaging in other transactions). If U.S. Office Products is
unable to service its indebtedness, it will be forced to pursue one or more
alternative strategies, such as selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. The Company's management
does not have experience operating a business with a substantial amount of
leverage.
U.S. Office Products operates in a highly competitive environment. It
generally competes with a large number of smaller, independent companies, many
of which are well-established in their markets. In addition, in North America,
the North American Office Products Group competes with five large office
products companies, each of which has significant financial resources. No
assurances can be give that competition will not have an adverse effect on the
Company's business.
U.S. Office Products acquired MBE in November 1997. Various factors may
affect MBE's business, including recent changes in MBE's senior management, the
reliance of MBE franchisees on United Parcel Service for ground shipping
services, the limited control that MBE has over its franchisees, the impact of
government regulation of MBE as a franchisor, the historically litigious nature
of franchise relationships and the growing competition from the United States
Postal Service.
As part of the Strategic Restructuring Plan, it is expected that Investor
will acquire shares of U.S. Office Products common stock representing 24.9% of
the outstanding shares of the Company's common stock after giving effect to the
issuance of such shares. Investor also will purchase various warrants that
F-19
<PAGE>
give it the right to acquire additional shares of common stock in the future.
Under the Investment Agreement that Investor and the Company signed on January
12, 1998 (the "Investment Agreement"), Investor will have, among other things,
the right (subject to certain conditions) to nominate three of the nine members
of the U.S. Office Products Board of Directors, including the Chairman of the
Board, and certain Board decisions will be subject to super-majority voting
provisions that, in certain circumstances, may require the concurrence of at
least one director nominated by Investor. Matters subject to super-majority
Board approval include (i) the issuance of new shares in excess of certain
amounts specified in the Investment Agreement, (ii) certain business
combinations, (iii) a disposition by the Company of all or substantially all of
its assets, (iv) a major recapitalization, dissolution, or liquidation of the
Company, or (v) an amendment of the Company's charter or by-laws that is
inconsistent with the terms of the Investment Agreement. Investor's significant
ownership of U.S. Office Products common stock may permit Investor to influence
significantly matters requiring the approval of the Company's stockholders. The
super-majority Board voting requirements may give Investor the ability to block
the approval of certain actions requiring the super-majority vote of the Board.
Together, this ownership position and the Board voting requirements may have the
effect of discouraging (or possibly preventing) a future change in control of
U.S. Office Products. In addition, the super-majority Board voting requirement
may have the effect of limiting the Company's future use of equity to acquire
businesses, raise capital, or provide employees with long-term incentives.
TAX CONSEQUENCES OF THE DISTRIBUTIONS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions stating that for U.S. federal income tax
purposes the Distributions will qualify as tax-free spin-offs under Section 355
of the Code and will not be taxable under Section 355(e) of the Code. The
Company will not complete the Distributions unless it receives the Tax Opinion.
The Tax Opinion will be based on the accuracy as of the time of the
Distributions of factual representations made by the Company, the Spin-Off
Companies and Investor, and certain other data, documentation and other
materials that Wilmer, Cutler & Pickering has deemed necessary. See "Tax
Consequences of the Distributions" in the Proxy Statement.
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e), no gain or loss will be recognized by
the Company or the Company's stockholders (except with respect to cash received
in lieu of fractional shares) as a result of the Distributions.
If a Distribution fails to qualify as a tax-free spin-off under Section 355,
the Company will recognize gain equal to the difference between the fair market
value of the common stock of the Spin-Off Company and the Company's adjusted tax
basis in the common stock of the Spin-Off Company. In addition, holders of U.S.
Office Products common stock will be treated as having received a taxable
corporate distribution in an amount equal to the fair market value of the common
stock of the Spin-Off Company that you receive in the Distribution. If the
Company were to recognize gain on one or more Distributions, such gain would
likely be substantial.
If any Distribution is taxable under Section 355(e), but otherwise qualifies
as a tax-free spin-off, the Company will recognize gain equal to the difference
between the fair market value of the common stock of the Spin-Off Company and
the Company's adjusted tax basis in the common stock of the Spin-Off Company.
However, no gain or loss will be attributable to holders of U.S. Office
Products' common stock as the result of a Distribution being taxable under
Section 355(e). If the Company were to recognize gain on one or more
Distributions, such gain would likely be substantial.
Certain limitations under Section 355 may restrict the Company's ability to
issue capital stock after the Distributions. These limitations will generally
prevent the Company from issuing capital stock to the extent the issuance is
part of a plan, which includes a Distribution, pursuant to which one or more
people or organizations acquire capital stock of the Company that represents 50%
or more of the voting power or 50% or more of the value of the Company's capital
stock. These limitations may restrict the Company's ability to undertake
transactions involving issuances of capital stock of the Company that management
otherwise believes would be beneficial.
F-20
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to (i) the Equity
Self-Tender, (ii) the Distributions, and (iii) the Equity Investment
contemplated by the Strategic Restructuring Plan, (iv) the 2001 Note Offer, (v)
the 2003 Note Tender, (vi) the New Borrowings to be undertaken in conjunction
with the Strategic Restructuring Plan and (vii) all acquisitions completed
through March 20, 1998. The unaudited pro forma combined financial statements do
not give effect to the allocation of corporate overhead to the Spin-Off
Companies.
The pro forma combined balance sheet gives effect to (i) the Equity
Self-Tender, (ii) the Distributions, (iii) the Equity Investment, (iv) the 2001
Note Offer, (v) the 2003 Note Tender, (vi) the New Borrowings and (vii) the
businesses acquired by the Company after January 24, 1998 in business
combinations accounted for under the purchase method (the "Post January 24, 1998
Purchase Acquisitions"), as if all such transactions had occurred as of the
Company's most recent balance sheet date, January 24, 1998.
The pro forma combined statement of income for the nine months ended January
24, 1998 gives effect to (i) the Equity Self-Tender; (ii) the Distributions;
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; and (vii) the business combinations accounted for under
the purchase method during fiscal 1998 (the "Fiscal 1998 Purchase
Acquisitions"), as if all such transactions had occurred on April 27, 1997. The
pro forma combined statement of income for the nine months ended January 24,
1998 is comprised of (i) the unaudited financial information of the Company for
the nine months ended January 24, 1998; and (ii) the unaudited financial
information of the Fiscal 1998 Purchase Acquisitions for the period from April
27, 1997 through their respective acquisition dates, except for the financial
information of the Post January 24, 1998 Purchase Acquisitions which is included
through January 24, 1998.
The pro forma combined statement of income for the nine months ended January
25, 1997 gives effect to (i) the Equity Self-Tender; (ii) the Distributions;
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; (vii) the business combinations accounted for under the
purchase method during fiscal 1997 (the "Fiscal 1997 Purchase Acquisitions");
and (viii) the Fiscal 1998 Purchase Acquisitions, as if all such transactions
had occurred on May 1, 1996. The pro forma combined statement of income for the
nine months ended January 25, 1997 is comprised of (i) the unaudited financial
information of the Company for the nine months ended January 25, 1997; (ii) the
unaudited financial information of the Fiscal 1997 Purchase Acquisitions for the
period from May 1, 1996 through the earlier of January 25, 1997 or their
respective dates of acquisition; and (iii) the unaudited financial information
of the Fiscal 1998 Purchase Acquisitions for the period from May 1, 1996 through
January 25, 1997.
The pro forma combined statement of income for the fiscal year ended April
26, 1997 gives effect to (i) the Equity Self-Tender; (ii) the Distributions,
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; (vii) the Fiscal 1997 Purchase Acquisition; and (viii)
the Fiscal 1998 Purchase Acquisitions, as if all such transactions had occurred
on May 1, 1996. The pro forma combined statement of income for the year ended
April 26, 1997 is comprised of (i) the audited financial information of the
Company for the fiscal year ended April 26, 1997; (ii) the unaudited financial
information of the Fiscal 1997 Purchase Acquisitions for the period from May 1,
1996 through their respective dates of acquisition and (iii) the unaudited
financial information of the Fiscal 1998 Purchase Acquisitions for the period
from May 1, 1996 through April 26, 1997.
The historical financial statements of the Company give retroactive effect
to the results of the 25 companies (related to continuing operations) acquired
by the Company during the fiscal year ended
F-21
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
April 26, 1997 which were acquired in business combinations accounted for under
the pooling-of-interests method of accounting. The results of the companies
included in the Spin-Off Companies have been reflected as discontinued
operations in the Company's historical statement of income.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or the future results of the Company. The pro
forma combined financial statements should be read in conjunction with the
Company's audited consolidated financial statements.
F-22
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST
U.S. JANUARY 24, PRO FORMA ADJUSTMENTS
OFFICE 1998 ---------------------------------------------------
PRODUCTS PURCHASE PURCHASE EQUITY
COMPANY ACQUISITIONS ACCOUNTING SELF-TENDER DISTRIBUTIONS
---------- ------------- ----------- ------------- -------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 45,258 $ 108 $(22,754)(a) $ 907,388(b) $
70,000(b)
(1,000,000)(b)
Accounts receivable,
net.................. 324,976 5,077
Inventory, net......... 239,043 2,035
Prepaid and other
current assets....... 103,624 94 (1,447)(b)
---------- ------------- ----------- ------------- -------------
Total current
assets........... 712,901 7,314 (22,754) (24,059)
Property and equipment,
net.................... 217,228 6,144
Intangible assets, net... 903,722 13,255(a)
Other assets............. 174,549 317 (3,739)(b)
Net assets of
discontinued
operations:
Amounts to become
receivable upon the
Distributions........ 114,959 (114,959)(c)
All other net assets... 346,083 (346,083)(d)
---------- ------------- ----------- ------------- -------------
Total assets....... $2,469,442 $13,775 $ (9,499) $ (27,798) $(461,042)
---------- ------------- ----------- ------------- -------------
---------- ------------- ----------- ------------- -------------
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------
EQUITY 2001 NOTE 2003 NOTE PRO FORMA
INVESTMENT OFFER TENDER COMBINED
----------- ----------- ----------- ----------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 270,000(e) $ $ 217,350(h) $
(270,000)(e) (217,350)(h)
Accounts receivable,
net.................. 330,053
Inventory, net......... 241,078
Prepaid and other
current assets....... 102,271
----------- ----------- ----------- ----------
Total current
assets........... 673,402
Property and equipment,
net.................... 223,372
Intangible assets, net... 916,977
Other assets............. 30,000(f) (3,275) (g) (5,518)(h) 192,334
Net assets of
discontinued
operations:
Amounts to become
receivable upon the
Distributions........
All other net assets...
----------- ----------- ----------- ----------
Total assets....... $ 30,000 $ (3,275) $ (5,518) $2,006,085
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
F-23
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST PRO FORMA ADJUSTMENTS
U.S. OFFICE JANUARY 24, 1998 -----------------------------------------------
PRODUCTS PURCHASE PURCHASE EQUITY
COMPANY ACQUISITIONS ACCOUNTING SELF-TENDER DISTRIBUTIONS
----------- ---------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt............. $ 332,636 $ 640 $ (640)(a) $ $(114,959)(c)
Accounts payable............ 164,229 2,438
Accrued compensation........ 41,262
Other accrued liabilities... 67,654 1,742 (2,074 )(b)
(26,000 )(b)
----------- -------- ---------- ----------- -------------
Total current
liabilities........... 605,781 4,820 (640) (28,074 ) (114,959)
Long-term debt................ 381,844 3,817 (3,817)(a) 907,388 (b)
Deferred income taxes......... 2,845
Other long-term liabilities
and minority interests...... 6,050 96
----------- -------- ---------- ----------- -------------
Total liabilities....... 996,520 8,733 (4,457) 879,314 (114,959)
Stockholders' equity:
Common stock................ 133 (37 )(b)
5 (b)
Paid-in capital............. 1,463,523 69,995 (b) (314,514)(d)
(999,963 )(b)
65,000 (b)
Cumulative translation
adjustment................ (113,022)
Retained earnings
(deficit)................. 122,288 (3,112 )(b) (31,569)(d)
(39,000 )(b)
Equity of purchased
companies................. 5,042 (5,042)(a)
----------- -------- ---------- ----------- -------------
Total stockholders'
equity................ 1,472,922 5,042 (5,042) (907,112 ) (346,083)
----------- -------- ---------- ----------- -------------
Total liabilities and
stockholders'
equity................ $2,469,442 $ 13,775 $ (9,499) $ (27,798 ) $(461,042)
----------- -------- ---------- ----------- -------------
----------- -------- ---------- ----------- -------------
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------
EQUITY 2001 NOTE 2003 NOTE PRO FORMA
INVESTMENT OFFER TENDER COMBINED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt............. $(217,677)(e) $ $ $
Accounts payable............ 166,667
Accrued compensation........ 41,262
Other accrued liabilities... (1,311)(g) 2,853(h) 42,864
---------- ---------- ---------- ----------
Total current
liabilities........... (217,677) (1,311) 2,853 250,793
Long-term debt................ (52,323)(e) (143,750)(g) (230,000)(h) 1,155,509
75,000(f) 217,350(h)
Deferred income taxes......... 2,845
Other long-term liabilities
and minority interests...... 6,146
---------- ---------- ---------- ----------
Total liabilities....... (195,000) (145,061) (9,797) 1,415,293
Stockholders' equity:
Common stock................ 33(e) 12(g) 146
Paid-in capital............. 269,967(e) 168,897(g) 707,905
(15,000)(f)
Cumulative translation
adjustment................ (113,022 )
Retained earnings
(deficit)................. (30,000)(f) (25,159)(g) 7,590(h) (4,237 )
(1,964)(g) (3,311)(h)
Equity of purchased
companies.................
---------- ---------- ---------- ----------
Total stockholders'
equity................ 225,000 141,786 4,279 590,792
---------- ---------- ---------- ----------
Total liabilities and
stockholders'
equity................ $ 30,000 $ (3,275) $ (5,518) $2,006,085
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-24
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1998
PRODUCTS PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS COMBINED
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 1,930,113 $ 140,542 $ $ 2,070,655
Cost of revenues.................................. 1,390,855 90,566 1,481,421
------------ ----------- ------------- ------------
Gross profit.................................... 539,258 49,976 589,234
Selling, general and administrative expenses...... 436,037 33,676 (2,357 (i) 467,356
Amortization expense.............................. 13,830 4,603(j) 18,433
------------ ----------- ------------- ------------
Operating income................................ 89,391 16,300 (2,246) 103,445
Other (income) expense:
Interest expense................................ 27,534 506 49,957(k) 77,997
Interest income................................. (1,545) (169) 1,714(k)
Other........................................... (6,369) (342) (6,711)
------------ ----------- ------------- ------------
Income from continuing operations before provision
for income taxes................................ 69,771 16,305 (53,917) 32,159
Provision for income taxes........................ 32,535 2,161 (13,793 (l) 20,903
------------ ----------- ------------- ------------
Income from continuing operations................. $ 37,236 $ 14,144 $ (40,124) $ 11,256
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Weighted average shares outstanding:
Basic........................................... 114,758 146,331(m)
Diluted......................................... 117,185 148,757(m)
Income per share from continuing operations:
Basic........................................... $ 0.32 $ 0.08
Diluted......................................... $ 0.32 $ 0.08
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-25
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 1,498,320 $ 363,229 $ 226,312 $ $ 2,087,861
Cost of revenues........................................... 1,077,408 259,958 150,345 1,487,711
------------ ----------- ----------- ----------- ------------
Gross profit........................................... 420,912 103,271 75,967 600,150
Selling, general and administrative expenses............... 344,474 93,201 53,931 (7,698)(i) 483,908
Amortization expense....................................... 8,072 10,343(j) 18,415
Non-recurring acquisition costs............................ 7,316 7,316
------------ ----------- ----------- ----------- ------------
Operating income....................................... 61,050 10,070 22,036 (2,645) 90,511
Other (income) expense:
Interest expense......................................... 27,540 3,109 1,855 45,493(k) 77,997
Interest income.......................................... (6,048) (186) (1,017) 7,251(k)
Other.................................................... (4,073) (2,156) (501) (6,730)
------------ ----------- ----------- ----------- ------------
Income from continuing operations before provision for
income taxes and extraordinary items..................... 43,631 9,303 21,699 (55,389) 19,244
Provision for income taxes................................. 18,238 3,007 7,341 (14,153)(l) 14,433
------------ ----------- ----------- ----------- ------------
Income from continuing operations before extraordinary
items.................................................... $ 25,393 $ 6,296 $ 14,358 $ (41,236) $ 4,811
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
Weighted average shares outstanding:
Basic.................................................... 85,978 146,331(m)
Diluted.................................................. 87,824 148,177(m)
Income per share from continuing operations before
extraordinary items:
Basic.................................................... $ 0.30 $ 0.03
Diluted.................................................. $ 0.29 $ 0.03
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-26
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................................... $ 2,115,954 $ 374,886 $ 303,169 $ $ 2,794,009
Cost of revenues....................................... 1,518,287 268,618 201,410 1,988,315
------------ ------------ ------------ ------------ ------------
Gross profit....................................... 597,667 106,268 101,759 805,694
Selling, general and administrative expenses........... 488,215 95,913 70,996 (8,257)(i) 646,867
Amortization expense................................... 12,416 12,722(j) 25,138
Non-recurring acquisition costs........................ 8,001 8,001
Restructuring costs.................................... 4,201 4,201
------------ ------------ ------------ ------------ ------------
Operating income................................... 84,834 10,355 30,763 (4,465) 121,487
Other (income) expense:
Interest expense..................................... 36,047 3,170 2,552 62,227(k) 103,996
Interest income...................................... (6,857) (212) (1,448) 8,517(k)
Other................................................ (4,233) (2,164) (753) (7,150)
------------ ------------ ------------ ------------ ------------
Income from continuing operations before provision for
income taxes and extraordinary items................. 59,877 9,561 30,412 (75,209) 24,641
Provision for income taxes............................. 27,939 3,056 9,933 (22,447)(l) 18,481
------------ ------------ ------------ ------------ ------------
Income from continuing operations before extraordinary
items................................................ $ 31,938 $ 6,505 $ 20,479 $ (52,762) $ 6,160
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
------------
Weighted average shares outstanding:
Basic................................................ 90,026 146,331(m)
Diluted.............................................. 91,761 148,066(m)
Income per share from continuing operations before
extraordinary items:
Basic................................................ $ 0.35 $ 0.04
Diluted.............................................. $ 0.35 $ 0.04
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-27
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments and repayment of
certain short-term and long-term debt associated with the Post January
24, 1998 Purchase Acquisitions. The portion of the consideration assigned
to goodwill ($13,255) in transactions accounted for under the purchase
method represents the excess of the cost over the fair market value of
the net assets acquired. The Company amortizes goodwill over a period of
40 years. The recoverability of the unamortized goodwill will be assessed
on an ongoing basis by comparing anticipated undiscounted future cash
flows from operations to net book value.
(b) Adjustment to reflect the Equity Self-Tender, including the repurchase
of 37,037 shares of common stock (including shares underlying employee
stock options) by the Company for $1,000,000 and reduced by the proceeds
from the exercise of employee stock options related to shares
participating in the Equity Self-Tender of $70,000. The funds to finance
the net $930,000 cost of the Equity Self-Tender are expected to be
obtained from New Borrowings of $907,388 and cash on hand of $22,612. As
a result of the New Borrowings, the adjustment also reflects the
write-off of $5,186 in short-term and long-term capitalized debt issue
costs related to the Company's current credit facility. The Company
estimates that the proceeds from the exercise of employee stock options
will be approximately $70,000 based upon 5,000 employee stock options
exercised at an average exercise price of $14.00 per share. As a result
of the Company allowing for the conditional exercise of employee stock
options tendered pursuant to the Equity Self-Tender, such tendered stock
options take on the characteristics of a combination plan during the
Equity Self-Tender period (the "Deemed Combination Plan"). Combination
plans are those that provide stock appreciation rights ("SARs") in
combination with typical stock options. To the extent that the
optionholder exercises the SAR provisions, the companion stock options
are canceled. Compensation expense is recorded for cash payments made
upon exercise of the deemed SARs. Upon completion of the Equity
Self-Tender, stock options not accepted pursuant to the Equity
Self-Tender revert to fixed option awards with terms identical to those
prior to commencement of the Equity Self-Tender. The terms of the Equity
Self-Tender, including the number of shares to be repurchased in relation
to the total number of shares and options outstanding and the stated
tender price in relation to the current market price of the Company's
common stock, provide persuasive evidence that only a portion of the
Deemed Combination Plan awards will be extinguished via payment under the
deemed SAR provisions. The Company estimates that the compensation
expense related to the option shares purchased in the Equity Self-Tender
will range from $65,000 to $72,000, assuming management's estimate of the
likely range of acceptance rates for the Equity Self-Tender of 22.5% to
25.0% of the total number of shares (including shares underlying options)
tendered. For purposes of the pro forma combined balance sheet, the
Company has reflected the after-tax compensation expense of $39,000
($65,000 before benefit from income taxes) as a reduction to retained
earnings. Additionally, other accrued liabilities has been decreased by
$26,000 to reflect the expected income tax benefit and additional paid-in
capital has been increased by $65,000. The Company has not included this
compensation expense in the unaudited pro forma combined statements of
income because it is of a non-recurring nature and is directly related to
the restructuring transaction.
(c) Adjustment to reflect the collection of $114,959 of receivables from the
Spin-Off Companies at the date of the Distributions.
F-28
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
(d) Adjustment to remove the remaining net assets of the Spin-Off Companies.
(e) Adjustment to reflect the issuance of 33,489 shares of common stock in
conjunction with the Equity Investment of $270,000. The Company has made
certain preliminary calculations in relation to the allocation of the
proceeds to be received from Investor to the related common stock, the
Warrants and the Special Warrants. These calculations cannot be finalized
until the trading value of the Company's common stock immediately
following the Distributions is available. The Company intends to reflect
any amounts allocated to the Warrants and the Special Warrants in
additional paid-in capital. The preliminary assessment of the fair value
of the Warrants at the future grant date was determined using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
WARRANTS
-----------
<S> <C>
Expected life...................................................................... 9 years
Risk free interest rate............................................................ 5.6%
Expected volatility of Company common stock........................................ 40%
Dividend rate...................................................................... 0%
</TABLE>
With respect to the Special Warrants, the Company's calculations assumed
that all holders of the 2001 Notes accept the 2001 Note Offer. The
Company does not anticipate assigning a value to the Special Warrants at
the time of the Equity Investment by Investor because (i) the 2001 Note
Offer is expected to have been completed prior to such Equity Investment;
and (ii) the other potential events which could give rise to the exercise
of the Special Warrants are considered by the Company to be contingent in
nature.
Based on the above assumptions, the Company's preliminary calculations
indicate that approximately $203,700 of the proceeds from the Equity
Investment will be allocated to the shares of Company common stock issued
to Investor, $66,300 will be allocated to the Warrants and no value will
be allocated to the Special Warrants. In arriving at these values, no
discount was applied to the value of the Warrants to reflect the
illiquidity of the Warrants pursuant to SFAS No. 123 issued by FASB.
(f) Adjustment to reflect the estimated transaction fees and expenses
(including financing costs) associated with the Equity Self-Tender, the
Distributions, the Equity Investment and the New Borrowings of $75,000.
Of this amount, $30,000 of debt issue costs will be capitalized. These
fees and expenses have not been reflected in the unaudited pro forma
combined statements of income because they are either capitalizable or
are of a non-recurring nature and are directly related to the Strategic
Restructuring Plan.
(g) Adjustment to reflect the issuance of 11,837 shares of common stock in
conjunction with the 2001 Note Offer, consisting of 8,890 shares of
common stock issued in exchange for 2001 Notes and 2,947 shares of common
stock to Investor in accordance with the provisions of the Special
Warrants. As a result of the 2001 Note Offer, the Company will issue
1,324 shares of common stock over the contractual amount with a market
value of $25,159 to induce conversion of the 2001 Notes. The $25,159 has
been reflected as a reduction in retained earnings as the market value of
the inducement is required to be recorded as an expense. In addition, the
adjustment
F-29
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
reflects the write-off of $3,275 in capitalized debt issue costs related
to the 2001 Notes. These expenses have not been reflected in the
unaudited pro forma combined statements of income because they are of a
non-recurring nature and are directly related to the Strategic
Restructuring Plan.
(h) Adjustment to reflect the early extinguishment of the 2003 Notes,
$230,000 principal amount, in exchange for $217,350 in cash in the 2003
Note Tender. The Company believes that it will be able to retire the 2003
Notes at a price of 94.5% of par value, or $217,350, resulting in an
extraordinary gain of $7,590, net of income taxes of $5,060, which has
been reflected as an increase to retained earnings. In addition, the
adjustment reflects the write-off of $5,518 in capitalized debt issue
costs related to the 2003 Notes. The gain and write-off have not been
reflected in the unaudited pro forma combined statements of income
because they are extraordinary items and are directly related to the
Strategic Restructuring Plan.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(i) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations
of executive compensation agreements resulting from certain acquisitions.
The Company believes that these reductions are expected to remain in
place for the forseeable future and are not reasonably likely to affect
operating performance.
(j) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1997
Purchase Acquisitions and the Fiscal 1998 Purchase Acquisitions for the
periods prior to the respective dates of acquisition. The Company has
recorded goodwill amortization in the historical financial statements
from the respective dates of acquisition forward. The goodwill is being
amortized over an estimated life of 40 years.
(k) Adjustment to reflect the increase in interest expense, at a weighted
average rate of 9.0%, resulting from the increase in debt outstanding to
$1,155,509 as a result of the Equity Self-Tender, partially offset by the
proceeds from the Equity Investment, and the effects of the 2001 Note
Offer and the 2003 Note Tender assuming full exchange and tender,
respectively. The weighted average interest rate of 9.0% was determined
based upon $755,509 outstanding under the terms of the new bank loan
facility at annual interest rates of LIBOR plus margins ranging from
2.25% to 2.5% (approximately 7.9% to 8.15%) and the issuance of $400,000
of senior subordinated notes at an annual interest rate of approximately
9.0%, plus commitment fees on unused balances and amortization of the
related debt issue costs. Pro forma interest expense will fluctuate
$5,778 on an annual basis for each 0.5% change in interest rates.
Depending on market conditions at the time the senior subordinated notes
are offered and when funds are borrowed under the new bank loan facility,
the interest rates may vary from those indicated herein.
(l) Adjustment to calculate the provision for income taxes on the combined
pro forma results at effective income tax rates of approximately 75%, 65%
and 75% for the fiscal year ended April 26, 1997 and the nine months
ended January 24, 1998 and January 25, 1997, respectively. The difference
between the effective tax rates and the statutory tax rate of 35% relates
primarily to state income taxes and non-deductible goodwill amortization
expense. This adjustment assumes
F-30
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
that all companies were taxed at the effective tax rates regardless of
how they were taxed prior to being acquired by the Company, including
those companies that previously paid no taxes under Subchapter S.
(m) Basic pro forma earnings per share is calculated based upon 146,331
weighted average shares of common stock outstanding for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997. The amounts are comprised of 133,042 shares outstanding for each of
the periods, 37,037 shares repurchased as a result of the Equity
Self-Tender, the issuance of 36,436 shares as a result of the Equity
Investment, the issuance of 5,000 shares related to employee stock
options participating in the Equity Self-Tender and the issuance of 8,890
shares as a result of the 2001 Note Offer, assuming full conversion. The
weighted average shares outstanding used to calculate diluted pro forma
earnings per share is based upon the basic weighted average shares
outstanding plus 1,735, 2,426 and 1,846 common stock equivalents
considered to be outstanding related to stock options for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997, respectively.
F-31
<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 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 26, 1997 and April 30, 1996, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended April 26, 1997, 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
certain wholly-owned subsidiaries, which statements reflect net income of $7.4
million and $10.4 million included in the Company's income from discontinued
operations, net of income taxes, for fiscal years ended April 30, 1996 and 1995,
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 those wholly-owned subsidiaries, 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.
As described in Note 4, as a result of the Strategic Restructuring Plan, the
Company has restated its financial statements to account for certain business
combinations as purchase transactions.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
June 6, 1997, except as to the second paragraph
of the Common Stock section of Note 15, which
is as of November 6, 1997 and Note 4, which is
as of January 13, 1998
F-32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the 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 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. 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.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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.
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 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.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 8, 1996
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hano Document Printers, Inc.:
We have audited the balance sheet of Hano Document Printers, Inc. as of
December 31, 1995 and the related statements of income, stockholders' equity,
and cash flows for the year then ended, which are not included 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. 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 audit provides 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 Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SFI Corp. and Hano Document Printers, Inc.:
We have audited the combined balance sheet of SFI Corp. and Hano Document
Printers, Inc. (collectively referred to as the "Companies") as of December 31,
1994, and the related statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1994, which are
not included herein. These combined financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of SFI Corp. and Hano
Document Printers, Inc. as of December 31, 1994 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Fortran Corp.
Newington, Virginia
We have audited the accompanying 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 the 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to and above present
fairly, in all material respects, the financial position of Fortran Corp. as of
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.
RUBIN, KOEHMSTEDT AND NADLER
Springfield, Virginia
June 7, 1996, except for Note 9,
as to which the date is
October 24, 1996
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MTA, Inc.
Seattle, Washington
We have audited the consolidated balance sheet of MTA, Inc. (the Company) as
of December 31, 1995 and the related statements of income and retained earnings
and of cash flows for the period from January 25, 1995 (date of incorporation)
to December 31, 1995 (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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTA, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the period from January 25, 1995 (date of incorporation) to December 31, 1995,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
September 23, 1996
F-38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheets of United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc., as at December 31, 1995 and 1994, and the
related combined statements of income and retained earnings 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 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. 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.
As referred to in Note A on "Principles of Combination," the companies,
whose financial statements are combined, are related through common ownership
and control. In addition, each has pledged certain assets and guaranteed
long-term indebtedness of the other as described in the notes to financial
statements. In view of their close operating and financial relationship, the
preparation of combined financial statements was considered appropriate. The
combined statements, however, do not refer to a legal entity and neither of the
companies guarantees trade obligations of the other.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of United
Envelope Co., Inc. and its affiliate as at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Huxley Envelope Corporation
We have audited the balance sheets of Huxley Envelope Corporation as of
December 31, 1995 and 1994, and the related statements of income and retained
earnings (accumulated 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 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. 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 Huxley Envelope Corporation
as of 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.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 4, 1996
F-40
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 183,483 $ 44,026 $ 45,258
Accounts receivable, less allowance for doubtful accounts of $3,586,
$7,337 and $9,110, respectively....................................... 159,448 283,751 324,976
Inventory............................................................... 103,768 225,998 239,043
Prepaid expenses and other current assets............................... 47,994 74,580 103,624
---------- ------------ ------------
Total current assets................................................ 494,693 628,355 712,901
Property and equipment, net............................................... 77,529 182,633 217,228
Intangible assets, net.................................................... 135,140 611,474 903,722
Other assets.............................................................. 64,942 113,407 174,549
Net assets of discontinued operations:
Amounts to become receivable upon the Distributions..................... 87,700 114,959
All other net assets.................................................... 33,674 83,422 346,083
---------- ------------ ------------
Total assets........................................................ $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt......................................................... $ 94,174 $ 144,125 $ 332,636
Accounts payable........................................................ 87,546 153,915 164,229
Accrued compensation.................................................... 16,775 32,515 41,262
Other accrued liabilities............................................... 22,074 63,814 67,654
---------- ------------ ------------
Total current liabilities........................................... 220,569 394,369 605,781
Long-term debt............................................................ 176,230 380,209 381,844
Deferred income taxes..................................................... 6,186 2,458 2,845
Other long-term liabilities and minority interests........................ 8,247 8,807 6,050
---------- ------------ ------------
Total liabilities................................................... 411,232 785,843 996,520
---------- ------------ ------------
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,
79,464,423, 104,479,004 and 133,041,979 shares issued and outstanding,
respectively.......................................................... 79 104 133
Additional paid-in capital.............................................. 319,906 867,039 1,463,523
Cumulative translation adjustment....................................... 770 (5,583) (113,022)
Retained earnings....................................................... 73,991 59,588 122,288
---------- ------------ ------------
Total stockholders' equity.......................................... 394,746 921,148 1,472,922
---------- ------------ ------------
Total liabilities and stockholders' equity.......................... $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ 658,494 $1,061,528 $2,115,954 $1,498,320 $1,930,113
Cost of revenues..................................... 485,955 789,436 1,518,287 1,077,408 1,390,855
----------- --------- --------- ----------- -----------
Gross profit..................................... 172,539 272,092 597,667 420,912 539,258
Selling, general and administrative expenses......... 152,176 231,569 488,215 344,474 436,037
Amortization expense................................. 801 2,711 12,416 8,072 13,830
Non-recurring acquisition costs...................... 8,057 8,001 7,316
Restructuring costs.................................. 682 4,201
----------- --------- --------- ----------- -----------
Operating income................................. 19,562 29,073 84,834 61,050 89,391
Interest expense..................................... 3,401 8,132 36,047 27,540 27,534
Interest income...................................... (675) (3,506) (6,857) (6,048) (1,545)
Other income......................................... (1,456) (684) (4,233) (4,073) (6,369)
----------- --------- --------- ----------- -----------
Income from continuing operations before provision
for income taxes and extraordinary items........... 18,292 25,131 59,877 43,631 69,771
Provision for income taxes........................... 2,800 6,032 27,939 18,238 32,535
----------- --------- --------- ----------- -----------
Income from continuing operations before
extraordinary items................................ 15,492 19,099 31,938 25,393 37,236
Income from discontinued operations, net of income
taxes.............................................. 15,675 15,778 26,800 20,411 25,464
----------- --------- --------- ----------- -----------
Income before extraordinary items.................... 31,167 34,877 58,738 45,804 62,700
Extraordinary items--losses on early terminations of
credit facilities, net of income taxes............. 701 1,450 612
----------- --------- --------- ----------- -----------
Net income........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.30 $ 0.32
Income from discontinued operations.............. 0.34 0.24 0.31 0.24 0.23
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net income....................................... $ 0.68 $ 0.51 $ 0.64 $ 0.53 $ 0.55
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Diluted:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.29 $ 0.32
Income from discontinued operations.............. 0.34 0.23 0.29 0.23 0.22
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net Income....................................... 0.68 $ 0.50 $ 0.62 $ 0.51 $ 0.54
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Unaudited pro forma income from continuing operations
before extraordinary items (see Note 11)........... $ 29,962
---------
---------
Unaudited pro forma basic income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
Unaudited pro forma diluted income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------ PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
---------- ------ ---------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994............... 38,443,262 $ 38 $26,483 $ (340) $ 58,733 $ (7,562) $77,352
Transactions of Combined Companies
upon formation of Company:
Issuance of common stock............ 5,817,000 6 (5) 1
Capital contribution................ 1,500 1,500
Distributions to stockholders....... (11,300) (11,300)
Adjustments to stockholders'
equity............................ (12,597) 5,035 7,562
Cash dividends...................... (222) (222)
Issuance of common stock, net of
associated expenses in conjunction
with:
Initial public offering............. 5,606,250 6 32,684 32,690
Acquisition......................... 1,312,500 1 8,749 8,750
Transactions of Pooled Companies:
Exercise of warrants and stock
options........................... 20,345 201 201
Cash dividends...................... (16,086) (16,086)
Adjustment to conform the year-ends of
Pooled Companies.................... 2,235 2,235
Cumulative translation adjustments.... 207 207
Net income............................ 31,167 31,167
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1995............... 51,199,357 51 57,015 (133) 69,562 126,495
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offerings.................... 14,352,068 14 174,723 174,737
Acquisitions........................ 11,120,163 11 68,607 68,618
Exercise of stock options, including
tax benefits...................... 95,025 1,023 1,023
Transactions of Pooled Companies:
Issuances of common stock for cash
and repayment of debt............. 872,249 1 8,297 8,298
Capital contributions............... 500 500
Exercise of warrants and stock
options........................... 978,923 1 1,752 1,753
Cash and stock dividends............ 846,638 1 1,361 (32,017) (30,655)
Undistributed earnings of Subchapter S
corporations acquired in pooling-of-
interests business combinations..... 6,628 (6,628)
Adjustment to conform the year-ends of
Pooled Companies.................... 8,898 8,898
Cumulative translation adjustments.... 903 903
Net income............................ 34,176 34,176
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1996............... 79,464,423 79 319,906 770 73,991 394,746
</TABLE>
(Continued)
F-43
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
-------------------------- PAID-IN TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK
------------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996................ 79,464,423 $ 79 $ 313,278 $ 770 $ 80,619
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 13,023,497 13 275,699
Direct equity investment............. 1,875,000 2 38,111
Acquisitions......................... 8,685,450 9 166,071
Exercise of stock options, including
tax benefits....................... 197,742 2,843
Employee stock purchase plan......... 229,998 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 409,631 6,859
Capital contributions................ 12,342 1,857
Exercise of warrants and stock
options............................ 478,616 1 1,979
Retirement of common stock........... 102,305 (443) (34)
Cash dividends paid and declared..... (20,931)
Undistributed earnings of Subchapter S
corporations acquired in
pooling-of-interests business
combinations......................... 57,640 (57,640)
Adjustment to conform the year-ends of
Pooled Companies..................... 286
Cumulative translation adjustments..... (6,353)
Net income............................. 57,288
------------- ----- ------------ ----------- ---------- -----------
Balance at April 26, 1997................ 104,479,004 104 867,039 (5,583) 59,588
Unaudited data:
Issuance of common stock, net of
associated expenses in conjunction
with:
Acquisitions......................... 27,792,099 28 585,509
Repayment of debt.................... 28,179 570
Exercise of stock options, including
tax benefits....................... 609,494 1 7,600
Employee stock purchase plan......... 169,723 2,805
Share adjustments at Pooled
Companies............................ (36,520)
Cumulative translation adjustments..... (107,439)
Net income............................. 62,700
------------- ----- ------------ ----------- ---------- -----------
Balance at January 24, 1998
(unaudited)............................ 133,041,979 $ 133 $ 1,463,523 $ (113,022) $ 122,288
------------- ----- ------------ ----------- ---------- -----------
------------- ----- ------------ ----------- ---------- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance at April 30, 1996................ $ 394,746
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 275,712
Direct equity investment............. 38,113
Acquisitions......................... 166,080
Exercise of stock options, including
tax benefits....................... 2,843
Employee stock purchase plan......... 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 6,859
Capital contributions................ 1,857
Exercise of warrants and stock
options............................ 1,980
Retirement of common stock........... (477)
Cash dividends paid and declared..... (20,931)
Undistributed earnings of Subchapter S
corporations acquired in
pooling-of-interests business
combinations.........................
Adjustment to conform the year-ends of
Pooled Companies..................... 286
Cumulative translation adjustments..... (6,353)
Net income............................. 57,288
------------
Balance at April 26, 1997................ 921,148
Unaudited data:
Issuance of common stock, net of
associated expenses in conjunction
with:
Acquisitions......................... 585,537
Repayment of debt.................... 570
Exercise of stock options, including
tax benefits....................... 7,601
Employee stock purchase plan......... 2,805
Share adjustments at Pooled
Companies............................
Cumulative translation adjustments..... (107,439)
Net income............................. 62,700
------------
Balance at January 24, 1998
(unaudited)............................ $1,472,922
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements
F-44
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Income from discontinued operations....................... (15,675) (15,778) (26,800) (20,411) (25,464)
Depreciation and amortization............................. 6,521 10,999 36,102 23,233 41,787
Non-recurring acquisition costs........................... 8,057 8,001 7,316
Payments of restructuring costs........................... (1,900)
Unrealized foreign currency gain.......................... (3,420) (3,420)
Deferred income taxes..................................... (367) (196) (1,035) 3,600 73
Extraordinary losses...................................... 701 1,450 612
Equity in net income of affiliate......................... (782) (265) (878)
Gain on sale of investment................................ (1,059)
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in business
combinations):
Accounts receivable..................................... (18,911) 969 (26,237) (32,154) (29,940)
Inventories............................................. (6,130) 1,861 (3,400) (6,718) (14,417)
Prepaid expenses and other current assets............... (1,417) (23,780) (6,059) (1,539) (3,909)
Accounts payable........................................ 7,349 2,802 (26,692) (22,922) 2,245
Accrued liabilities..................................... 5,204 (565) 7,396 (1,771) 5,699
----------- --------- --------- ----------- -----------
Net cash provided by (used in) operating activities... 7,741 19,246 15,812 (9,247) 34,937
----------- --------- --------- ----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received............. (15,993) (89,223) (345,319) (323,813) (33,642)
Payments of acquisition costs............................... (7,283) (5,343) (4,094) (3,871)
Additions to property and equipment, net of disposals....... (11,049) (17,868) (34,036) (15,891) (28,200)
Investment in affiliate..................................... (41,270) (41,270) (40,773)
Proceeds from sale of investment............................ 5,729
Other....................................................... 867 (5,687) 2,013 (5,476) 3,190
----------- --------- --------- ----------- -----------
Net cash used in investing activities................. (26,175) (120,061) (423,955) (390,544) (97,567)
----------- --------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock...................... 32,811 180,230 318,899 41,868 8,239
Proceeds from issuance of long-term debt.................... 6,553 139,040 225,387 224,080 457
Payments of long-term debt.................................. (3,643) (13,143) (174,788) (163,112) (10,647)
Net advances to discontinued operations..................... (111,891) (76,021) (99,213)
Proceeds from (payments of) short-term debt, net............ 3,433 (39,077) 24,132 259,705 172,000
Payments to terminate credit facility....................... (261) (261)
Payments of dividends at Pooled Companies................... (7,700) (8,287) (6,158) (6,122)
Capital contributed by stockholders of Pooled Companies..... 400 1,814 1,814
Adjustment to conform fiscal year-ends of certain Pooled
Companies................................................. 601 (1,397) 286 286
Capital contributed by Combined Company stockholder......... 1,500
Payments to stockholders of Combined Companies.............. (11,300)
----------- --------- --------- ----------- -----------
Net cash provided by financing activities............. 22,255 257,766 277,420 282,237 70,836
----------- --------- --------- ----------- -----------
Effect of exchange rates on cash and cash equivalents......... (180) (121) (511) (345) (3,159)
----------- --------- --------- ----------- -----------
Cash provided by (used in) discontinued operations............ 3,549 1,707 (8,223) (3,170) (3,815)
----------- --------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.......... 7,190 158,537 (139,457) (121,069) 1,232
Cash and cash equivalents at beginning of period.............. 17,756 24,946 183,483 183,483 44,026
----------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period.................... $ 24,946 $ 183,483 $ 44,026 $ 62,414 $ 45,258
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 7,731 $ 3,426 $ 36,536 $ 28,980 $ 26,962
Income taxes paid......................................... 7,044 7,814 22,734 18,852 24,017
</TABLE>
F-45
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company issued common stock, notes payable and cash in connection with
certain business combinations accounted for under the purchase method during
fiscal 1995, 1996 and 1997 and the nine months ended January 25, 1997 and
January 24, 1998. 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 NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable............................................. $ 15,350 $ 70,640 $ 99,747 $ 88,202 $ 27,284
Inventories..................................................... 10,331 49,602 115,995 119,584 18,970
Prepaid expenses and other current assets....................... 956 8,412 20,874 13,559 15,806
Property and equipment.......................................... 3,248 30,442 94,112 107,202 52,695
Intangible assets............................................... 21,079 119,493 490,011 432,219 371,606
Other assets.................................................... (1,149) 51,698 7,748 5,174 34,759
Short-term debt................................................. (8,253) (95,971) (20,612) (12,819) (8,755)
Accounts payable................................................ (9,180) (44,034) (99,753) (89,338) (20,058)
Accrued liabilities............................................. (3,297) (19,719) (52,464) (81,506) (13,870)
Long-term debt.................................................. (905) (11,635) (153,448) (115,017) (20,320)
Other long-term liabilities and minority interest............... (437) (7,751) (1,296) (8,262) (357)
----------- ----------- ----------- ----------- -----------
Net assets acquired..................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
The acquisitions were funded as follows:
Common stock.................................................... $ 8,750 $ 61,167 $ 155,595 $ 135,185 $ 424,118
Debt............................................................ 3,000 787
Cash............................................................ 15,993 89,223 345,319 323,813 33,642
----------- ----------- ----------- ----------- -----------
Total....................................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Noncash transactions:
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited) the Company issued 291,671, 384,630 and 28,179 shares of common
stock, respectively, to repay $2,470, $6,359 and $570 of indebtedness,
respectively.
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited), the Company recorded additional paid-in capital of
approximately $426, $1,250 and $2,168, respectively, related to the tax
benefit on stock options exercised.
- - During fiscal 1996, one Pooled Company converted $1,385 of debt to common
stock.
- - During fiscal 1996, one Pooled Company paid a dividend of $9,851 through the
issuance of 846,638 shares of common stock
See accompanying notes to consolidated financial statements.
F-46
<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. The Company is a supplier of a broad range of office
and educational products and business services to corporate, commercial,
industrial and educational customers. The Company operates throughout the United
States, as well as in New Zealand, Australia and Canada and, through a 49% owned
affiliate, in the United Kingdom.
NOTE 2--FORMATION OF COMPANY
Concurrent with the closing of its initial public offering in February 1995,
the Company acquired four companies (the "Combined Companies") for a combination
of its common stock and cash and acquired two companies in business combinations
accounted for under the purchase method. Because of the substantial ongoing
interest of the stockholders of the Combined Companies in U.S. Office Products,
the assets and liabilities of the Combined Companies were combined on a
historical cost basis. The capital stock of the Combined Companies is included
in additional paid-in capital.
NOTE 3--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 revenues 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 1997," "fiscal 1996" and "fiscal
1995" refer to the Company's fiscal years ended April 26, 1997 and April 30,
1996 and 1995, respectively. 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 in April.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Investments in less than 50% owned entities
are accounted for under the equity method. All significant intercompany
transactions and accounts are eliminated in consolidation.
F-47
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 trade accounts receivable.
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 products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is 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 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its 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. Substantially all goodwill is amortized
on a straight line basis over estimated useful lives of 25 to 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.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's wholly-owned foreign subsidiary has entered into forward
foreign currency exchange contracts (the "Exchange Contracts") with
counterparties to hedge the exposure of foreign currency fluctuations to the
extent permissible by hedge accounting requirements. In order to qualify for
hedge accounting, a foreign currency transaction must be designated as, and
effective as, a hedge of a firm foreign currency commitment or an existing
foreign currency denominated asset or liability. Gains and losses on Exchange
Contracts designated to firm foreign currency commitments are deferred and
accounted for as an adjustment to the purchase price of the asset, while gains
and losses on Exchange Contracts designated
F-48
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to an underlying asset or liability are reported as other income or loss in the
Company's financial statements. The offsetting transaction loss or gain
resulting from the foreign currency denominated asset or liability is also
reflected in other income or loss in the Company's financial statements. At
April 26, 1997, the Exchange Contracts, in the notional amount of $3,319, hedge
certain foreign currency denominated firm purchase commitments. The Exchange
Contracts generally have maturity dates of 60 days or less. Discounts or
premiums on the Exchange Contracts are amortized over the life of the contracts.
The Company's wholly-owned foreign subsidiary 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. In order to qualify for hedge accounting, an interest rate swap
must be designated to a specific debt and there must be a high correlation
between the interest rate component of the value of the swap and changes in the
variable interest rates on the underlying debt. The Swap Agreements were
specifically designated and were fully correlated with changes in the variable
interest rates on the underlying debt. The notional amount of the Swap
Agreements was $43,000 at April 30, 1996. Amounts to be paid or received under
the Swap Agreements are accrued as interest rates change and are recognized over
the life of the Swap Agreements as an adjustment to interest expense. During
fiscal 1997, the Swap Agreements were terminated at the time of the
extinguishment of the underlying debt, resulting in a loss of $117 and was
included in other income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using the following methods and assumptions:
- - The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value;
- - The fair values of the 5 1/2% Convertible Subordinated Notes due 2001 and the
5 1/2% Convertible Subordinated Notes due 2003 are based on quoted market
prices;
- - The carrying amounts of the Company's debt, other than the 5 1/2% Convertible
Subordinated Notes due 2001 and the 5 1/2% Convertible Subordinated Notes
due 2003, approximate 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
Income taxes have been computed utilizing the asset and liability approach
which 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. Certain
companies acquired in pooling-of-interests transactions elected to be taxed as
Subchapter S corporations, and accordingly, no federal income taxes were
recorded by those companies for periods prior to their acquisition by U.S.
Office Products.
F-49
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TAXES ON UNDISTRIBUTED EARNINGS
No provision is made for U.S. income taxes on earnings of 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 of these subsidiaries.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. The Company also leases equipment to customers under both short-term and
long-term lease agreements. Revenue related to 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 is recognized as income upon delivery of the equipment to the customer.
The Company, through its wholly-owned subsidiary Mail Boxes Etc. ("MBE"),
enters into area and individual franchise agreements in the United States and
master license agreements in other countries. Area franchise agreements grant
the area franchisee the exclusive right to market individual franchise centers
for the Company in the area franchisee's territory. The area franchisee
generally receives a commission on the individual franchises sold as well as a
share of the royalties earned by the Company from centers in the area
franchisee's territory. Individual franchise agreements grant the individual
franchisee the exclusive right to open and operate a franchise center in the
individual franchisee's territory.
Franchise fee revenue is recognized upon the completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is complete. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant obligations that must be completed before any
revenue is recognized are: all operating manuals are provided and training is
completed. Revenue is recognized using the installment method when the revenue
is collectible over an extended period and no reasonable basis exists for
estimating collectibility.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
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 in cost of revenues.
F-50
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NON-RECURRING ACQUISITION COSTS
Non-recurring 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.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance costs related to the Company's
employees in accordance with EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring)."
ACCRUED ACQUISITION COSTS
The Company accrues the direct external costs incurred in conjunction with
the consummation of business combinations and the costs incurred to consolidate
acquired operations into existing Company facilities, including the external
costs and liabilities to close redundant facilities and severance and relocation
costs related to the acquired entity's employees in accordance with EITF Issue
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the Consolidated Statement of Income as a
component of selling, general and administrative expenses. During fiscal 1995,
1996 and 1997, the Company incurred advertising expenses of $3,309, $7,233 and
$14,355, respectively.
NET INCOME PER SHARE
Net income per share is calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The adoption of SFAS 121 did not have a material effect on the Company's
consolidated operating results or financial position.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
during fiscal 1997. Under the provisions of SFAS 123, companies can elect to
account for stock-based compensation plans using a fair-value based method or
continue measuring compensation expense for those plans using the intrinsic
value method prescribed in APB Opinion No. 25. The Company has elected to
continue using the intrinsic value method to account for stock-based
compensation plans. Pro forma disclosures of net
F-51
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income and net income per share, as if the fair value-based method of accounting
defined in SFAS 123 has been applied, are presented in Note 15.
UNAUDITED INTERIM FINANCIAL DATA
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 January 24, 1998 and the results
of operations and of cash flows for the nine months ended January 25, 1997 and
January 24, 1998, as presented in the accompanying unaudited consolidated
financial data.
NOTE 4--STRATEGIC RESTRUCTURING PLAN
In January 1998, the Company's Board of Directors (the "Board") approved a
comprehensive restructuring plan (the "Strategic Restructuring Plan"). The
principal elements of the Strategic Restructuring Plan are (i) a self-tender
offer by the Company (the "Equity Self-Tender") to purchase 37,037 shares of
Company common stock (including shares that may be issued on exercise of stock
options) at $27.00 per share and the incurrence of significant additional debt
to pay a portion of the purchase price of the shares in the Equity Self Tender;
(ii) after acceptance of shares in the Equity Self Tender, the pro rata
distribution to U.S. Office Products stockholders of shares of four companies
(the "Spin-Off Companies") that will conduct the Company's current print
management, corporate travel services, educational supplies and technology
solutions businesses (the "Distributions"); and (iii) following acceptance of
shares in the Equity Self Tender and the record date for the Distributions, the
sale to an affiliate of an investment fund managed by Clayton, Dubilier & Rice,
Inc. ("Investor") of equity interests in U.S. Office Products. In these
transactions, Investor will not acquire any equity interest in the Spin-Off
Companies. The Distributions are expected to be tax-free to both the Company and
its stockholders (except for any cash in lieu of fractional shares received by
stockholders). As part of the financing for the Strategic Restructuring Plan,
the Company is expanding its bank credit facility, issuing new subordinated
indebtedness and offering to repurchase or reduce the conversion price on
convertible notes previously issued. The Company expects the Strategic
Restructuring Plan to be completed in the second calendar quarter of 1998. The
transactions are subject to a number of conditions, including financing,
approval of the Company's stockholders and receipt of regulatory approvals.
DISCONTINUED OPERATIONS
As a result of the Strategic Restructuring Plan, the Spin-Off Companies are
reflected as discontinued operations for all periods presented in the Company's
consolidated financial statements. The income from discontinued operations
included in the consolidated statement of income represents the sum of the
results
F-52
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
of the Company's Print Management, Corporate Travel Services, Educational
Supplies and Technology Solutions divisions for the periods presented and is
summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FISCAL 1995:
Revenues..................................... $ 139,732 $ 34,569 $ 119,510 $ 88,999 $ 382,810
Operating income............................. 5,571 2,905 4,479 8,199 21,154
Income before provision for income taxes..... 3,982 2,992 1,558 8,097 16,629
Provision for income taxes................... 317 18 218 401 954
Income from discontinued operations,
net of income taxes........................ 3,665 2,974 1,340 7,696 15,675
FISCAL 1996:
Revenues..................................... $ 314,999 $ 45,267 $ 150,343 $ 114,293 $ 624,902
Operating income............................. 12,455 3,068 2,484 9,252 27,259
Income (loss) before provision for (benefit
from) income taxes......................... 6,933 2,863 (3,194) 10,631 17,233
Provision for (benefit from) income taxes.... (33) 565 173 750 1,455
Income (loss) from discontinued operations,
net of income taxes........................ 6,966 2,298 (3,367) 9,881 15,778
FISCAL 1997:
Revenues..................................... $ 334,220 $ 57,677 $ 191,746 $ 136,278 $ 719,921
Operating income............................. 16,426 5,668 10,295 11,198 43,587
Income before provision for income taxes..... 11,224 5,450 6,375 10,914 33,963
Provision for (benefit from) income taxes.... 3,651 1,353 (2,034) 4,193 7,163
Income from discontinued operations,
net of income taxes........................ 7,573 4,097 8,409 6,721 26,800
NINE MONTHS ENDED JANUARY 25, 1997
(UNAUDITED):
Revenues..................................... $ 244,764 $ 41,527 $ 159,977 $ 101,295 $ 547,563
Operating Income............................. 14,750 3,105 10,839 8,448 37,142
Income before provision for income taxes..... 10,259 3,031 7,878 8,182 29,350
Provision for income taxes................... 2,249 551 4,085 2,054 8,939
Income from discontinued operations net of
income taxes............................... 8,010 2,480 3,793 6,128 20,411
</TABLE>
F-53
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED JANUARY 24, 1998
(UNAUDITED):
Revenues..................................... $ 257,777 $ 80,707 $ 247,880 $ 142,512 $ 728,876
Operating Income............................. 14,028 5,719 21,349 11,630 52,726
Income before provision for income taxes..... 12,577 5,522 16,916 11,644 46,659
Provision for income taxes................... 5,629 2,794 7,734 5,038 21,195
Income from discontinued operations net of
income taxes............................... 6,948 2,728 9,182 6,606 25,464
</TABLE>
The results of the Spin-Off Companies include allocations of interest
expense, at U.S. Office Products' weighted average interest rates, based upon
the average intercompany debt outstanding during the periods presented.
Intercompany debt allocated to the Spin-Off Companies generally is comprised of
funding provided to the Spin-Off Companies by U.S. Office Products for
acquisitions and acquisition related expenses, repayments of long-term and
short-term debt of acquired companies, payments of direct operating expenses of
the Spin-Off Companies and the net results of daily advances and sweeps of cash
by the Company to keep each Spin-Off Company's cash balance at or near zero on a
daily basis. To the extent that the sum of the intercompany funding and
third-party debt outstanding exceeded the amount of debt to be allocated to the
Spin-Off Companies pursuant to the investment agreement with Investor, such
excess amounts have been characterized as divisional equity. The results of the
Spin-Off Companies do not include any allocations of corporate overhead from
U.S. Office Products during the periods presented.
The other net assets of the discontinued operations included in the
Company's consolidated balance sheet represent the sum of the net assests of the
Company's Print Management, Corporate Travel Services, Educational Supplies and
Technology Solutions divisions for the periods presented and are summarized as
follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
APRIL 30, 1996:
Current assets............................... $ 78,071 $ 6,103 $ 38,557 $ 25,640 $ 148,371
Property, plant and equipment, net........... 32,703 7,948 7,647 1,756 50,054
Intangible assets, net....................... 879 5,456 7,142 13,477
Other assets................................. 6,029 539 777 875 8,220
Current liabilities.......................... (56,532) (7,402) (42,670) (22,344) (128,948)
Long-term liabilities........................ (34,065) (6,869) (15,766) (800) (57,500)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 27,085 $ 5,775 $ (4,313) $ 5,127 $ 33,674
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
</TABLE>
F-54
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
APRIL 26, 1997:
Current assets............................... $ 81,310 $ 6,935 $ 55,709 $ 30,542 $ 174,496
Property, plant and equipment, net........... 34,175 7,953 14,478 2,164 58,770
Intangible assets, net....................... 705 7,112 20,824 28,641
Other assets................................. 7,807 581 359 2,005 10,752
Current liabilities.......................... (66,413) (11,886) (39,712) (20,530) (138,541)
Long-term liabilities........................ (7,208) (5,218) (35,052) (3,218) (50,696)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 50,376 $ 5,477 $ 16,606 $ 10,963 $ 83,422
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
JANUARY 24, 1998 (UNAUDITED):
Current assets............................... $ 85,326 $ 22,609 $ 86,676 $ 64,618 $ 259,229
Property, plant and equipment, net........... 31,063 19,406 20,489 5,074 76,032
Intangible assets, net....................... 1,995 85,525 94,651 63,891 246,062
Other assets................................. 8,473 1,002 2,595 508 12,578
Current liabilities.......................... (58,449) (20,236) (35,529) (31,252) (145,466)
Long-term liabilities........................ (10,530) (15,957) (63,307) (12,558) (102,352)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 57,878 $ 92,349 $ 105,575 $ 90,281 $ 346,083
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
</TABLE>
The amounts to become receivable upon the Distributions reflected in the
unaudited January 24, 1998 Consolidated Balance Sheet are expected to be
recovered from the Spin-Off Companies in connection with the Distributions.
PURCHASE ACCOUNTING RESTATEMENT
On December 24, 1997, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission which included audited supplemental
consolidated financial statements (the "Supplemental Financial Statements"). The
Supplemental Financial Statements gave retroactive effect to 20 fiscal 1998
business combinations, including the Mail Boxes Etc. acquisition, which were
originally accounted for under the pooling-of-interests method.
As a result of the Strategic Restructuring Plan and as required by generally
accepted accounting principles, the Company has restated its consolidated
financial statements for all periods to account for these acquisitions (as well
as two subsequent business combinations originally accounted for under the
pooling-of-interests method) under the purchase method. In relation to amounts
reflected in the Supplemental Financial Statements, this restatement and the
reclassification of assets and liabilities for discontinued operations, as
discussed above, had the combined effect of reducing the Company's reported
total assets at April 26, 1997 by $267,430 and reported net income for fiscal
1995, 1996 and 1997 by $10,602 (or $0.23 per share), $14,998 (or $0.22 per
share) and $17,811 (or $0.20 per share), respectively. Additionally, the
restatement of the 22 business combinations as purchase transactions gave rise
to approximately
F-55
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
$422.8 million of goodwill, associated with both continuing and discontinued
operations, during the nine months ended January 24, 1998.
NOTE 5--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1996 and 1997, the Company issued 8,440,852 and 22,108,776 shares
of common stock, respectively, to acquire 14 companies (the "1996 Poolings") and
40 companies, including 25 companies related to the continuing operations (the
"1997 Poolings"), respectively, in business combinations 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, 1996 and April 26, 1997.
Commencing on May 1, 1995 and 1996, the year-ends of the 1996 Poolings and
the 1997 Poolings were changed to April 30, 1996 and April 26, 1997,
respectively, resulting in adjustments to retained earnings of $2,235, $8,898
and $286 during fiscal 1995, 1996 and 1997, respectively. Following is a summary
of the results related to the adjustments to retained earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- ---------- ----------
Revenues....................................................................... $ 55,126 $ 245,737 $ (9,907)
Costs and expenses............................................................. 52,891 236,839 (10,193)
--------- ---------- ----------
Net adjustment............................................................. $ 2,235 $ 8,898 $ 286
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F-56
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the separate results, in each of the periods
presented, of U.S. Office Products (excluding the results of 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 POOLED
PRODUCTS COMPANIES COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
FOR THE YEAR ENDED APRIL 30, 1995:
Revenues.............................................................. $ 120,479 $ 538,015 $ 658,494
Income from continuing operations before extraordinary items.......... $ 1,514 $ 13,978 $ 15,492
FOR THE YEAR ENDED APRIL 30, 1996:
Revenues.............................................................. $ 488,670 $ 572,858 $ 1,061,528
Income from continuing operations before extraordinary items.......... $ 7,828 $ 11,271 $ 19,099
FOR THE YEAR ENDED APRIL 26, 1997:
Revenues.............................................................. $ 1,906,496 $ 209,458 $ 2,115,954
Income from continuing operations before extraordinary items.......... $ 27,978 $ 3,960 $ 31,938
FOR THE NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Revenues.............................................................. $ 1,300,421 $ 197,899 $ 1,498,320
Income from continuing operations before extraordinary items.......... $ 19,677 $ 5,716 $ 25,393
FOR THE NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Revenues.............................................................. $ 1,930,113 $ $ 1,930,113
Income from continuing operations before extraordinary items.......... $ 37,236 $ $ 37,236
</TABLE>
PURCHASE METHOD
In fiscal 1995, in addition to the acquisitions of the Combined Companies,
the Company made six acquisitions, including five related to continuing
operations, 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
1,312,500 shares of common stock with a market value of $8,750. The total assets
related to 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.
In fiscal 1996, the Company made 34 acquisitions, including 31 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $206,937, consisting of $130,178 of cash, $8,141 of debt and
11,120,163 shares of common stock with a market value of $68,618. The total
assets related to these 34 acquisitions were $414,113, including goodwill of
$127,870. The results of these acquisitions have been included in the Company's
results from their respective dates of acquisition.
In fiscal 1997, the Company made 77 acquisitions, including 71 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $520,891 consisting of $354,811 of cash, and 8,685,450 shares
of common stock with a market value of $166,080. The total assets related to
these 77 acquisitions were $861,647, including goodwill of $506,386. The results
of these acquisitions have been included in the Company's results from their
respective dates of acquisition.
F-57
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 30, 1996 and April 26, 1997 and
includes the Company's consolidated financial statements, which give retroactive
effect to the acquisitions of the Pooled Companies for all periods presented,
and the results of the Purchased Companies as if all such purchase acquisitions
had been made at the beginning of fiscal 1996. 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 on all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
<S> <C> <C>
APRIL 30, APRIL 26,
1996 1997
------------ ------------
Revenues.................................................................... $ 2,413,720 $ 2,496,519
Income from continuing operations before extraordinary items................ 35,361 48,825
Income per share from continuing operations before extraordinary items...... 0.30 0.42
</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 1996 or the
results which may occur in the future.
EQUITY INVESTMENT IN AFFILIATE
In November 1996, the Company acquired a 49% equity interest in Dudley
Stationery Limited ("Dudley"), which is being accounted for under the equity
method. Under the terms of the agreement, the Company agreed to invest
approximately $80 million for working capital into Dudley over a two-year
period. The Company has currently invested approximately $41.3 million of the
total $80 million in Dudley which is included in other assets on the
Consolidated Balance Sheet. The Company has included its share of Dudley's net
income as a component of other income on the Consolidated Statement of Income.
NOTE 6--ACCRUED ACQUISITION COSTS
In conjunction with the acquisitions of the fiscal 1997 Purchased Companies,
the Company accrued the direct external costs incurred in conjunction with the
consummation of the acquisitions and the costs to consolidate acquired
operations into existing Company facilities, including the external costs
associated with closing redundant facilities of acquired companies, and
severance and relocation costs related to the acquired companies' employees.
As of the consummation date of an acquisition, the Company begins to assess
and formulate a plan to exit activities of the acquired companies. Typically,
this involves evaluating the facilities of the Company and the acquired
companies in the specific geographic areas, determining which of the acquired
facilities will be exited and identifying employee groups that will be
terminated or relocated. In most cases, the facilities are closed and the
employees terminated within one year of the completion of the plan.
F-58
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--ACCRUED ACQUISITION COSTS (CONTINUED)
The following table sets forth the Company's accrued acquisition costs for
the periods ended April 30, 1996, April 26, 1997 and January 24, 1998:
<TABLE>
<CAPTION>
EMPLOYEE DISPOSAL OF
REDUNDANT SEVERANCE & ASSETS &
FACILITIES RELOCATION OTHER TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30, 1996................... $ $ $ $
Additions................................. 1,593 2,484 6,712 10,789
----------- ------ ----------- ---------
Balance at April 26, 1997................... 1,593 2,484 6,712 10,789
Unaudited data:
Additions................................. 1,442 3,244 4,686
Utilizations.............................. (256) (141) (5,400) (5,797)
----------- ------ ----------- ---------
Balance at January 24, 1998................. $ 1,337 $ 3,785 $ 4,556 $ 9,678
----------- ------ ----------- ---------
----------- ------ ----------- ---------
</TABLE>
NOTE 7--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs for the periods ended April 30, 1996, April 26, 1997 and
January 24, 1998:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE- DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30 1995:
Additions.............................. $ 682 $ 682
Utilizations........................... (682) (682)
------ ----- ----------- ---------
Balance at April 30, 1996................
Additions.............................. 1,337 308 2,556 4,201
Utilizations........................... (302) (229) (2,150) (2,681)
------ ----- ----------- ---------
Balance at April 26, 1997................ 1,035 79 406 1,520
Unaudited data:
Utilizations........................... (937) (79) (348) (1,364)
------ ----- ----------- ---------
Balance at January 24, 1998.............. $ 98 $ $ 58 $ 156
------ ----- ----------- ---------
------ ----- ----------- ---------
</TABLE>
F-59
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- ----------
<S> <C> <C>
Land........................................................................... $ 4,878 $ 31,934
Buildings...................................................................... 32,140 44,814
Furniture and fixtures......................................................... 42,340 121,701
Warehouse equipment............................................................ 23,290 24,726
Equipment under capital leases................................................. 7,308 8,602
Leasehold improvements......................................................... 8,653 16,107
----------- ----------
118,609 247,884
Less: Accumulated depreciation................................................. (41,080) (65,251)
----------- ----------
Net property and equipment..................................................... $ 77,529 $ 182,633
----------- ----------
----------- ----------
</TABLE>
Depreciation expense for fiscal years 1995, 1996 and 1997 was $4,906, $7,926
and $20,699, respectively.
NOTE 9--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill......................................................... $ 136,338 $ 625,074 $ 928,365
Other............................................................ 2,549 3,063 3,915
---------- ---------- ------------
138,887 628,137 932,280
Less: Accumulated amortization................................... (3,747) (16,663) (28,558)
---------- ---------- ------------
$ 135,140 $ 611,474 $ 903,722
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
Amortization expense for fiscal years 1995, 1996, 1997 and the nine months
ended January 24, 1998 was $801, $2,711, $12,416 and $13,830, respectively.
F-60
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Credit facilities with banks, average interest rates of 7.6% at April 26, 1997 and
7.8% at April 30, 1996.......................................................... $ 1,020 $ 140,090
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.................................... 67,660
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............................................................................. 4,749 1,367
Current maturities of long-term debt.............................................. 8,014 2,668
---------- ----------
Total short-term debt....................................................... $ 94,174 $ 144,125
---------- ----------
---------- ----------
</TABLE>
The Company currently has an agreement under which a syndicate of financial
institutions, led by Bankers Trust Company, as Agent (the "Bank"), is providing
the Company with a $500 million 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 million for working capital loans and $400 million for
acquisition loans. The Credit Facility is secured by a majority of the assets
of the Company and its subsidiaries and contains customary covenants, including
financial covenants with respect to the Company's consolidated leverage and
interest coverage ratios, capital expenditures, payment of dividends and
purchases and sales of assets, and customary default provisions, including
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy. The Company was in compliance with or obtained
waivers relating to these covenants at April 26, 1997. At April 26, 1997, the
balance outstanding under the Credit Facility was $140,090 and included five
eurodollar contracts, expiring within 30 days, totaling $105,000 at an average
interest rate of 7.2%.
F-61
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Convertible Subordinated Notes due 2003, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$31.60 per share, subject to adjustment in certain events....................... $ 230,000
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
$19.00 per share, subject to adjustment in certain events....................... $ 143,750 143,750
Notes payable, secured by certain assets of the Company, interest rates ranging
from 8.0% to 10.0%, maturities from October 1996 through 2003................... 13,384
Other............................................................................. 22,370 3,610
Capital lease obligations......................................................... 4,740 5,517
---------- ----------
184,244 382,877
Less: Current maturities of long-term debt........................................ (8,014) (2,668)
---------- ----------
Total long-term debt........................................................ $ 176,230 $ 380,209
---------- ----------
---------- ----------
</TABLE>
The 2003 Notes are redeemable, in whole or in part, at the Company's option
at specified redemption prices on or after May 22, 1998, but may not be redeemed
prior to May 15, 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 2003 Notes
are included in other assets and are being amortized over the seven year period
of maturity. The fair value of the 2003 Notes at April 26, 1997, based upon
quoted market prices, totaled $184,000.
The 2001 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
2001 Notes are included in other assets and are being amortized over the five
year period of maturity. The fair value of the 2001 Notes at April 26, 1997,
based upon quoted market prices, totaled $147,344.
F-62
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $ 2,668
1999.............................................................. 2,211
2000.............................................................. 1,524
2001.............................................................. 144,436
2002.............................................................. 219
Thereafter........................................................ 231,819
---------
$ 382,877
---------
---------
</TABLE>
NOTE 11--INCOME TAXES
Domestic and foreign income from continuing operations before provision for
income taxes and extraordinary items consist of the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Domestic......................................................................... $ 16,099 $ 22,139 $ 38,024
Foreign.......................................................................... 2,193 2,992 21,853
--------- --------- ---------
Total...................................................................... $ 18,292 $ 25,131 $ 59,877
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Income taxes currently payable:
Federal...................................................................... $ 2,126 $ 4,632 $ 18,776
State........................................................................ 232 351 1,987
Foreign...................................................................... 809 1,245 8,211
--------- --------- ---------
3,167 6,228 28,974
--------- --------- ---------
Deferred income tax expense (benefit)............................................ (367) (196) (1,035)
--------- --------- ---------
Total provision for income taxes........................................... $ 2,800 $ 6,032 $ 27,939
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-63
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory.................................................................................. $ 1,386 $ 708
Allowance for doubtful accounts............................................................ 1,325 1,253
Accrued liabilities........................................................................ 2,971 6,091
--------- ---------
Total current deferred tax assets...................................................... 5,682 8,052
--------- ---------
Long-term deferred tax liabilities:
Property and equipment..................................................................... (4,457) (2,357)
Intangible assets.......................................................................... (1,063) (961)
Internal Revenue Service tax assessment.................................................... (3,383) (3,383)
Other...................................................................................... 2,717 4,243
--------- ---------
Total long-term deferred tax liabilities................................................. (6,186) (2,458)
--------- ---------
Net deferred tax asset (liability)....................................................... $ (504) $ 5,594
--------- ---------
--------- ---------
</TABLE>
The Internal Revenue Service ("IRS") tax assessment relates to the deferral
of a gain on the sale of land and a 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 assessed the Company additional taxes. The
subsidiary has recorded a deferred tax liability, including interest, as a
result of the assessment. 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, APRIL 30, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate........................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit.............................. 1.3 1.4 3.3
Subchapter S corporation income not subject to
corporate level taxation......................................................... (27.2) (26.1) (3.3)
Foreign earnings not subject to U.S. taxes......................................... (4.2) (4.1) (12.8)
Nondeductible goodwill............................................................. 2.7 3.7 4.9
Nondeductible acquisition costs.................................................... 8.4 4.7
Foreign taxes...................................................................... 4.4 4.9 13.7
Other.............................................................................. 3.3 0.8 1.2
----------- ----------- -----------
Effective income tax rate.......................................................... 15.3% 24.0% 46.7%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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 specific Pooled Companies provided no federal
income tax expense prior to these acquisitions by the Company.
F-64
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the specific Pooled Companies had been subject to
federal income taxes for the entire periods presented.
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED
-----------------
APRIL 26,
1997
-----------------
<S> <C>
Income from continuing operations before extraordinary items per consolidated statement of
income....................................................................................... $ 31,938
Pro forma income tax provision adjustment...................................................... 1,976
-------
Pro forma income from continuing operations before extraordinary items......................... $ 29,962
-------
-------
</TABLE>
NOTE 12--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998................................................................... $ 953 $ 46,645
1999................................................................... 1,662 38,434
2000................................................................... 1,055 30,700
2001................................................................... 697 20,514
2002................................................................... 470 15,458
Thereafter............................................................. 3,433 53,778
--------- ----------
Total minimum lease payments........................................... 8,270 $ 205,529
----------
----------
Less: Amounts representing interest.................................... (2,753)
---------
Present value of net minimum lease payments............................ $ 5,517
---------
---------
</TABLE>
Rent expense for all operating leases for fiscal 1995, 1996 and 1997 was
$12,587, $19,023 and $40,183, respectively.
NOTE 13--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, results of
operations or cash flows of the Company.
F-65
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements.
NOTE 14--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue
Code. The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service. In fiscal 1997, the Company's matching contribution expense was
$1,195.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For fiscal 1995, 1996 and 1997, the
subsidiaries incurred expenses totaling $2,023, $2,138 and $1,398, respectively,
related to these plans.
NOTE 15--STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 requires the dual
presentation of basic and diluted EPS on the face of the statement of income.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company has adopted SFAS No. 128 during the nine months
ended January 24, 1998 and has restated all prior period EPS data. The following
information presents the
F-66
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's computations of basic and diluted EPS from continuing operations
before extraordinary items for the periods presented in the consolidated
statement of income.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -------------
<S> <C> <C> <C>
FISCAL 1995:
Basic EPS.............................................................. $ 15,492 45,562 $ .34
---
---
Effect of dilutive employee stock options.............................. 142
------------ -------------
Diluted EPS............................................................ $ 15,492 45,704 $ .34
------------ ------------- ---
------------ ------------- ---
FISCAL 1996:
Basic EPS.............................................................. $ 19,099 67,545 $ .28
---
---
Effect of dilutive employee stock options.............................. 829
------------ -------------
Diluted EPS............................................................ $ 19,099 68,374 $ .28
------------ ------------- ---
------------ ------------- ---
FISCAL 1997:
Basic EPS.............................................................. $ 31,938 90,026 $ .35
---
---
Effect of dilutive employee stock options.............................. 1,735
------------ -------------
Diluted EPS............................................................ $ 31,938 91,761 $ .35
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Basic EPS.............................................................. $ 25,393 85,978 $ .30
---
---
Effect of dilutive employee stock options.............................. 1,846
------------ -------------
Diluted EPS............................................................ $ 25,393 87,824 $ .29
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Basic EPS.............................................................. $ 37,236 114,758 $ .32
---
---
Effect of dilutive employee stock options.............................. 2,427
------------ -------------
Diluted EPS............................................................ $ 37,236 117,185 $ .32
------------ ------------- ---
------------ ------------- ---
</TABLE>
The Company had additional employee stock options and two series of
convertible debt securities outstanding during the periods presented that were
not included in the computation of diluted EPS because they were anti-dilutive.
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 Company's stockholders approved the amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 25,000,000 to 100,000,000 shares. In August 1996,
the Company's stockholders approved the amendment to the
F-67
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's Restated Certified of Incorporation to increase the number of
authorized shares of common stock from 100,000,000 to 500,000,000.
In October 1997, the Board of Directors of the Company approved a three for
two split of the Company's common stock. The financial statements give
retroactive effect for the split for all periods presented.
STOCK COMPENSATION PLANS
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 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, as amended, is equal to 20% of the
aggregate number of shares of the Company's 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.
In August 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Non-Employee Directors' Stock Plan (the "Directors'
Plan"). The purpose of the Directors' Plan is to promote ownership by
non-employee directors of a greater proprietary interest in the Company, thereby
aligning such directors' interests more closely with the interests of
stockholders of the Company. A total of 750,000 shares of common stock has been
reserved for issuance under the Directors' Plan. At April 26, 1997, options to
acquire 108,000 shares of common stock have been granted under the Directors'
Plan.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans. Accordingly, because the exercise prices of the options have equaled the
market price on the date of grant, no compensation expense has been recognized
for stock options granted. Had compensation cost for the Company's stock
options been recognized based upon the fair value of the stock options on the
grant date under the methodology prescribed by SFAS 123, the Company's net
income and net income per share would have been impacted as indicated in the
following table. The pro forma results shown below reflect only the impact of
options granted in fiscal 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
--------------------
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Income from continuing operations:
As reported..................................................... $ 18,398 $ 30,488
Pro forma....................................................... 16,339 17,842
Income from continuing operations per share:
As reported:
Basic......................................................... $ 0.27 $ 0.33
Diluted....................................................... 0.27 0.33
Pro forma:
Basic......................................................... $ 0.24 $ 0.20
Diluted....................................................... 0.24 0.19
</TABLE>
F-68
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Expected life of option.................................................. 7 years 7 years
Risk free interest rate.................................................. 6.58% 6.66%
Expected volatility of USOP stock........................................ 58.5% 44.0%
</TABLE>
The weighted-average fair value of options granted was $12.44 and $17.06 for
fiscal 1996 and 1997, respectively.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1994.......... 125,498 $ 0.45 125,498 $ 0.45
Granted.......................... 944,250 5.95
Canceled......................... (10,500) 6.67
------------
Balance at April 30, 1995.......... 1,059,248 5.29 177,998 1.89
Granted.......................... 4,146,886 12.55
Exercised........................ (95,025) 6.25
Canceled......................... (24,300) 8.47
------------
Balance at April 30, 1996.......... 5,086,809 11.18 324,798 3.77
Granted.......................... 6,729,165 20.41
Exercised........................ (197,744) 8.39
Canceled......................... (73,444) 12.65
------------
Balance at April 26, 1997.......... 11,544,786 $ 16.60 1,598,228 $ 10.10
------------
------------
</TABLE>
The following table summarizes information about stock options outstanding
at April 26, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE EXERCISABLE PRICE
- ------------------------------- ------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.45 to $6.67................. 884,498 7.2 years $ 5.09 476,630 $ 4.32
$6.68 to $13.33................ 2,660,398 7.9 years 9.33 702,303 9.70
$13.34 to $20.00............... 4,234,986 9.3 years 17.55 313,866 16.25
$20.01 to $26.67............... 3,737,004 9.3 years 23.27 105,429 20.65
$26.68 to $29.92............... 27,900 9.1 years 28.13
------------ ----------
$0.45 to $29.92................ 11,544,786 8.7 years $ 16.60 1,598,228 $ 10.10
------------ ----------
------------ ----------
</TABLE>
F-69
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The options outstanding information includes 125,498, 58,802 and 343,488
options to acquire common stock at exercise prices of $.45, $10.59 and $10.70,
respectively, which were granted at certain Pooled Companies prior to their
respective acquisitions by the Company.
Non-qualified options granted to employees 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.
NOTE 16--SEGMENT REPORTING
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
NEW ZEALAND
NORTH AND
AMERICA AUSTRALIA TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
FISCAL 1995:
Revenues.......................................... $ 629,920 $ 28,574 $ 658,494
Operating income.................................. 18,133 1,429 19,562
Identifiable assets of continuing operations at
year-end........................................ 220,878 5,512 226,390
FISCAL 1996:
Revenues.......................................... $ 984,387 $ 77,141 $ 1,061,528
Operating income.................................. 25,540 3,533 29,073
Identifiable assets of continuing operations at
year-end........................................ 584,170 188,134 772,304
FISCAL 1997:
Revenues.......................................... $ 1,415,161 $ 700,793 $ 2,115,954
Operating income.................................. 56,126 28,708 84,834
Identifiable assets of continuing operations at
year-end........................................ 782,615 753,254 1,535,869
</TABLE>
The amounts listed above as identifiable assets of continuing operations at
year-end differ from the total asset amounts presented on the Consolidated
Balance Sheet since net assets of discontinued operations of $33,514, $33,674
and $171,122 at April 30, 1995 and 1996 and April 26, 1997, respectively, were
excluded from the above analysis but are included in total assets on the
Company's Consolidated Balance Sheet.
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during fiscal 1996 and 1997
in the Company's Quarterly Reports on Form 10-Q as a result of the restatement
of the financial statements to give retroactive effect to the results of the
F-70
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
companies acquired during fiscal 1996 and 1997 in business combinations
accounted for under the pooling-of-interests method and as a result of the
reporting of the results of Spin-Off Companies as discontinued operations.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit.................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................ 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items........................... 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations...... 3,387 5,550 7,727 (886) 15,778
Net income...................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.24
Net income.................................. 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.23
Net income.................................. 0.08 0.15 0.20 0.07 0.50
</TABLE>
F-71
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
Revenues........................................ $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
<S> <C> <C> <C> <C> <C>
Gross profit.................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................ 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items........................... 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations............. 9,475 8,933 2,003 6,389 26,800
Net income...................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.31
Net income.................................. 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.29
Net income.................................. 0.20 0.20 0.12 0.12 0.62
Pro forma income from continuing operations
before extraordinary items (see Note 11)...... 6,431 9,166 8,225 6,140 29,962
Pro forma basic income per share from continuing
operations before extraordinary item.......... 0.08 0.11 0.09 0.06 0.33
Pro forma diluted income per share from
continuing operations before extraordinary
item.......................................... 0.08 0.10 0.09 0.06 0.33
</TABLE>
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED)
In January 1998, U.S. Office Products announced its intention to complete
the Strategic Restructuring Plan described in Note 4. In addition, subsequent to
April 26, 1997 and through March 9, 1998, the Company has completed 42 business
combinations related to continuing operations for an aggregate purchase price of
$502.3 million, consisting of approximately $79.8 million of cash and 20.4
million shares of the Company's common stock with an aggregate market value on
the dates of acquisition of approximately $422.5 million. In addition, on
December 22, 1997, U.S. Office Products made an additional equity investment of
$40.8 million in Dudley Stationery Limited, its 49% owned independent office
products dealer in the United Kingdom, to fund additional acquisitions at
Dudley.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the Strategic Restructuring Plan and the
acquisitions described above had been consummated as of
F-72
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
the beginning of fiscal 1997. The results presented below include certain pro
forma adjustments to reflect (i) substantially higher amortization expenses as
compared to prior periods (as a result of reclassifying 12 business combinations
as purchase acquisitions (including the Company's acquisition of Mail Boxes
Etc.), rather than under the pooling-of-interests method, as the Company had
expected when it completed those acquisitions); (ii) substantially higher
interest expense, as a result of increased borrowing that the Company expects to
incur to help finance the cost of the Tender Offer; and (iii) higher effective
income tax rates, due to increased non-deductible goodwill expense and the
Company's inability to acquire subchapter S corporations in pooling-of-interests
transactions:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED NINE MONTHS ENDED
APRIL 26, 1997 JANUARY 24, 1998
---------------- ------------------
<S> <C> <C>
Revenues............................................... $ 2,794,009 $ 2,070,655
Income from continuing operations before extraordinary
items................................................ 11,332 11,186
Basic income per share from continuing operations
before extraordinary items........................... 0.08 0.08
Diluted income per share from continuing operations
before extraordinary items........................... 0.08 0.08
</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 1997 or the
results which may occur in the future.
On April 14, 1998, a stockholder purporting to represent a class composed of
all U.S. Office Products' stockholders filed an action in the Delaware Chancery
Court. The action claims that the Directors breached their fiduciary duty to the
stockholders of U.S. Office Products by changing the terms of the Equity-Self
Tender to include employee stock options. The complaint seeks injunctive relief,
damages and attorneys fees. The Company believes that this lawsuit is without
merit and intends to vigorously contest it.
F-73
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Mail Boxes Etc.
We have audited the accompanying consolidated balance sheets of Mail Boxes
Etc. as of April 30, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1997. 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 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. 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 consolidated financial position of Mail Boxes Etc.
at April 30, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended April 30, 1997,
in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
/s/ ERNST & YOUNG LLP
--------------------------------------------
Ernst & Young LLP
San Diego, California
June 6, 1997
</TABLE>
F-74
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
APRIL 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................................. $ 3,992 $ 1,416
Restricted cash--franchisee deposits...................................................................... 1,613 2,073
Short-term investments.................................................................................... 27,342 21,825
Accounts receivable, net of allowance for doubtful accounts of $1,334 and $1,507, at April 30, 1997 and
1996, respectively...................................................................................... 6,547 6,799
Receivable from National Media Fund....................................................................... 250 770
Inventories............................................................................................... 447 544
Current portion of notes receivable....................................................................... 6,048 6,756
Current portion of net investment in sales-type leases.................................................... 2,322 2,414
Deferred income taxes..................................................................................... 1,272 1,846
Re-acquired area and center rights held for resale........................................................ 629 638
Other..................................................................................................... 1,394 1,063
--------- ---------
Total current assets.................................................................................. 51,856 46,144
Notes receivable, net..................................................................................... 12,977 10,831
Net investment in sales-type leases....................................................................... 6,067 7,518
Property and equipment:
Land.................................................................................................... 1,200 1,200
Building and improvements............................................................................... 5,076 4,201
Office furniture and equipment.......................................................................... 4,307 4,018
Vehicles................................................................................................ 209 209
--------- ---------
Total property and equipment.......................................................................... 10,792 9,628
Less accumulated depreciation and amortization.......................................................... 4,831 4,247
--------- ---------
Net property and equipment.............................................................................. 5,961 5,381
Excess of cost over assets acquired, net of accumulated amortization of $607 and $549 at April 30, 1997
and 1996, respectively.................................................................................. 383 441
Re-acquired area rights, net of accumulated amortization of $511 and $240 at April 30, 1997 and 1996,
respectively............................................................................................ 6,443 3,240
Deferred income taxes..................................................................................... 1,249 1,307
Other assets.............................................................................................. 739 904
--------- ---------
Total Assets.......................................................................................... $ 85,675 $ 75,766
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................................................................... $ 1,363 $ 2,096
Franchisee deposits....................................................................................... 2,097 2,619
Royalties, referrals and commissions payable.............................................................. 1,760 2,515
Accrued employee expenses and related taxes............................................................... 2,390 1,963
Other accrued expenses.................................................................................... 1,550 2,012
Income taxes payable...................................................................................... 769 838
Current maturities of long term debt...................................................................... 692 958
--------- ---------
Total current liabilities............................................................................. 10,621 13,001
Long-term debt, net of current maturities................................................................... 3,916 1,402
Commitments and contingencies...............................................................................
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and outstanding.............
Common stock, no par value, 40,000,000 shares authorized, with 11,300,273 and 11,139,698 shares issued and
outstanding at April 30, 1997 and 1996, respectively.................................................... 16,728 14,944
Retained earnings......................................................................................... 54,410 46,419
--------- ---------
Total shareholders' equity............................................................................ 71,138 61,363
--------- ---------
Total liabilities and shareholders' equity............................................................ $ 85,675 $ 75,766
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-75
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Revenues:
Royalty and marketing fees..................................................... $ 35,254 $ 30,947 $ 24,673
Franchise fees................................................................. 9,915 8,557 8,670
Sales of supplies and equipment................................................ 12,775 10,839 10,020
Interest income on leases and other............................................ 8,687 6,975 5,424
Company centers................................................................ 1,206 1,789 1,564
--------- --------- ---------
Total Revenues............................................................... 67,837 59,107 50,351
Cost and expenses:
Franchise operations........................................................... 18,463 14,881 12,506
Franchise development.......................................................... 6,383 5,883 5,090
Cost of supplies and equipment sold............................................ 9,585 8,465 7,915
Marketing...................................................................... 6,219 4,068 4,630
General and administrative..................................................... 9,060 10,293 7,878
Company centers................................................................ 1,265 1,842 1,598
Litigation settlement expenses................................................. 5,000
--------- --------- ---------
Total cost and expenses...................................................... 55,975 45,432 39,617
--------- --------- ---------
Operating income................................................................. 11,862 13,675 10,734
Interest on investments and other................................................ 963 674 447
--------- --------- ---------
Income before provision for income taxes......................................... 12,825 14,349 11,181
Provision for income taxes....................................................... 4,834 5,620 4,411
--------- --------- ---------
Net income................................................................... $ 7,991 $ 8,729 $ 6,770
--------- --------- ---------
--------- --------- ---------
Net income per common share...................................................... $ 0.68 $ 0.77 $ 0.60
--------- --------- ---------
--------- --------- ---------
Weighted average common and common equivalent shares outstanding................. 11,780 11,403 11,357
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-76
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, April 30, 1994................................................ 11,569 $ 19,195 $ 30,920 $ 50,115
Exercise of employee stock options and other........................... 146 928 928
Common stock repurchased............................................... (657) (5,681) (5,681)
Income tax benefit from stock option activity.......................... 13 13
Net income............................................................. 6,770 6,770
--------- --------- --------- ---------
Balance, April 30, 1995................................................ 11,058 14,455 37,690 52,145
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 221 2,135 2,135
Common stock repurchased............................................... (140) (1,922) (1,922)
Income tax benefit from stock option activity.......................... 276 276
Net income............................................................. 8,729 8,729
--------- --------- --------- ---------
Balance, April 30, 1996................................................ 11,139 14,944 46,419 61,363
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 180 1,590 1,590
Common stock repurchased............................................... (19) (410) (410)
Income tax benefit from stock option activity.......................... 604 604
Net income............................................................. 7,991 7,991
--------- --------- --------- ---------
Balance, April 30, 1997................................................ 11,300 $ 16,728 $ 54,410 $ 71,138
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-77
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net income........................................................................ $ 7,991 $ 8,729 $ 6,770
Adjustments to reconcile net income to net cash provided from operating
activities:
Depreciation and amortization................................................... 1,046 1,030 1,024
Gain on sale of equipment under sales type lease agreements..................... (429) (558) (681)
Increase (decrease) in allowance for doubtful accounts.......................... (530) 880 1,236
Loss (gain) on disposal of property and equipment............................... (7) 4 122
Deferred income taxes........................................................... 632 (1,054) (1,023)
Changes in assets and liabilities:
Restricted cash................................................................. 460 (459) (252)
Accounts and notes receivable................................................... (760) (1,049) (7,386)
Receivable from National Media Fund............................................. 520 830 (1,600)
Assets leased to franchisees and inventories.................................... (1,338) (1,235) (1,999)
Re-acquired area and center rights held for resale.............................. 109 378 261
Other current assets............................................................ (331) (58) 421
Other assets.................................................................... (38) 152 173
Accounts payable................................................................ (733) 945 419
Franchisee deposits............................................................. (522) 466 747
Royalties, referrals and commissions payable.................................... (755) 66 610
Accrued employee expenses and related taxes..................................... 427 500 697
Other accrued expenses.......................................................... (369) 838 821
Income taxes payable............................................................ 535 397 730
--------- --------- ---------
Net cash flows provided from operating activities............................. 5,908 10,802 1,090
Investing Activities:
Net change in short-term investments............................................ (5,517) (11,773) 389
Additions to property and equipment............................................. (1,292) (472) (477)
Principal payments received on sales-type leases................................ 3,407 3,628 3,223
Re-acquired area rights......................................................... (439) (185) (887)
--------- --------- ---------
Net cash flows provided from (used in) investing activities..................... (3,841) (8,802) 2,248
Financing Activities:
Borrowing under line of credit.................................................. 1,630 3,720 3,800
Repayments under line of credit................................................. (2,150) (4,550) (2,200)
Repayments on notes payable..................................................... (354) (146) (54)
Repurchase of common stock...................................................... (410) (1,922) (5,681)
Proceeds from the issuance of common stock...................................... 1,793 1,923 937
--------- --------- ---------
Net cash flows provided from (used in) financing activities..................... 509 (975) (3,198)
--------- --------- ---------
Increase in cash and cash equivalents............................................... 2,576 1,025 140
Cash and cash equivalents at beginning of year...................................... 1,416 391 251
--------- --------- ---------
Cash and cash equivalents at end of year............................................ $ 3,992 $ 1,416 $ 391
--------- --------- ---------
--------- --------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for Income taxes...................................... $ 3,762 $ 6,348 $ 5,479
</TABLE>
F-78
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest expense.................................................................... $ 261 $ 155 $ 98
Supplemental Schedule of Non-Cash Activities:
Equipment sold under sales-type leases.......................................... $ 1,864 $ 2,232 $ 2,724
Cost of equipment sold under sales-type leases.................................. $ 1,435 $ 1,674 $ 2,043
Notes payable issued in connection with re-acquired area rights................. $ 3,123 $ 185 $ 1,495
Accounts and notes forgiven in connection with re-acquired area rights.......... $ 104 $ 468
Exchange of area rights......................................................... $ 260
</TABLE>
See accompanying notes.
F-79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Mail Boxes Etc. ("MBE" or "the Company") was incorporated in November 1983
as a California corporation. It operates domestically through one wholly-owned
subsidiary, Mail Boxes Etc. USA, Inc. This subsidiary grants territorial
franchise rights for the operation or sale of service centers specializing in
postal, packaging, business and communication services. The purchase price paid
by the Company to acquire this subsidiary exceeded the subsidiary's net assets
by $0.9 million; the excess is being amortized on the straight-line method over
20 years.
The Company acquired a majority interest in the master license for the
United Kingdom during FY96. During FY97 MBE acquired the remaining interest in
the United Kingdom and operated this entity as a wholly-owned subsidiary,
MBE-UK. All accounts of this foreign subsidiary have been measured using U.S.
dollars as the functional currency. The gains and losses arising from the
measurement of the foreign subsidiary's account have not been significant. At
the end of FY97, the MBE Master License for the United Kingdom was sold to a
group comprised of the individual principal owners of the MBE Master License for
Canada and several other MBE Area and Individual Franchisees.
The Company provides franchisees with a system of business training, advice
regarding site location, marketing, advertising programs and management support
designed to assist the franchisee in opening and operating MBE Centers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
REVENUE RECOGNITION
The Company enters into area and individual franchise agreements in the
United States and master license agreements in other countries.
Area franchise agreements grant the area franchisee the exclusive right to
market individual franchise centers for the Company in the area franchisee's
territory. The area franchisee generally receives a commission on individual
franchises sold as well as a share of future royalties earned by the Company
from centers in the area franchisee's territory. Individual franchise agreements
grant the individual franchisee the exclusive right to open and operate a
franchise center in the individual franchisee's territory.
Franchise fee revenue is recognized upon completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is completed. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant initial obligations that must be completed before
any revenue is recognized are: all operating manuals are provided and training
is completed.
F-80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue is recognized using the installment method when the revenue is
collectable over an extended period and no reasonable basis exists for
estimating collectability.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
In FY95, the National Media Fund was created to administer national
advertising programs. The National Media Fund is managed by a committee of area
franchisees, individual franchisees and MBE. Certain advertising fees, based on
franchisees' sales (as defined), are collected by the Company for the National
Media Fund. Such advertising fees are not included in the accompanying financial
statements. As of April 30, 1997 and 1996, the Company had advanced $250
thousand and $770 thousand to the National Media Fund, respectively, to fund
certain national advertising programs.
These advances, including interest, are repaid to the Company based on the
collection of the advertising fees and availability of funds.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers cash equivalents to be those instruments which have
original maturities of three months or less.
In accordance with Financial Accounting Standards Board Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities for which the Company
does not have the intent or the ability to hold to maturity are classified as
available for sale along with the Company's investments in equity securities.
Securities classified as available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. At April 30, 1997 and 1996, the Company had no investments
that were classified as trading or held to maturity as defined by Statement No.
115.
Realized gains and losses are included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available for sale is included in interest income.
The following is a summary of cash and cash equivalents and the estimated
fair value of available for sale securities by balance sheet classification at
April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents Cash.............................................................. $ 351 $ 1,339
Money market fund....................................................................... 3,641 77
Short-term investments:
U.S. Government securities.............................................................. 5,842 4,000
Mutual fund preferred equity securities................................................. 21,500 17,825
--------- ---------
Total cash, cash equivalents and short-term investments..................................... $ 31,334 $ 23,241
--------- ---------
--------- ---------
</TABLE>
F-81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimated fair value of each investment approximates the amortized cost,
and therefore, there are no unrealized gains or losses as of April 30, 1997 or
1996.
"Restricted cash-franchisee deposits" is the amount that prospective
franchisees have deposited into a separate account managed by MBE. When all of
the requirements for recognizing revenue for an individual, area or master
license sale are completed (see the "Revenue Recognition" section of Note 1),
then the deposit amount is transferred from this separate account into MBE's
regular account and the revenue from the sale is recognized. If MBE's
obligations are not completed then these deposits are usually refundable. The
account, "Franchisee deposits", in the liability section of the balance sheet
includes the restricted cash deposit amount and other deposits received from its
franchisees.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt and equity instruments of
financial institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments. Receivables from franchisees include trade
receivables, lease receivables and notes receivable. Credit is extended based on
an evaluation of the franchisee's financial condition. Sales-type leases are
collateralized by the leased equipment and fixtures.
Trade receivables are not collateralized. However, the center ownership
transfer process requires that all amounts owed be paid when a center ownership
is transferred.
Notes receivable from area franchisees and master licensees are
collateralized by the area rights or master license rights, respectively. The
Company has provided for estimated credit losses.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of resources and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories consist of supplies and equipment held for resale to franchisees
and equipment held for lease. Inventories are recorded at the lower of cost
(first-in, first-out method) or market.
RE-ACQUIRED INDIVIDUAL AND AREA FRANCHISE RIGHTS
The Company repurchases franchise rights for two primary reasons. The
Company may repurchase area rights with the intention of developing a better
support system and then reselling the areas within a short period of time. The
Company may acquire individual center rights to upgrade the Center and then
resell it within a short period of time. The Company had an investment of
approximately $629 thousand and $638 thousand in such individual and area rights
at April 30, 1997 and 1996, respectively. The Company may also repurchase the
area rights with the primary intention of retaining the royalties normally
shared with the former area franchisees and maintaining such rights as long-term
investments. The area
F-82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
repurchases have been accounted for as purchases. The Company records these area
repurchases at cost less accumulated amortization. Periodically the Company
assesses the fair value of these areas based on estimated cash flows to
determine if an impairment in the value has occurred and an adjustment is
necessary. As of April 30, 1997 no adjustment is necessary. The Company had an
investment of $6.4 million and $3.2 million in such area rights at April 30,
1997 and 1996, respectively. Area franchise rights held as long-term investments
are amortized over a period of 20 years.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Building................................................... 31.5 years
12.5--31.5
Building improvements...................................... years
Office furniture and equipment............................. 3-5 years
Vehicles................................................... 3 years
</TABLE>
EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's stock options generally equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
ACCOUNTING FOR ASSET IMPAIRMENT
The Company adopted Statement of Financial Accounting Standards No. 121
(SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", effective May 1, 1995. SFAS No. 121
required impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. There was no effect on the financial
statements from the adoption of SFAS No. 121.
NET INCOME PER COMMON SHARE
Earnings per share are based on the weighted average number of common shares
and common share equivalents (stock options) outstanding during the period.
F-83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
2. NOTES RECEIVABLE
Notes receivable consist of the following at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Notes with interest rates ranging from 8%-14%, from individual franchisees, due at varying
dates through 2005........................................................................ $ 11,688 $ 11,170
Notes with interest rates ranging from 8%-14%, from area franchisees, due at varying dates
through 2005.............................................................................. 7,252 6,611
Notes with interest rates ranging from 8.5%--11.75%, from master licensees, due at varying
dates through 2004........................................................................ 1,728 1,806
--------- ---------
20,668 19,587
Less portion due within one year............................................................ (6,048) (6,756)
Less allowance for uncollectible notes...................................................... (1,643) (2,000)
--------- ---------
$ 12,977 $ 10,831
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:..................................... $ 1,997 $ 2,041
--------- ---------
--------- ---------
</TABLE>
Scheduled principal maturities for notes receivable as of April 30, 1997,
are as follows (in thousands): 1998--$6,048; 1999--$4,164; 2000--3,384;
2001--$2,582; 2002--$1,997; and thereafter $2,493
At April 30, 1997, the Company was obligated to fund approximately $281
thousand under certain financing programs offered to franchisees.
3. NET INVESTMENT IN SALES--TYPE LEASES
The Company leases various types of office and computer equipment to
franchisees under three to eight-year lease agreements. The following summarizes
the components of the net investment in sales-type leases at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Total minimum lease payments to be received................................................. $ 10,980 $ 13,241
Less unearned income........................................................................ (2,591) (3,309)
--------- ---------
Net investment in sales-type leases......................................................... 8,389 9,932
Less portion due within one year............................................................ (2,322) (2,414)
--------- ---------
$ 6,067 $ 7,518
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:......................................... $ 1,203 $ 1,420
--------- ---------
--------- ---------
</TABLE>
Annual minimum lease payments subsequent to April 30, 1997, are as follows
(in thousands): 1998-- $3,307; 1999--$2,736; 2000 -$2,031; 2001--$1,330;
2002--$778; and thereafter--$798.
4. DEBT
The Company has a line of credit with a bank which allows maximum borrowings
of $7 million. As of April 30, 1997, $250 thousand has been borrowed and $6.750
million is available for borrowing under the line of credit. The line of credit
is unsecured and bears interest at a rate based on LIBOR plus certain basis
F-84
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
4. DEBT (CONTINUED)
points (6.81% at April 30, 1997). The agreement expires on September 1, 1998, at
which time all outstanding borrowing can be converted to a three-year term loan,
which would be payable in equal monthly installments. The line of credit
agreement contains various covenants, including limitations on additional
indebtedness and maintaining certain financial ratios.
5. NOTES PAYABLE
Long-term debt consists of notes payable to former area franchisees in
connection with the repurchase of area franchise rights. Payments are made in
monthly installments of $51 thousand including interest at 8% to 8.5% per annum.
Aggregate principal maturities on notes payable at April 30, 1997 are as follows
(in thousands): 1998 ---$442; 1999--$452; 2000--$447; 2001--$457; 2002--$463;
and thereafter-- $2,097.
6. INCOME TAXES
The provision for income taxes consists of the following for each of the
years ended April 30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal............................................................................ $ 3,297 $ 5,324 $ 4,352
State.............................................................................. 905 1,344 1,088
--------- --------- ---------
4,202 6,668 5,440
Deferred:
Federal............................................................................ 557 (913) (890)
State.............................................................................. 75 (135) (139)
--------- --------- ---------
632 (1,048) (1,029)
--------- --------- ---------
$ 4,834 $ 5,620 $ 4,411
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has derived tax deductions measured by the excess of the market
value over the option price at the date employee stock options were exercised.
The cumulative related tax benefit of approximately $1.4 million has been
credited to common stock. Significant components of the Company's deferred tax
assets for federal and state income taxes as of April 30 are:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Valuation reserves................................................................... $ 1,884 $ 2,646 $ 1,679
State taxes.......................................................................... 247 339 295
Deferred compensation................................................................ 390 168 131
--------- --------- ---------
Total deferred tax assets............................................................ $ 2,521 $ 3,153 $ 2,105
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
6. INCOME TAXES (CONTINUED)
A reconciliation between the amount of tax computed by multiplying income
before taxes by the applicable statutory rates and the amount of reported taxes
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate....................................................................... 34.0% 35.0% 34.0%
State tax, net of federal tax benefit................................................ 5.0% 5.5% 5.6%
Other................................................................................ (1.3%) (1.3%) (0.1%)
--- --- ---
37.7% 39.2% 39.5%
--- --- ---
--- --- ---
</TABLE>
7. STOCK OPTIONS
The Company has granted options to directors, officers and key employees
under stock option plans to purchase shares of the Company's common stock.
Options are generally granted at prices equal to the fair market value of
the shares at the date of grant and are generally exercisable in equal
increments over three to five years, commencing one year after the date of
grant. At April 30, 1997, 473 thousand options were exercisable and the Company
had nearly 2.6 million shares available for future grant under the stock option
plan for employees and 160 thousand shares available for future grant under the
stock option plan for outside directors.
A summary of the Company's stock option activity and related information is
as follows (shares in thousands):
<TABLE>
<CAPTION>
FY97
----------------------------
<S> <C> <C>
NUMBER OF WGTD. AVG.
SHARES EXERCISED PRICE
----------- ---------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year...................................................... 1,113 $ 9.85
Granted............................................................................... 489 $ 17.54
Exercised............................................................................. (180) $ 9.97
Forfeited............................................................................. (169) $ 13.12
----- ------
Outstanding at the end of the year.................................................... 1,253 $ 12.39
----- ------
Exercisable at the end of the year.................................................... 473* $ 10.75
----- ------
</TABLE>
- ------------------------
* Because of the Merger Agreement with U.S. Office Products described in Note
13, all stock options granted prior to May 22, 1997 (the date of the Merger
Agreement), will become vested and fully exercisable prior to the Merger. If
the Merger is not consummated, all options that were accelerated solely as a
result of the Merger Agreement, but were not exercised, will revert back to
their original vesting schedule.
F-86
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
FY96
--------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 914 $ 9.93
Granted................................................................................ 441 $ 9.17
Exercised.............................................................................. (221) $ 8.70
Forfeited.............................................................................. (21) $ 13.30
----- ------
Outstanding at the end of the year..................................................... 1,113 $ 9.85
----- ------
Exercisable at the end of the year..................................................... 394 $ 12.49
----- ------
</TABLE>
<TABLE>
<CAPTION>
FY95
----------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
------------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 847 $ 9.90
Granted................................................................................ 258 $ 7.81
Exercised.............................................................................. (146) $ 6.29
Forfeited.............................................................................. (45) $ 9.31
----- ------
Outstanding at the end of the year..................................................... 914 $ 9.93
----- ------
Exercisable at the end of the year..................................................... 408 $ 10.77
----- ------
</TABLE>
Adjusted pro forma information regarding net income and earnings-per-share
is required by SFAS 123, and has been determined as if the Company had accounted
for its employee and non-employee directors stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using the "Black Scholes" method for option pricing with the
following weighted-average assumptions for FY97 and FY96: 1) risk free interest
rates of 6%; 2) dividend yields of 0%; 3) volatility factors of the expected
market value of the Company's common stock of .395; and a weighted-average
expected life of the options of 5 years.
For purposed of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information would have been as follows (in
thousands):
<TABLE>
<CAPTION>
FY97 FY96
----------- -------------
<S> <C> <C>
Adjusted pro forma net income.......................................................... $ 7,403 $ 8,549
Adjusted pro forma earnings-per-share.................................................. $ 0.63 $ 0.75
</TABLE>
The results above are not likely to be representative of the effects of
applying FAS 123 on reported net income or loss for future years as these
amounts reflect the expense for only one or two years vesting.
F-87
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
The following summarizes information about the Company's stock options
outstanding at April 30, 1977 (number of options in thousands):
<TABLE>
<CAPTION>
SHARES SUBJECT TO OUTSTANDING OPTIONS
- ------------------------------------------------------------------------------ EXERCISABLE
OPTION WGTD. AVE ---------------------------------------
RANGE OF SHARES REMAINING WGTD. AVE. NUMBER WGTD. AVE.
EXERCISE PRICE OUTSTANDING LIFE EXER. PRICE EXERCISABLE EXER. PRICE
- -------------------------------------------------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$4.13 ...................................... 8 1.0 yrs $ 4.13 8 $ 4.13
$6.81--$ 8.25..................................... 390 7.5 $ 7.84 112 $ 7.57
$9.00--$10.50..................................... 278 4.6 $ 10.00 195 $ 9.96
$11.50--$14.50.................................... 145 4.8 $ 13.80 140 $ 13.78
$16.50--$23.13.................................... 432 9.1 $ 17.70 18 $ 18.27
----- ----------- ----------- ----- -----------
1,253 473
</TABLE>
8. FRANCHISE FEES
Franchise fees consist of the following for each of the years ended April
30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Individual franchises................................................................ $ 7,240 $ 6,397 $ 6,774
Area franchises...................................................................... 296 292 58
Master licenses & international fees................................................. 1,062 957 1,170
Transfer and renewal fees............................................................ 1,317 911 668
--------- --------- ---------
$ 9,915 $ 8,557 $ 8,670
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. ROYALTY EXPENSES
Royalties shared with area franchisees are included in franchise operations
in the accompanying consolidated statements of income and are as follows (in
thousands): 1997--$12,875; 1996--$11,686; and 1995--$9,689.
10. EMPLOYEE BENEFIT PLANS
In November 1988, the Company adopted an amended and restated Stock Purchase
and Salary Savings Plan (Plan) covering substantially all employees that have
been employed for at least six months and meet other age and eligibility
requirements. Employees may contribute up to ten percent of compensation per
year (subject to a maximum limit by federal tax law) into various funds.
Profit sharing contributions by the Company to the Plan are made at the
discretion of the Board of Directors and were $240 thousand, $450 thousand, and
$420 thousand for the years ended April 30, 1997, 1996 and 1995, respectively.
At the discretion of the Board of Directors, the Company may also make annual
matching contributions to the Plan. Matching contributions for 1997, 1996 and
1995 were $214 thousand, $162 thousand, and $136 thousand, respectively and
equal to 50% of the employee's contributions.
F-88
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has entered into an employment agreement with its chief
executive officer, under which the Company agreed to obtain a split dollar life
insurance policy for his benefit. The Company contributed $100 thousand in both
FY97 and FY96 toward the funding of this policy. The Company has retained an
equity interest in this policy equal to the extent of its contributions.
Consequently, there is no effect on the Company's earnings as a result of these
contributions.
Contributions after FY97 will be determined annually by the Board of
Directors.
11. LITIGATION
On November 6, 1996, the Company entered into a comprehensive settlement of
various lawsuits and claims made by certain franchisees in several lawsuits
being pursued in San Diego County Superior Court. Under the settlement
agreement, the Company paid $4 million in cash and will deliver an aggregate
amount of 39,080 shares of its common stock over a period of two years. The
settlement expense reflected in the Company's financial results is $5 million.
The Company is still involved in various lawsuits and claims from its
franchisees and former employees in the course of conducting its business. While
the Company intends to vigorously defend these actions, management is unable to
make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation. It is possible that the
Company's results of operations in a particular quarter or annual period could
be materially adversely affected by an ultimate unfavorable outcome of certain
pending litigation. Management believes, however, that the ultimate outcome of
all pending litigation should not have a material adverse effect on the
Company's financial position or liquidity.
12. RELATED PARTY TRANSACTIONS
Nearly 40% of the franchisees' gross sales and almost 50% of their
subject-to-royalty revenues are generated by selling UPS Services. The Company
receives royalty revenue based on revenues earned by the franchisees. The
Company recognized royalty and marketing fee revenues generated from UPS
services of $16.9 million, $14.9 million, and $11.8 million for the years ended
April 30, 1997, 1996, and 1995, respectively.
13. SUBSEQUENT EVENTS
On May 22, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with U.S. Office Products Company ("USOP"), pursuant to
which a newly-formed, wholly-owned subsidiary of USOP will be merged (the
"Merger") with and into MBE, with MBE to be the surviving corporation. Once the
merger is completed, MBE will be a wholly-owned subsidiary of USOP. Consummation
of the Merger is subject to certain conditions, including the approval of the
principal terms of the transaction by the Company's shareholders.
14. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information includes all adjustments which
management considers necessary for a fair statement of such information. For
interim quarterly financial statements, the provision for
F-89
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
14. QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
income taxes is estimated using the best available information for projected
results for the entire year (in thousands, except for per share data).
<TABLE>
<CAPTION>
FY97 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues......................................................... $ 14,779 $ 17,047 $ 18,838 $ 17,173
Total cost and expenses................................................ 11,634 18,078 13,204 13,059
Provision for (benefit from) income taxes.............................. 1,331 (341) 2,310 1,534
Net income (loss)...................................................... 2,070 (470) 3,557 2,834
Earnings (loss) per share.............................................. .18 (0.04) .30 .24
</TABLE>
<TABLE>
<CAPTION>
FY96 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues......................................................... $ 12,803 $ 15,097 $ 16,164 $ 15,093
Total cost and expenses................................................ 10,279 11,804 11,870 11,479
Provision for (benefit from) income taxes.............................. 1,036 1,345 1,751 1,488
Net income (loss)...................................................... 1,622 2,091 2,708 2,308
Earnings (loss) per share.............................................. .14 .18 .24 .20
</TABLE>
F-90
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
1997
------------
<S> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents......................................................................... $ 1,059
Restricted cash--franchisee deposits.............................................................. 1,923
Short-term investments............................................................................ 31,354
Accounts receivable, net.......................................................................... 7,806
Inventories....................................................................................... 533
Current portion of notes receivable............................................................... 8,998
Current portion of net investment in sales-type leases............................................ 3,388
Deferred income taxes............................................................................. 1,272
Re-acquired area and center rights held for resale................................................ 612
Other............................................................................................. 1,637
------------
Total current assets............................................................................ 58,582
Notes receivable, net............................................................................. 18,131
Net investment in sales-type leases............................................................... 5,133
Property and equipment, net....................................................................... 6,686
Excess of cost over assets acquired, net.......................................................... 268
Re-acquired area rights........................................................................... 1,157
Deferred income taxes............................................................................. 1,249
Other assets...................................................................................... 958
------------
Total assets.................................................................................... $ 92,164
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................................. $ 1,952
Franchisee deposits............................................................................... 2,395
Royalties, referrals and commissions payable...................................................... 2,760
Accrued employee expenses and related taxes....................................................... 2,089
Other accrued expenses............................................................................ 2,038
Income taxes payable.............................................................................. 1,523
Current maturities of debt and notes payable...................................................... 274
------------
Total current liabilities....................................................................... 13,031
Long-term debt, net of current maturities........................................................... 2,448
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and outstanding.....
Common stock, no par value, 40,000,000 shares authorized, with 11,422,091 shares issued
outstanding at October 31, 1997................................................................. 18,340
Retained earnings................................................................................. 58,345
------------
Total shareholders' equity...................................................................... 76,685
------------
Total liabilities and shareholders' equity.................................................... $ 92,164
------------
------------
</TABLE>
See accompanying notes.
F-91
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
<S> <C> <C> <C> <C>
10/31/97 10/31/96 10/31/97 10/31/96
--------- --------- --------- ---------
Revenue:
Royalty and marketing fees........................................ $ 8,466 $ 7,985 $ 17,161 $ 15,586
Franchise fees.................................................... 3,802 2,736 6,144 4,531
Sales of supplies and equipment................................... 3,537 3,899 6,049 6,929
Interest income on leases and other............................... 2,537 2,163 4,413 4,151
Company centers................................................... 204 264 458 630
--------- --------- --------- ---------
Total revenues................................................ 18,546 17,047 34,225 31,827
Cost and Expenses:
Franchise operations.............................................. 4,515 4,328 8,598 8,488
Franchise development............................................. 1,840 1,742 3,316 2,954
Cost of supplies and equipment sold............................... 2,552 2,912 4,396 5,189
Marketing......................................................... 1,773 1,713 3,048 3,061
General and administrative........................................ 3,251 2,099 5,591 4,341
Company centers................................................... 197 284 459 680
Litigation settlement expenses.................................... 5,000 5,000
Non recurring charges............................................. 2,510
--------- --------- --------- ---------
Total cost and expenses....................................... 14,128 18,078 27,918 29,713
--------- --------- --------- ---------
Operating Income (loss)............................................... 4,418 (1,031) 6,307 2,114
Interest on investments and other..................................... 309 220 631 476
--------- --------- --------- ---------
Income (loss) before provision (benefit) for income taxes............. 4,727 (811) 6,938 2,590
Provision for income taxes............................................ 1,881 (341) 3,003 990
--------- --------- --------- ---------
Net income (loss)............................................. $ 2,846 $ (470) $ 3,935 $ 1,600
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per common share:................................... $ .24 $ (.04) $ .33 $ .14
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common and common equivalent shares outstanding...... 12,101 11,198 12,088 11,774
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-92
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Operating Activities:
Net income................................................................................. $ 3,935 $ 1,600
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization............................................................ 556 523
Gain on sale of re-acquired area rights.................................................. (2,644) (339)
Gain on sale of equipment under sales-type lease agreements.............................. (166) (241)
Changes in assets and liabilities:
Restricted cash.......................................................................... (310) 80
Accounts and notes receivable............................................................ (1,792) 461
Receivable from National Media Fund...................................................... 250 770
Assets leased to franchisees and inventories............................................. (675) (1,032)
Re-acquired area and center rights (held for resale)..................................... (143) (86)
Other current assets..................................................................... (243) (1,447)
Other assets............................................................................. (127) (191)
Accounts payable......................................................................... 589 288
Franchisee deposits...................................................................... 298 89
Royalties, referrals and commissions payable............................................. 1,000 (26)
Accrued employee expenses and related taxes.............................................. (301) (929)
Other accrued expenses................................................................... 488 4,806
Income taxes payable..................................................................... 754 (838)
--------- ---------
Net cash flows provided from operating activities...................................... 1,469 3,488
Investing Activities:
Net change in short-term investments..................................................... (4,012) (2.840)
Additions to property and equipment...................................................... (1,106) (215)
Principal payments received on sales-type leases......................................... 624 1,777
--------- ---------
Net cash flows (used in) investment activities......................................... (4,494) (1,278)
Financing Activities:
Borrowings under revolving loan.......................................................... 930
Repayments under revolving loan.......................................................... (250) (1,700)
Repayments on notes payable.............................................................. (1,270) (136)
Repurchase of common stock............................................................... (112) (283)
Proceeds from the issuance of common stock............................................... 1,724 945
--------- ---------
Net cash flows provided from (used in) financing activities............................ 92 (244)
Increase in cash and cash equivalents........................................................ (2,933) 1,966
Cash and cash equivalents at beginning of period............................................. 3,992 1,416
--------- ---------
Cash and cash equivalents at end of period................................................... $ 1,059 $ 3,382
--------- ---------
--------- ---------
Supplemental Disclosure for Cash Flow Information:
Cash paid during the period for income taxes............................................. $ 2,240 $ 3,270
Interest................................................................................. 164 85
Supplemental Schedule with Non-Cash Investment and Financing Activities:
Equipment sold under sales-type agreements............................................... $ 755 $ 1,048
Additions to debt for acquisition of Area rights......................................... 597 1,780
</TABLE>
See accompanying notes.
F-93
<PAGE>
MAIL BOXES ETC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. BASIS OF PRESENTATION:
NOTE 1. PRESENTATION
The condensed consolidated balance sheet as of October 31, 1997, the
condensed consolidated statements of operations for the three-month periods and
six-month periods ended October 31, 1997 and 1996, and the condensed
consolidated statements of cash flows for the six-month periods then ended have
been prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations, and cash flows
have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. In addition, certain Risk Factors may also
impact future financial reports. It is suggested that the condensed consolidated
financial statements contained in this report be read in conjunction with the
financial statements and notes thereto included in the 1997 Annual Report on
Form 10-K, as well as the Risk Factors discussed in the Form 10-K Report. The
results of operations for the quarter ended October 31, 1997 are not necessarily
indicative of the operating results for the full year.
NOTE 2. SUBSEQUENT EVENT
During November 1997, Mail Boxes Etc. was acquired by U.S. Office Products.
U.S. Office Products issued approximately 15.4 million shares of its common
stock in exchange for all the outstanding shares of Mail Boxes Etc.,
representing an exchange ratio of 1.349 shares of U.S. Office Products common
stock for each share of Mail Boxes Etc. common stock.
F-94
<PAGE>
OFFERING CIRCULAR/PROSPECTUS
[LOGO]
OFFER TO EXCHANGE UP TO 8,889,920 SHARES OF COMMON STOCK
FOR 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2001
AT A TEMPORARILY REDUCED NOTE CONVERSION PRICE
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW
YORK CITY TIME,
MAY 29, 1998, UNLESS EXTENDED.
U.S. Office Products Company (the "Company") hereby offers to exchange
shares of its common stock, par value $.001 per share (the "Common Stock"), for
its outstanding 5 1/2% Convertible Subordinated Notes due 2001 (the "Notes") at
an exchange rate that will effectively reduce the conversion price for a period
beginning on the date of this Offering Circular/Prospectus and ending at 12:00
midnight, New York City time, on May 29, 1998 or such later date as extended by
the Company, in its sole discretion (the "Expiration Date") (such period, the
"Exchange Period"). This offer is being made on the terms set forth in this
Offering Circular/Prospectus (the "Offering Circular/Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal," which, together
with the Offering Circular/Prospectus, constitutes the "Exchange Offer").
The Notes are currently convertible into shares of Common Stock at a rate of
one share for each $19.00 principal amount of the Notes (the "Existing
Conversion Price"). During the Exchange Period, holders of the Notes (the
"Holders") will be able to exchange the Notes for Common Stock at an exchange
rate of 61.843 shares per $1,000 principal amount of the Notes, which
effectively reduces the conversion price to $16.17 per share (the "Reduced
Conversion Price"). The Company will pay in cash unpaid interest accrued on the
Notes through the Expiration Date with respect to all Notes tendered pursuant to
the Exchange Offer.
Holders who exchange pursuant to the Exchange Offer will be able to tender
shares they receive upon exchange in a self-tender offer for shares of Common
Stock that the Company is making. Holders who exchange also will be able to
receive shares of stock of four companies that the Company is spinning off to
its stockholders. See "The Strategic Restructuring Plan."
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will accept for exchange all Notes validly tendered and not withdrawn
prior to 12:00 midnight, New York City time, on the Expiration Date. The
Exchange Offer will expire on the Expiration Date. Tenders of Notes may be
withdrawn at any time on or prior to the Expiration Date and, unless accepted
for exchange by the Company, may be withdrawn at any time after 40 business days
after the date of this Offering Circular/Prospectus.
As of the date of this Offering Circular/Prospectus, there were $143,750,000
principal amount of the Notes outstanding. The Common Stock is traded on the
Nasdaq National Market System under the trading symbol "OFIS." On April 29,
1998, the closing sale price of the Common Stock on the Nasdaq National Market
System was $17.81 per share.
THE COMPANY WILL NOT BE REQUIRED TO COMPLETE THE EXCHANGE OFFER IF THE
OBLIGATION OF INVESTOR (AS DEFINED HEREIN) TO MAKE THE EQUITY INVESTMENT IS
TERMINATED, OR IF THE COMMITMENT WITH RESPECT TO A PROPOSED NEW CREDIT FACILITY
IS TERMINATED. IN ADDITION, THE EXCHANGE OFFER IS SUBJECT TO CERTAIN OTHER
CONDITIONS. SEE "THE TERMS OF THE EXCHANGE OFFER--CONDITIONS OF THE EXCHANGE
OFFER." [CONTINUED ON FOLLOWING PAGE]
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS OFFERING CIRCULAR/PROSPECTUS
FOR A DISCUSSION OF CERTAIN FACTORS THAT HOLDERS SHOULD CONSIDER IN EVALUATING
WHETHER TO EXCHANGE THEIR NOTES FOR COMMON STOCK PURSUANT TO THE EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING CIRCULAR/
PROSEPCTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
BancAmerica Robertson Stephens has been retained to act as Dealer Manager to
solicit exchanges of Notes for Common Stock. See "The Terms of the Exchange
Offer--Dealer Manager." State Street Bank and Trust Company has been retained to
act as the Exchange Agent in connection with the Exchange Offer. MacKenzie
Partners, Inc. has been retained to act as Information Agent to assist in
connection with the Exchange Offer.
------------------------
The Dealer Manager for the Exchange Offer is:
[LOGO]
The date of this Offering Circular/Prospectus is May 1, 1998.
<PAGE>
None of the Board of Directors of the Company or the Company makes any
recommendation to Holders as to whether to tender or refrain from tendering in
the Exchange Offer. Holders are urged to consult their financial and tax
advisors in making their decisions on what action to take in light of their own
particular circumstances.
In order to participate in the Exchange Offer, Holders must submit a Letter
of Transmittal and comply with the other procedures for tendering in accordance
with the instructions contained herein and in the Letter of Transmittal prior to
the Expiration Date. See "The Terms of the Exchange Offer-- Procedures for
Tender of Notes for Exchange."
The Company expressly reserves the right, in its sole discretion, subject to
applicable law, to (i) terminate the Exchange Offer, and not accept for exchange
any Notes and promptly return all Notes at any time for any reason, including
(without limitation) upon the failure of any of the conditions specified in "The
Terms of the Exchange Offer--Conditions of the Exchange Offer," (ii) waive any
condition to the Exchange Offer and accept all Notes previously tendered
pursuant to the Exchange Offer, (iii) extend the Expiration Date and retain all
Notes tendered pursuant to the Exchange Offer until the Expiration Date,
subject, however, to all withdrawal rights of Holders (see "The Terms of the
Exchange Offer--Withdrawal Rights") or (iv) amend or modify the terms of the
Exchange Offer in any manner. Any amendment applicable to the Exchange Offer
will apply to all Notes tendered pursuant to the Exchange Offer. The minimum
period during which the Exchange Offer must remain open following a material
change in the terms of the Exchange Offer or a waiver by the Company of a
material condition of the Exchange Offer, other than a change in the principal
amount of Notes being sought or in the consideration offered, will depend upon
the facts and circumstances, including the relative materiality of the change or
waiver. See "The Terms of the Exchange Offer--Expiration Date; Extension;
Amendment; Termination."
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the U.S. Securities and
Exchange Commission (the "Commission") (File No. 0-25372) are incorporated
herein by reference:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended April
26, 1997, as amended through the date hereof;
(b) The Company's Quarterly Reports on Form 10-Q for the periods ended July
26, 1997, October 25, 1997 and January 24, 1998;
(c) The Company's Current Reports on Form 8-K filed with the Commission on
April 22, 1998; April 7, 1998; March 12, 1998; March 9, 1998; February 12, 1998;
January 16, 1998; December 24, 1997; November 24, 1997; November 6, 1997; and
July 21, 1997;
(d) The Company's definitive Proxy Statement on Schedule 14A filed on April
30, 1998; and
(e) The Company's Registration Statement on Form 8-A, as amended, filed with
the Commission on February 13, 1995.
In addition, all reports and other documents filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"), subsequent to the date of
effectiveness of the Registration Statement of which this Offering Circular/
Prospectus is a part and prior to the termination of the offering made hereby,
shall be deemed to be incorporated by reference into this Offering
Circular/Prospectus. Any statement contained herein or incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Offering Circular/Prospectus to the extent that a statement
contained or incorporated by reference herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Offering Circular/Prospectus.
THIS OFFERING CIRCULAR/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THE COMPANY WILL PROVIDE WITHOUT
CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER OF NOTES, TO WHOM THIS
OFFERING CIRCULAR/PROSPECTUS IS DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF
SUCH PERSON, A COPY OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED HEREIN
BY REFERENCE, OTHER THAN EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS). SUCH REQUESTS
SHOULD BE MADE BY CONTACTING MARK D. DIRECTOR, EXECUTIVE VICE PRESIDENT-
ADMINISTRATION, GENERAL COUNSEL AND SECRETARY, U.S. OFFICE PRODUCTS COMPANY,
1025 THOMAS JEFFERSON STREET, N.W., SUITE 600 EAST, WASHINGTON, D.C. 20007 OR
THE INFORMATION AGENT AT THE ADDRESS SET FORTH ON THE BACK PAGE OF THIS OFFERING
CIRCULAR/PROSPECTUS. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY
REQUEST SHOULD ALLOW AT LEAST FIVE (5) BUSINESS DAYS FOR DELIVERY.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE CONTAINED
IN THIS OFFERING CIRCULAR/PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE DEALER MANAGER. NEITHER THE DELIVERY OF THIS OFFERING
CIRCULAR/PROSPECTUS NOR ANY EXCHANGE CONTEMPLATED HEREBY SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE RESPECTIVE DATES AS OF WHICH INFORMATION IS
GIVE HEREIN.
The Exchange Offer is not being made to (nor will any tender of Notes for
exchange be accepted from or on behalf of) Holders in any jurisdiction in which
the making of the Exchange Offer or the acceptance of any tender of Notes for
exchange therein would not be in compliance with the laws of such jurisdiction.
However, the Company may, at its discretion, take such action as it may deem
necessary for the Company to make the Exchange Offer in any such jurisdiction
and extend the Exchange Offer to Holders in such jurisdiction. In any
jurisdiction the securities laws or blue sky laws of which require the Exchange
Offer to be made by a licensed broker or dealer, the Exchange Offer is being
made on behalf of the Company by the Dealer Manager or one or more registered
brokers or dealers which are licensed under the laws of such jurisdiction.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Summary............................................................... 1
Risk Factors.......................................................... 7
The Terms of the Exchange Offer....................................... 15
Dividend Policy....................................................... 24
Capitalization........................................................ 25
Selected Historical and Pro Forma Financial Data...................... 26
The Strategic Restructuring Plan...................................... 28
Effect of the Strategic Restructuring Plan on the Conversion Price for
the Notes........................................................... 44
U.S. Federal Income Tax Considerations................................ 45
Description of the Notes.............................................. 47
Description of the Common Stock....................................... 58
Legal Matters......................................................... 59
Experts............................................................... 59
Available Information................................................. 60
</TABLE>
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS
OFFERING CIRCULAR/PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN. SEE "RISK
FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THE EXCHANGE OFFER. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE
TERMS "U.S. OFFICE PRODUCTS" OR THE "COMPANY" REFER TO U.S. OFFICE PRODUCTS
COMPANY, A DELAWARE CORPORATION, AND ITS SUBSIDIARIES AFTER COMPLETION OF THE
STRATEGIC RESTRUCTURING PLAN. CERTAIN OTHER CAPITALIZED TERMS USED IN THIS
SUMMARY ARE DEFINED ELSEWHERE IN THIS OFFERING CIRCULAR/PROSPECTUS.
THIS OFFERING CIRCULAR/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS OFFERING CIRCULAR/PROSPECTUS,
THE WORDS "ANTICIPATE," "ESTIMATE," "INTEND," "MAY," "WILL," AND "EXPECT" AND
SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE
EVENTS OR CIRCUMSTANCES. 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 IN "RISK FACTORS." THIS OFFERING
CIRCULAR/PROSPECTUS ALSO CONTAINS PRO FORMA FINANCIAL INFORMATION THAT GIVES
EFFECT TO CERTAIN EVENTS. SUCH INFORMATION IS NOT NECESSARILY INDICATIVE OF THE
RESULTS THAT THE COMPANY WOULD HAVE ATTAINED HAD THE EVENTS OCCURRED AT THE
BEGINNING OF THE PERIODS PRESENTED, AS ASSUMED, OR OF THE FUTURE RESULTS OF THE
COMPANY.
THE COMPANY
U.S. Office Products is one of the world's leading suppliers of a broad
range of office products and business services to corporate customers. Through
its North American Office Products Group ("NAOPG"), U.S. Office Products
provides office supplies, office furniture and office coffee, beverage and
vending services primarily to middle market companies (25 to 500 employees).
Based on current sales, NAOPG is one of the largest contract stationers in the
United States. Outside North America, U.S. Office Products' Blue Star Group
Limited ("Blue Star") is a leading supplier of office products in New Zealand
and Australia, and U.S. Office Products owns a 49% interest in Dudley Stationery
Limited ("Dudley"), the second largest contract stationer in the United Kingdom.
With its November 1997 acquisition of Mail Boxes Etc. ("MBE"), U.S. Office
Products has expanded into the high growth small office and home office market.
MBE is the world's largest franchisor of local postal, packaging, business and
communications service centers with approximately 3,600 outlets worldwide.
Since its founding in October 1994, U.S. Office Products has grown primarily
through an aggressive acquisition program, which has included the purchase of
more than 230 businesses in the United States and internationally. U.S. Office
Products has focused on acquiring successful, established companies with
experienced management and sales presence in specific geographic, product or
service markets. It adheres to a rigorous due diligence and financial review
process in acquiring target companies.
U.S. Office Products is now transitioning into a new stage of development,
less reliant on acquisitions and more focused on operational efficiencies,
organic growth and improved profit margins. To execute this new strategy, U.S.
Office Products is implementing new product, sales and marketing programs to
leverage its extensive sales force and its existing distribution channels. U.S.
Office Products continues to pursue strategic alliances with well-known
companies to enable U.S. Office Products to increase sales by offering a broader
selection of services and products, such as its arrangement to distribute
Starbucks-Registered Trademark- coffee in the North American office market. In
addition, U.S. Office Products is centralizing a number of common business
functions, such as purchasing, distribution, inventory management and
information systems. Furthermore, U.S. Office Products is systematically
consolidating the operations of businesses located within the same geographic
areas into large, centrally-located regional warehouses known as district
fulfillment centers ("DFCs"). Through DFCs, U.S. Office Products believes it can
achieve greater regional
1
<PAGE>
efficiencies and economies of scale in purchasing, distribution and asset
utilization. At the same time, U.S. Office Products continues to encourage
entrepreneurial innovation and management of customer relationships at the local
level. U.S. Office Products believes that its organizational structure combines
the best elements of both centralized and decentralized management for its
business.
The Company is a Delaware corporation. Its executive offices are located at
1025 Thomas Jefferson Street, N.W., Suite 600 East, Washington, D.C. 20007, and
its telephone number is 202-339-6700.
THE STRATEGIC RESTRUCTURING PLAN
The Board of Directors of U.S. Office Products has adopted a comprehensive
restructuring plan. The principal elements of the plan (including modifications
the Board of Directors has made since first adopting this plan, as so modified,
the "Strategic Restructuring Plan") are as follows:
- EQUITY SELF-TENDER. Pursuant to a self-tender offer, the Company will
offer to purchase 37,037,037 shares of its Common Stock, including shares
issuable upon exercise of options (vested and unvested) to purchase Common
Stock, at $27.00 per share (or, in the case of shares underlying stock
options, $27.00 minus the exercise price of such options) (the "Equity
Self-Tender"). Holders who exchange their Notes for Common Stock in the
Exchange Offer will be able to tender such Common Stock in the Equity
Self-Tender. The Equity Self-Tender is expected to commence on May 4,
1998, and to expire on June 1, 1998, unless extended. The Equity
Self-Tender will not expire prior to the Expiration Date for the Exchange
Offer.
- SPIN-OFF DISTRIBUTIONS. The Company will distribute to its stockholders
the shares of four separate companies: Aztec Technology Partners, Inc.,
Workflow Management, Inc., School Specialty, Inc., and Navigant
International, Inc. (collectively, the "Spin-Off Companies"). The
distributions of the shares of the Spin-Off Companies are referred to in
this Offering Circular/Prospectus as the "Distributions." The Spin-Off
Companies will conduct the Company's former technology solutions, print
management, educational supplies and corporate travel services businesses,
respectively. Each of the Spin-Off Companies plans to issue additional
shares of its common stock in a public offering substantially concurrent
with the Distributions. Holders who exchange their Notes for Common Stock
in the Exchange Offer will receive stock of the Spin-Off Companies in the
Distributions to the extent shares of Common Stock are not tendered and
accepted in the Equity Self-Tender and are held on the record date for the
Distributions. The record date for the Distributions will be after the
expiration date for the Equity Self-Tender.
- EQUITY INVESTMENT. Pursuant to an investment agreement (the "Investment
Agreement"), an affiliate ("Investor") of an investment fund managed by
Clayton, Dubilier & Rice, Inc. ("CD&R"), a private investment firm, will
acquire for $270.0 million Common Stock representing 24.9% of the
outstanding equity of the Company (after giving effect to the Equity
Self-Tender and such investment) and warrants to purchase additional
Common Stock (the "Equity Investment").
The Strategic Restructuring Plan was adopted in light of the Company's
movement into a new stage of development, less reliant on acquisitions and more
focused on growth through improvements in and expansion of existing operations.
The Company believes that the Strategic Restructuring Plan will benefit the
Company by focusing U.S. Office Products' business on a complementary group of
businesses and permitting management to implement operational improvements in
its core business. It will also bring to the Company's core business the
managerial assistance and support of CD&R. For a more detailed description of
the Strategic Restructuring Plan, see "The Strategic Restructuring Plan."
In connection with the Strategic Restructuring Plan and subject to
stockholder approval, the Company plans to undertake a one-for-four reverse
stock split to be effective upon completion of all other elements of the
Strategic Restructuring Plan.
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In conjunction with the Strategic Restructuring Plan, the Company plans to
undertake the following financing transactions (together with the Exchange
Offer, the "Financing Transactions") in addition to the Exchange Offer:
- NEW CREDIT FACILITY. Pursuant to a commitment letter from a group of
lenders, the Company plans to enter into a new $1.225 billion senior
credit facility (the "Credit Facility").
- SUBORDINATED DEBT OFFERING. The Company plans to issue and sell at least
$400.0 million in Senior Subordinated Notes in a private placement (the
"Subordinated Debt Offering" and, together with borrowings under the
Credit Facility, the "New Borrowings").
- 2003 NOTES TENDER OFFER. The Company plans to offer to purchase any and
all of its $230.0 million outstanding 5 1/2% Convertible Subordinated
Notes Due 2003 (the "2003 Notes") for a purchase price of 94.5% of the
principal amount, plus accrued interest (the "2003 Note Tender").
The Company intends to use the proceeds of the Equity Investment and the New
Borrowings to refinance the Company's existing credit facility, to pay the
purchase price of the Equity Self-Tender and the 2003 Note Tender, and to pay
fees and expenses incurred in connection with the Strategic Restructuring Plan
and the Financing Transactions. For a more detailed discussion of the Financing
Transactions, see "The Strategic Restructuring Plan--Financing Transactions."
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THE EXCHANGE OFFER
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Securities subject to the Exchange
Offer.................................. U.S. Office Products Company 5 1/2% Convertible
Subordinated Notes due 2001.
Exchange Ratio........................... 61.843 shares of Common Stock per $1,000
principal amount of the Notes.
Reduced Conversion Price................. The Exchange Ratio effectively reduces the
Conversion Price for Holders tendering their
Notes pursuant to the Exchange Offer to $16.17
principal amount of the Notes per share of
Common Stock for the Exchange Period.
Purpose.................................. To induce the exchange of the Notes prior to
their maturity, and thereby (i) reduce the
amount of cash the Company otherwise could be
required to pay to retire the Notes in 2001 and
(ii) minimize the dilutive effect of the
issuance of Common Stock upon conversion of the
Notes if they were converted after the
completion of the Strategic Restructuring Plan.
Exchange Period.......................... From May 1, 1998 through 12:00 midnight, New
York City time, on May 29, 1998, unless extended
by the Company, in its sole discretion (the
latest date and time to which extended, the
"Expiration Date"). The Exchange Offer will
expire on the Expiration Date. See "The Terms of
the Exchange Offer--Expiration Date; Extension;
Amendment; Termination."
Withdrawal Rights........................ Tenders of Notes may be withdrawn at any time on
or prior to the Expiration Date and, unless
accepted for exchange by the Company, may be
withdrawn at any time after 40 business days
after the date of this Offering
Circular/Prospectus. Withdrawal can be effected
by delivering a written notice of such
withdrawal to the Exchange Agent in conformity
with certain procedures set forth below under
"The Terms of the Exchange Offer--Withdrawal
Rights."
Extension; Amendment; Termination........ The Company expressly reserves the right to (i)
extend, amend or modify the terms of the
Exchange Offer in any manner, and (ii) withdraw
or terminate the Exchange Offer and not accept
for exchange any Notes, at any time for any
reason. See "The Terms of the Terms of the
Exchange Offer--Expiration Date; Extension;
Amendment; Termination."
Conditions to the Exchange Offer......... The Exchange Offer is conditioned upon
Investor's obligation to make the Equity
Investment not having been terminated, the
commitment with respect to the Credit Facility
not having been terminated, as well as certain
other conditions. See "The Terms of the Exchange
Offer--Conditions of the Exchange Offer."
Fractional Shares........................ No fractional shares will be issued upon
exchange of Notes pursuant to the Exchange
Offer. If any fractional share of stock
otherwise would be issuable upon the exchange of
any Note, the Company will pay the
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exchanging Holder an amount equal to such
fractional share times the Current Market Price
(as defined in this Offering
Circular/Prospectus) on the last trading day
prior to the date of exchange. See "The Terms of
the Exchange Offer--Terms of the Offer."
Accrued Interest......................... The Company will pay in cash unpaid interest
accrued on the Notes through the Expiration Date
with respect to all Notes exchanged pursuant to
the Exchange Offer. See "The Terms of the
Exchange Offer--Terms of the Offer."
Dealer Manager........................... BancAmerica Robertson Stephens.
Exchange Agent........................... State Street Bank & Trust Company.
Information Agent........................ MacKenzie Partners, Inc.
How to Exchange Notes.................... Any holder of Notes wishing to exchange Notes in
the Exchange Offer should: (A)(i) complete and
sign the Letter of Transmittal attached to this
Offering Circular/ Prospectus (the "Letter of
Transmittal"), and (ii) tender the original Note
and the Letter of Transmittal to the Exchange
Agent or (B) follow the procedures for book-
entry delivery set forth in "The Terms of the
Exchange Offer--Procedures for Tender of Notes
for Exchange." Note that there is no provision
for notice of guaranteed delivery with respect
to the Exchange Offer.
Acceptance of Notes and Delivery of
Securities............................. Upon the terms and subject to the conditions of
the Exchange Offer, the Exchange Agent will
deliver the registered certificates for the
shares of Common Stock (or appropriate credit to
the account of such Holder at the Depository
Trust Company ("DTC") with respect to such
shares of Common Stock) issuable upon exchange
of the Notes as soon as practicable after the
Expiration Date. See "The Terms of the Exchange
Offer-- Exchange of Notes."
Special Procedures for Beneficial
Owners................................. Any beneficial owner whose Notes are registered
in the name of a broker, dealer, commercial
bank, trust company, or other nominee and who
wishes to exchange should contact such
registered Holder promptly and instruct such
registered Holder to tender the Notes on such
beneficial owner's behalf. If such beneficial
owner wishes to exchange on its own behalf, such
owner must, prior to completing and executing a
Letter of Transmittal and delivering its Notes,
make appropriate arrangements to register the
ownership of such Notes in such owner's name.
The transfer of registered ownership may take
considerable time and may not be able to be
completed prior to the Expiration Date. See "The
Terms of the Exchange Offer--Procedures for
Tender of Notes for Exchange."
Notes not Tendered or Accepted for
Exchange............................... Holders who do not exchange their Notes in the
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Exchange Offer or whose Notes are not accepted
for exchange will continue to hold such Notes
and will be entitled to all the rights, and will
be subject to all of the limitations, applicable
thereto. See "The Terms of the Exchange
Offer--Market and Trading Information" and
"Description of the Notes." To the extent that a
significant amount of Notes are exchanged in the
Exchange Offer, a Holder's ability to sell Notes
not tendered for exchange could be adversely
affected. See "Risk Factors--Limited Trading
Market." The Conversion Price will be $19.00 per
share, adjusted to take account for the Equity
Self-Tender, the Distributions, and the reverse
stock split. See "Effect of the Strategic
Restructuring Plan on the Conversion Price for
the Notes."
Risk Factors............................. A decision to exchange Notes for Common Stock
pursuant to the Exchange Offer involves certain
risks, including, among others, the following:
risks arising from the significant additional
indebtedness that the Company will incur in
completing the Strategic Restructuring Plan,
risks associated with changing the Company's
strategic focus, and risks related to the
Company's acquisition program. See "Risk
Factors."
Tax Considerations of Exchange........... Wilmer, Cutler & Pickering has opined that for
U.S. federal income tax purposes, the exchange
of Notes for Common Stock will be a
recapitalization that is tax-free to holders of
Notes (except with respect to cash received in
lieu of fractional shares and in respect of
unpaid interest accrued on the Notes through the
Expiration Date not previously included in
income). See "U.S. Federal Income Tax
Considerations." This opinion is based in part
on the fact that the Company will not complete
the Distributions unless Wilmer, Cutler &
Pickering delivers an opinion at the time of the
Distributions stating that the Distributions
will qualify as tax-free spin-offs under Section
355 of the Internal Revenue Code of 1986, as
amended (the "Code"). See "The Strategic
Restructuring Plan--U.S. Federal Income Tax
Consequences of the Distributions."
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RISK FACTORS
HOLDERS WHO ARE CONSIDERING EXCHANGING THEIR NOTES PURSUANT TO THE EXCHANGE
OFFER SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER
INFORMATION INCLUDED IN THIS OFFERING CIRCULAR/PROSPECTUS OR INCORPORATED HEREIN
BY REFERENCE, IN EVALUATING WHETHER TO EXCHANGE THEIR NOTES FOR SHARES OF COMMON
STOCK.
SUBSTANTIAL INDEBTEDNESS OF THE COMPANY; ABILITY TO SERVICE DEBT
The Company will incur substantial indebtedness in connection with the
Strategic Restructuring Plan and the Financing Transactions and will thereby
become highly leveraged. At January 24, 1998, the Company had outstanding
approximately $714.5 million in indebtedness consisting of bank loans,
convertible subordinated notes, and capital leases. As a result of the Strategic
Restructuring Plan and the Financing Transactions, the Company's total
indebtedness will increase by approximately $441.0 million to approximately
$1,155.5 million, assuming that all Notes are exchanged and all 2003 Notes are
tendered and accepted for purchase in the 2003 Note Tender. Any Notes that
remain outstanding will increase the amount of outstanding debt. Any Notes that
are not exchanged will be subordinated to all of the additional indebtedness
incurred in connection with the Financing Transactions, except the $400.0
million of Senior Subordinated Notes the Company plans to issue in the
Subordinated Debt Offering and any of the 2003 Notes that remain outstanding
after the 2003 Note Tender, each of which will rank PARI PASSU with the Notes.
See "Description of the Notes--Subordination."
The Company's high leverage could have material consequences to the Company,
including, but not limited to, the following: (i) the Company's ability to
obtain additional financing in the future for acquisitions, working capital,
capital expenditures, and general corporate or other purposes may be impaired or
any such financing may not be available on terms favorable to the Company; (ii)
a substantial portion of the Company's cash flow will be required for debt
service and, as a result, will not be available for its operations and other
purposes; (iii) a substantial decrease in net operating cash flows or an
increase in expenses could make it difficult for the Company to meet its debt
service requirements or force it to modify its operations or sell assets; (iv)
the Company's ability to withstand competitive pressures may be limited; and (v)
the Company's level of indebtedness could make it more vulnerable to economic
downturns, and reduce its flexibility in responding to changing business and
economic conditions. In addition, the Company's borrowings under the Credit
Facility are and will continue to be at variable rates of interest, which
exposes the Company to the risk of increased interest rates. If the Company is
unable to service its indebtedness, it may be forced to pursue one or more
alternative strategies, such as selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. The Company's management
does not have experience to date operating a business with a substantial amount
of leverage.
Historically, the Company has funded its capital requirements by debt
financings and the sale of Common Stock. Future sales of Common Stock may be
subject to limitations on the number of shares the Company can issue without
jeopardizing the tax-free treatment for the Distributions. See "--Potential
Limitations on Stock Issuances" and "--Potential Liability for Taxes Related to
the Distributions." In addition, the Credit Facility and the indenture governing
the Senior Subordinated Notes are expected to contain restrictions on the
incurrence of additional indebtedness. See "--Risks Arising from Restrictions in
Agreements Relating to Indebtedness."
The ability of the Company to meet its debt service and other obligations
(including compliance with financial covenants) will be dependent upon the
future performance of the Company and its cash flow from operations, which will
be subject to prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control. These factors could
include general economic conditions, operating difficulties, increased operating
costs, product pricing pressures, potential revenue instability arising from
cost savings initiatives or other factors, labor relations, the response of
competitors or customers to the Company's business strategy or projects and
delays in implementation of the Company's business strategy.
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LIMITED TRADING MARKET
The Notes were issued in February 1996, and there currently is a limited
trading market for the Notes. Quotations for securities that are not widely
traded, such as the Notes, may differ from actual trading prices and should be
viewed as approximations. Holders are urged to contact their brokers to obtain
the best available information as to current market prices.
To the extent that Notes are tendered and accepted for exchange in the
Exchange Offer, the trading market for Notes that remain outstanding may be
significantly more limited, which might adversely affect the liquidity of the
Notes. The extent of the public market and the availability of price quotations
would depend upon a number of factors, including the number of holders of Notes
remaining at such time. An issue of securities with a smaller outstanding market
value available for trading (the "float") may command a lower price than would a
comparable issue of securities with a greater float. Therefore, the market price
for Notes that are not tendered for exchange in the Exchange Offer may be
affected adversely to the extent that the amount of Notes exchanged pursuant to
the Exchange Offer reduces the float. The reduced float also may tend to make
the trading prices of the Notes that are not exchanged more volatile.
RISKS ARISING FROM RESTRICTIONS IN AGREEMENTS RELATING TO INDEBTEDNESS
The Credit Facility and the indenture governing the Senior Subordinated
Notes are expected to impose significant operating and financial restrictions on
the Company. Such restrictions will affect, and in many respects significantly
limit or prohibit, among other things, the ability of the Company to incur
additional indebtedness and certain types of indebtedness, create liens, engage
in transactions with stockholders and affiliates, sell assets, issue capital
stock of subsidiaries or engage in mergers or acquisitions. In addition, the
Credit Facility is expected to require that the Company maintain certain
financial ratios. These restrictions could also limit the ability of the Company
to effect future financings, make needed capital expenditures, withstand a
future downturn in the Company's business or the economy in general, or
otherwise conduct necessary corporate activities.
RISKS RELATED TO CHANGE IN STRATEGIC FOCUS AND BUSINESS AND GROWTH STRATEGIES
The Company was founded in October 1994 and conducted no operations prior to
the acquisition of its founding companies in February 1995. Since that time, the
Company has grown primarily through an aggressive acquisition strategy. The
Company is now transitioning into a new stage of development, less reliant on
acquisitions and more focused on operational efficiencies, organic growth and
improved profit margins. The Company's ability to achieve these objectives will
depend on a number of factors, including its ability to generate increased
revenues and margins in existing businesses, its ability to continue to
integrate existing operations and new acquisitions without substantial delays or
other problems, and achievement of operating improvements and cost reductions.
In particular, the Company's ability to achieve operating improvements will
depend on successful implementation of its plans to establish DFCs in the United
States. There can be no assurance that these efforts to achieve operating
improvements will be successful or will result in anticipated levels of cost
savings and efficiencies or growth in revenues and margins. See
"Business--Business Strategies."
CHALLENGES OF BUSINESS INTEGRATION; RISKS RELATED TO ACQUISITIONS
Historically, the Company has grown substantially through acquisitions. The
Company's aggressive acquisition program has produced a significant increase in
revenues, 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 require
additional expenditures to expand operational and financial systems and
corporate management administration. Because of the various costs and possible
cost-saving strategies, historical operating results may not be indicative of
future performance. There also
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can be no assurance that the pace of the Company's acquisitions will not
adversely affect efforts to implement cost-saving and integration strategies and
to manage operations and acquisitions profitably. Additionally, attempts to
achieve economies of scale through cost cutting and lay-offs of existing
personnel may, at least in the short term, have an adverse impact upon the
Company. Delays in implementing planned integration and consolidation
strategies, or the failure of such strategies to achieve anticipated cost
savings, also could have an adverse effect on the Company's results of
operations and financial condition. In addition, there can be no assurance that
the Company's management and financial controls, personnel, computer systems and
other corporate support systems will be adequate to manage the increasing size
and scope of the Company's operations and its continuing acquisition activity.
The Company intends to pursue selected acquisition opportunities; however,
no assurance can be given that the Company will identify, finance and complete
additional suitable acquisitions on acceptable terms, or that future
acquisitions, if completed, will be successful. Moreover, the amount of capital
stock the Company can issue as consideration for future acquisitions without
jeopardizing the tax-free treatment of the Distributions will be limited in the
near-term. See "--Potential Liability for Taxes Related to the Distributions".
The Company will likely incur additional debt to finance any additional
acquisitions. In addition, acquired companies may not achieve future revenues
and profitability levels that justify the prices that the Company paid to
acquire them. Acquisitions also may involve a number of risks that could have a
material adverse effect on future operations and financial performance,
including diversion of management's attention; unanticipated declines in
revenues or profitability following acquisitions; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated business problems or legal liabilities; and the amortization of
acquired intangible assets, such as goodwill.
RISKS RELATING TO INABILITY TO USE POOLING-OF-INTEREST ACCOUNTING TREATMENT FOR
FUTURE ACQUISITIONS
As a result of the Equity Self-Tender and the Distributions, the Company
will be precluded from completing business combinations under the
pooling-of-interests accounting method for a period up to 6-9 months. Any
business combinations that the Company completes during this period will have to
be accounted for under the purchase method. Under the purchase method of
accounting, the Company will have to record goodwill for each such acquisition,
in an amount equal to any excess of the purchase price paid for the acquired
company over the fair market value of the acquired company's net assets. Under
the pooling-of-interests method, no goodwill is recorded in connection with the
acquisition of a pooled company, and there is no corresponding expense
associated with the amortization of such goodwill.
HIGHLY COMPETITIVE MARKETS
The Company operates in a highly competitive environment. It generally
competes with a large number of smaller, independent companies, many of which
are well-established in their markets. In addition, in the United States, the
NAOPG competes with five large office products companies, each of which may have
greater financial resources than the Company. Several of the Company's large
competitors operate in many of its geographic and product markets, and other
competitors may choose to enter its geographic and product markets in the
future. In addition, as a result of this competition, the Company may lose
customers or have difficulty acquiring new customers. As a result of competitive
pressures in the pricing of products, the Company's revenues or margins may
decline. The highly leveraged nature of the Company after the Strategic
Restructuring Plan and the Financing Transactions could limit the Company's
ability to continue to make necessary or desirable investments or capital
expenditures, to compete effectively and to respond to market conditions.
The Company faces significant competition to acquire additional businesses
as the office products industry undergoes continuing consolidation. Competition
is expected to increase in the domestic and international markets that the
Company serves or is planning to enter as consolidation occurs (or
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accelerates) in those markets. A number of the Company's major competitors are
actively pursuing acquisitions on a global basis.
FOREIGN OPERATIONS; EXCHANGE RATE FLUCTUATIONS
Management intends to continue to focus significant attention and resources
on international operations and expects foreign revenues to continue to
represent a significant portion of the Company's total revenues. The factors
described in this section that apply to the Company's domestic operations
generally may also affect the Company's foreign operations. In addition, the
Company's foreign operations are subject to a number of other risks, including
fluctuations in currency exchange rates; new and different legal and regulatory
requirements in local jurisdictions; tariffs and trade barriers; potential
difficulties in staffing and managing local operations; credit risk of local
customers and distributors; potential difficulties in protecting intellectual
property; potential imposition of restrictions on investments; potentially
adverse tax consequences, including imposition or increase of withholding and
other taxes on remittances and other payments by subsidiaries; and local
economic, political and social conditions, including the possibility of
hyper-inflationary conditions, in certain countries. There can be no assurance
that one or a combination of these factors will not have a material adverse
impact on the Company's ability to maintain or increase its foreign sales or on
its business, financial condition or results of operations.
Over 34% of the Company's consolidated revenues for the nine months ended
January 24, 1998 were generated from the Company's international operations and
are denominated in currencies other than United States dollars. The Company's
results of operations have been and may continue to be impacted by the exchange
rate of the international operations' currencies into United States dollars.
Devaluation has adversely affected the return on the Company's investment in its
New Zealand and Australian operations. If the exchange rates stabilize at
current rates or continue to decline, the Company's return on assets and equity
from its New Zealand and Australian operations will continue to be depressed.
The Company expects that it will incur additional costs with respect to
accessing cash flows from international operations, including such items as New
Zealand and Australian withholding taxes and other taxes and foreign currency
hedging costs. In addition, the Company's results of operations could be further
impacted by fluctuations in the New Zealand and Australian exchange rates as a
result of the structure of certain financing alternatives currently being
evaluated by the Company.
Substantially all of the Company's indebtedness is denominated in U.S.
dollars. As a result, declines relative to the U.S. dollar in the value of the
currencies in which the Company's revenues are generated may materially
adversely affect the Company's business, financial condition and results of
operations and the ability of the Company to meet its obligations under
agreements relating to its indebtedness.
RISKS RELATING TO DEPENDENCE OF MAIL BOXES ETC. ON BUSINESS OF UPS AND FRANCHISE
RELATIONSHIPS
Various factors may affect the Company's Mail Boxes Etc. ("MBE") business.
The Company estimates that a significant percentage of the gross sales of a
typical MBE retail center in the United States are attributable to services
provided by United Parcel Service ("UPS"). In addition, the Company estimates
that the vast majority of general ground shipping from MBE retail centers in the
United States is done through UPS. As such, UPS is a key vendor for MBE. If UPS
were to raise its prices to MBE or otherwise materially adversely change the
terms on which it provides shipping services for MBE retail centers or if UPS
cannot provide service or provides limited services, as it did during a 1997
strike by UPS employees, the revenues of MBE could be materially and adversely
affected. MBE conducts its business principally through franchisees or
licensees, with the result that MBE has limited control over franchisee
operations and is subject to significant government regulation of its legal
relationships with franchisees that limits the control that MBE has over its
franchisees. MBE also faces growing competition from the United States Postal
Service as it establishes postal service centers located in shopping centers and
other locations to compete against MBE and other similar retail service centers.
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RELIANCE ON KEY PERSONNEL
The Company's operations will depend on the continued efforts of its senior
executive officers, including Thomas Morgan, President and Chief Executive
Officer, and the senior management of certain of its subsidiaries. If any of
these individuals becomes unable to continue in his or her present role, or if
the Company is unable to attract and retain other skilled employees, its
business could be adversely affected. The Company intends to obtain key person
life insurance covering Thomas Morgan, but does not intend to obtain key person
life insurance covering any other members of senior management.
INTANGIBLE ASSETS
As of January 24, 1998, approximately $917.0 million, or 45.4% of the
Company's total assets on a pro forma basis to reflect the Equity Self-Tender,
the Distributions, the Equity Investment, the Financing Transactions and
purchase acquisitions completed subsequent to January 24, 1998 as if such
transactions had occurred on January 24, 1998, represented intangible assets,
the substantial majority of which was goodwill. As a result, a substantial
portion of the value of the Company's assets may not be available to repay
creditors in the event of a bankruptcy or dissolution of the Company.
INCREASE IN OUTSTANDING SHARES AND INABILITY TO DETERMINE CONVERSION PRICE
To the extent that Notes are exchanged for Common Stock, the number of
shares of Common Stock outstanding will increase. At March 26, 1998, there were
approximately 133.2 million shares of Common Stock outstanding. If all Notes are
exchanged, the total shares outstanding will increase by approximately 8.9
million to 142.1 million. If those shares are tendered in the Equity
Self-Tender, that in turn will decrease the percentage of all outstanding shares
that will be accepted in the Equity Self-Tender. The increase in number of
shares outstanding resulting from the exchange will also increase the number of
shares of each Spin-Off Company that will be issued in the Distributions, which
could result in a reduction in the trading prices of the shares of the Spin-Off
Companies as compared to the trading prices that might have been realized if no
exchanges had occurred before the Distributions. On the other hand, to the
extent Notes are not exchanged prior to the Equity Self-Tender and the
Distributions, then the number of shares into which they can be converted will
be increased as a result of the anti-dilution provisions in the Indenture. See
"Effect of the Strategic Restructuring Plan on the Conversion Price for the
Notes." The number of shares of Common Stock issuable upon conversion of the
2003 Notes outstanding after the 2003 Note Tender will similarly be adjusted.
Accordingly, the number of shares represented by convertible notes after
completion of the Strategic Restructuring Plan and the Financing Transactions
cannot be determined at this time and will not be determined prior to the
Expiration Date.
Even if the Strategic Restructuring Plan is not completed, the exchange of
Notes pursuant to the Exchange Offer will result in a dilution of earnings per
share and a potential adverse impact on the trading price of the Common Stock.
This dilution will be greater than would otherwise result if the Notes were
converted at the Existing Conversion Price. See "--Failure to Complete Strategic
Restructuring Plan."
As a result of the Strategic Restructuring Plan, the number and exercise
price of existing stock options held by the Company's employees will be adjusted
pursuant to a formula based on the market prices of the Common Stock around the
time of the Distributions and cannot be determined at this time. Nevertheless,
the Company expects that the adjustment will increase the percentage interests
represented by such options. See "The Strategic Restructuring Plan--Adjustment
to Employee Stock Options." However, the Company's employees are eligible to
tender shares underlying options (both vested and unvested) in the Equity
Self-Tender and, to the extent shares underlying tendered options are purchased,
the percentage interest represented by options outstanding after the Strategic
Restructuring Plan will be less than it otherwise would have been.
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IMPACT OF THE STRATEGIC RESTRUCTURING PLAN ON TRADING PRICES OF COMMON STOCK
There can be no assurance as to the prices at which the Common Stock will
trade after the Strategic Restructuring Plan is completed. The plan consists of
a number of elements that involve major changes to the assets and capital
structure of the Company. Upon completion of these transactions, the trading
price of the Common Stock is likely to be substantially lower to reflect the
cash distributions that will occur in the Equity Self-Tender and the
distribution of assets in the Distributions. The actual adjustment that will be
made by the market based on its valuation of the parts of the Strategic
Restructuring Plan cannot be predicted. The Company expects that an active
market for its Common Stock will continue on the Nasdaq National Market System,
but the trading prices may be affected in the short or long run by a number of
factors in addition to those that typically affect the trading prices of stocks.
These special factors may include: reduced public float, trades by investors
seeking to change their relative ownership positions in the stock of the Company
and each Spin-Off Company, uncertainty in the marketplace about the impact of
the Strategic Restructuring Plan on the Company's future operating results,
possible trading strategies by investors seeking to arbitrage disparities in
pricing between the Common Stock and the stock of each Spin-Off Company, and
increased market volatility resulting from market uncertainty or confusion about
the transactions or their impact on the Company.
EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
shares of Common Stock. Investor will hold shares of Common Stock representing
24.9% of shares outstanding after the issuance of such shares to Investor, and
warrants to purchase an equal number of shares (plus additional shares in
certain circumstances). The Investment Agreement restricts Investor's ability to
sell these shares or warrants, but when these restrictions expire (or if they
are waived) Investor may sell these shares or warrants. Additional shares may be
issued either in connection with acquisitions by the Company or upon exercise of
outstanding options, options that may be issued in the future, and warrants. The
sale of shares upon exercise of options or by Investor, or the perception that
such sales could occur, may have an adverse effect on the trading price of the
Common Stock if a significant number of shares become available over a limited
period of time.
ABILITY OF INVESTOR TO INFLUENCE MANAGEMENT
As part of the Strategic Restructuring Plan, Investor will acquire shares of
Common Stock amounting to 24.9% of the outstanding shares of the Common Stock
after giving effect to the Equity Self-Tender and to the issuance of such
shares. Investor will also purchase various warrants that give it the right to
acquire additional shares of Common Stock in the future. Such warrants will
include warrants that will give it the right to buy one share of Common Stock of
the Company for each share purchased by Investor in the Equity Investment. If no
currently outstanding stock options are exercised, exercise of these warrants
would give Investor ownership of approximately 39.9% of the Common Stock of the
Company after implementation of the Strategic Restructuring Plan (assuming that
all of the Notes are exchanged in the Exchange Offer and all of the 2003 Notes
are tendered and accepted for purchase in the 2003 Note Tender). Investor will
have, among other things, the right (subject to certain conditions) to nominate
three of the nine members of the Company's Board of Directors (the "Board"),
including the Chairman of the Board. Investor will retain the right to nominate
three members of the Board and to designate the Chairman of the Board until
Investor's level of ownership of Common Stock declines by more than one-third.
In addition, certain Board decisions will be subject to super-majority voting
provisions that, in certain circumstances, may require the concurrence of at
least one director nominated by Investor. The super-majority voting provisions
require the affirmative vote of three-fourths of the Board for certain decisions
such as sale of certain equity securities; any merger, tender offer involving
the Company's equity securities or sale, lease or disposition of all or
substantially all of the Company's assets or other business
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combination involving the Company; any dissolution or partial liquidation of the
Company; and certain changes to the Company's charter and by-laws. These
super-majority Board voting requirements may give Investor the ability to block
the approval of certain actions requiring the super-majority vote of the Board.
In addition, Investor's significant ownership of the Common Stock may permit
Investor to influence significantly matters requiring the approval of the
Company's stockholders. See "The Strategic Restructuring Plan---Equity
Investment."
POTENTIAL LIABILITY FOR CERTAIN LIABILITIES OF THE SPIN-OFF COMPANIES
As part of the Strategic Restructuring Plan, the Spin-Off Companies are
expected to indemnify the Company for certain liabilities that the Company could
incur relating to the Distributions, the operations of the Spin-Off Companies
and other matters. There can be no assurance that the Spin-Off Companies will be
able to satisfy any such indemnities, and the Company may therefore incur such
liabilities even if they arose out of the activities of the Spin-Off Companies.
The Company could be adversely affected if in the future the Spin-Off Companies
are unable to satisfy these obligations. See "The Strategic Restructuring
Plan--Distributions--Distribution Agreement." In addition, the Company has
agreed to indemnify Investor and its affiliates against losses resulting from
any of the Spin-Off Companies failing to satisfy their indemnity obligations to
the Company.
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Spin-Off
Opinion") at the time of the Distributions stating that for U.S. federal income
tax purposes, the Distributions will qualify as tax-free spin-offs under Section
355 of the Internal Revenue Code of 1986, as amended (the "Code"), and will not
be taxable under Section 355(e). The Company will not complete the Distributions
unless it receives the Spin-Off Opinion. The Spin-Off Opinion will be based on
the accuracy as of the time of the Distributions of factual representations made
by the Company, the Spin-Off Companies and Investor, and certain other
information, data, documentation and other materials that Wilmer, Cutler &
Pickering has deemed necessary. See "The Strategic Restructuring Plan--U.S.
Federal Income Tax Consequences of the Distributions."
The Spin-Off Opinion will represent Wilmer, Cutler & Pickering's best
judgment of how a court would rule. However, the Spin-Off Opinion is not binding
upon either the Internal Revenue Service ("IRS") or any court. A ruling has not
been, and will not be, sought from the IRS with respect to the U.S. federal
income tax consequences of the Distributions. Accordingly, the IRS and/or a
court could reach a conclusion that differs from the conclusions in the Spin-Off
Opinion.
If a Distribution fails to qualify as a tax-free spin-off under Section 355
of the Code, the Company will recognize gain equal to the difference between the
fair market value of the Spin-Off Company's common stock on the effective date
of the Distribution (the "Distribution Date") and the Company's adjusted tax
basis in the Spin-Off Company's common stock on the Distribution Date. In
addition, each stockholder of the Company will be treated as having received a
taxable corporate distribution in an amount equal to the fair market value (on
the Distribution Date) of the Spin-Off Company's common stock distributed to
such stockholder. If the Company were to recognize gain on one or more
Distributions, such gain would likely be substantial.
If a Distribution is taxable under Section 355(e), but otherwise satisfies
the requirements for a tax-free spin-off, the Company will recognize gain equal
to the difference between the fair market value of the Spin-Off Company's common
stock on the Distribution Date and the Company's adjusted tax basis in the
Spin-Off Company's common stock on the Distribution Date. However, no gain or
loss will be recognized by holders of Common Stock (except with respect to cash
received in lieu of fractional shares). If the Company were to recognize gain on
one or more Distributions, such gain would likely be substantial.
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POTENTIAL LIMITATIONS ON STOCK ISSUANCES
Certain limitations under Section 355 of the Code may restrict the Company's
ability to issue capital stock after the Distributions. As described below under
"The Strategic Restructuring Plan -- U.S. Federal Income Tax Consequences of the
Distributions," these limitations will generally prevent the Company from
issuing capital stock to the extent the issuance is part of a plan or series of
related transactions that includes one or more of the Distributions and pursuant
to which one or more persons acquires capital stock of the Company that
represents 50% or more of the voting power or 50% or more of the value of the
Company's capital stock. These limitations may restrict the Company's ability to
undertake transactions involving issuances of capital stock of the Company that
management otherwise believes would be beneficial.
FAILURE TO COMPLETE STRATEGIC RESTRUCTURING PLAN
The Exchange Offer is not subject to all of the same conditions as the
Equity Self-Tender and the other elements of the Strategic Restructuring Plan.
Accordingly, it is possible that a Holder could exchange its Notes under
circumstances where all or part of the Strategic Restructuring Plan is not
completed. Such an exchanging Holder would then hold Common Stock without the
opportunity to sell shares in the Equity Self-Tender or to receive shares of the
Spin-Off Companies in the Distributions. Moreover, failure to complete the
Strategic Restructuring Plan, or parts of it, could have a material adverse
effect on the Company and its stockholders. The Company would have to continue
to operate the businesses of the Spin-Off Companies or otherwise dispose of
them. As a result of the announcement of the Strategic Restructuring Plan, the
Company's reported earnings will be reduced by the loss of pooling-of-interests
accounting treatment for many transactions. In addition, in certain
circumstances the Company could be obligated to pay a termination fee of $25.0
million to CD&R if the Equity Investment is not completed. The Strategic
Restructuring Plan is subject to numerous conditions, and there can be no
assurance that any or all of its elements will be completed or that the
agreements among the Company and the Spin-Off Companies, which are in the
process of being negotiated, will contain the terms described in "The Strategic
Restructuring Plan--Distributions."
YEAR 2000 COMPLIANCE
The Company is currently reviewing the year 2000 compliance of software that
it uses in its business. The Company's Trinity System, which it is currently
installing throughout its North American Office Products Group operations as the
core operations system, is year 2000 compliant. However, the Company's operating
subsidiaries are, in some cases, using billing or other software that is not
year 2000 compliant. Based upon information that the Company has collected from
its operating subsidiaries, it expects to be able to achieve year 2000
compliance in 1999 and does not expect that the cost of making necessary
adaptations will be material to the Company. If the Company cannot make the
necessary adaptations on a
timely basis, or if the costs are greater than expected, the Company's business
could be adversely affected.
RISKS RELATED TO AN INVESTMENT IN THE SPIN-OFF COMPANIES
Holders who exchange Notes for Common Stock in the Exchange Offer will
receive common stock of the Spin-Off Companies in the Distributions to the
extent shares are not tendered and accepted in the Equity Self-Tender and are
held on the record date for the Distributions. An investment in the common stock
of the Spin-Off Companies involves significant risks. For a discussion of these
risks, see "Risk Factors" in each of the information statements filed in
connection with the Distributions, copies of which will be distributed to
Holders no less than ten (10) days prior to the expiration date of the Equity
Self-Tender.
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THE TERMS OF THE EXCHANGE OFFER
GENERAL
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to accept. Neither the Board of Directors nor the
Company makes any recommendation to Holders as to whether to tender or refrain
from tendering in the Exchange Offer. Holders are urged to consult their
financial and tax advisors in making their own decisions on what action to take
in light of their own particular circumstances.
PURPOSE OF THE OFFER
The Company has effectively reduced the conversion price of the Notes during
the Exchange Period through the Exchange Offer in order to induce Holders to
exchange their Notes for Common Stock prior to maturity and thereby (i) reduce
the amount of cash the Company otherwise could be required to pay to retire the
Notes in 2001 and (ii) minimize the dilutive effect of the issuance of Common
Stock upon conversion of the Notes if they were converted after completion of
the Strategic Restructuring Plan.
TERMS OF THE OFFER
Subject to the terms and conditions of the Exchange Offer, U.S. Office
Products is offering to exchange shares of Common Stock for Notes at an Exchange
Ratio of 61.843 shares per $1,000 principal amount of the Notes. For Holders
tendering their Notes for exchange pursuant to the Exchange Offer, the Exchange
Offer effectively reduces the aggregate principal amount of the Notes that must
be surrendered to receive one share of Common Stock from $19.00 per share to
$16.17 per share.
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange the Notes at the Exchange Ratio for any and all Notes that
are properly tendered and not withdrawn during the Exchange Period. As of the
date of this Offering Circular/Prospectus, the total principal amount of the
Notes outstanding was $143,750,000. If all Notes are exchanged during the
Exchange Period, approximately 8,890,000 shares of Common Stock will be issued
upon exchange of the Notes. If the Exchange Offer were not in effect,
approximately 7,565,800 shares of Common Stock would be issuable upon conversion
of the Notes (assuming all of such Notes were converted prior to completion of
the Strategic Restructuring Plan).
The Company shall be deemed to have accepted validly tendered Notes (or
defectively tendered Notes with respect to which the Company has waived such
defect) when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders for the purpose of receiving the Common Stock from the Company and
remitting such Common Stock to tendering Holders. Upon the terms and subject to
the conditions of the Exchange Offer, delivery of Common Stock in exchange for
Notes will be made as promptly as practicable after the Expiration Date.
No fractional shares will be issued upon exchange of Notes pursuant to the
Exchange Offer. If any fractional share of stock otherwise would be issuable
upon the exchange of any Note, the Company shall pay the exchanging Holder an
amount equal to such fractional share multiplied by the Current Market Price on
the last trading day prior to the date of exchange. "Current Market Price" is
defined in the Indenture, and generally means the average of the daily closing
prices per share of Common Stock for the ten consecutive trading days
immediately prior to the last trading day prior to the date of conversion.
The Company will pay to all Holders who tender Notes for exchange pursuant
to the Exchange Offer unpaid interest accrued on the Notes through the
Expiration Date, irrespective of the date on which Notes are tendered for
exchange. The unpaid interest will be paid in cash promptly after the exchange
pursuant to the Exchange Offer.
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CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, and in addition
to (and not in limitation of) the Company's rights to extend and amend the
Exchange Offer at any time in its sole discretion, the Company will not be
required to accept for exchange, and may delay the acceptance for exchange of,
any tendered Notes, and may terminate the Exchange Offer if (i) the obligation
to make the Equity Investment has been terminated; (ii) the commitment with
respect to the Credit Facility has been terminated, or (iii) any of the General
Conditions (as defined below) shall not have been satisfied.
The obligation to make the Equity Investment will be deemed to have been
terminated for purposes of the Exchange Offer if, prior to the Expiration Date,
the Investment Agreement is terminated in accordance with its terms, or there
has occurred any event that would give Investor the right to terminate the
Investment Agreement in accordance with its terms, and Investor has not waived
that right in writing.
The commitment with respect to the Credit Facility will be deemed to have
been terminated for purposes of the Exchange Offer if the closing of the Credit
Facility shall not have occurred on or before June 30, 1998 (or such other date
as the Company and lenders may agree).
All General Conditions will be deemed to have been satisfied for purposes of
the Exchange Offer unless any of the following conditions occur prior to the
Expiration Date:
(i) there shall have been instituted or threatened or be pending any
action or proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, in
connection with the Exchange Offer, the Equity Investment, the Equity
Self-Tender or the Distributions; or that has, or is reasonably likely to
have, in the sole judgment of the Company, a material adverse effect on the
business, operations, properties, condition (financial or otherwise),
assets, liabilities or prospects of the Company and its subsidiaries taken
as a whole;
(ii) any order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been proposed, enacted, entered,
issued, promulgated, enforced or deemed applicable by any court or
governmental, regulatory or administrative agency or instrumentality that,
in the sole judgment of the Company, would or might prohibit, prevent,
restrict or delay consummation of the Exchange Offer, the Equity Investment,
the Equity Self-Tender or the Distributions or that has, or is reasonably
likely to have, in the sole judgment of the Company, a material adverse
effect on the business, operations, properties, condition (financial or
otherwise), assets, liabilities or prospects of the Company and its
subsidiaries taken as a whole;
(iii) there shall have occurred or be likely to occur any event that, in
the sole judgment of the Company, would or might prohibit, prevent, restrict
or delay consummation of the Exchange Offer, the Equity Investment, the
Equity Self-Tender or the Distributions or that will, or is reasonably
likely to, materially impair the contemplated benefits to the Company of the
Exchange Offer, the Equity Investment, the Equity Self-Tender or the
Distributions, or otherwise result in the consummation of the Exchange
Offer, the Equity Investment, the Equity Self-Tender or the Distributions
not being, or not being reasonably likely to be, in the best interests of
the Company and its subsidiaries taken as a whole;
(iv) the Trustee under the Indenture (each as defined below) shall have
objected in any respect to, or taken any action that could, in the sole
judgment of the Company, materially adversely affect the consummation of the
Exchange Offer, or shall have taken any action that challenges the validity
or effectiveness of the procedures used by the Company in (a) making the
Exchange Offer or (b) issuing Common Stock in exchange for any of the Notes;
(v) a tender or exchange offer for some or all of the Common Stock
(other than the Equity Self-Tender) or a proposal with respect to a merger,
consolidation or other business combination with or
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involving the Company or any subsidiary shall have been proposed to be made
or shall have been made by another person;
(vi) (1) any entity, "group" (as that term is used in Section 13(d)(3)
of the Exchange Act) or person (other than Investor and entities, groups or
persons, if any, who have filed with the Commission, on or before January
12, 1998, a Schedule 13G or Schedule 13D with respect to the Common Stock)
shall have acquired or proposed to acquire beneficial ownership of more than
5% of the outstanding shares; or
(2) such entity, group or person that has publicly disclosed any such
beneficial ownership of more than 5% of the Common Stock prior to such date
shall have acquired, or proposed to acquire, beneficial ownership of
additional shares of Common Stock constituting more than 2% of the
outstanding shares of Common Stock or shall have been granted any option or
right to acquire beneficial ownership of more than 2% of the outstanding
shares of Common Stock (other than the Equity Investment); or
(3) any entity, person or group shall have filed a Notification and
Report Form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
reflecting an intent to acquire the Company or any of its shares of Common
Stock; or
(vii) there shall have occurred (a) any general suspension of trading in,
or limitation on prices for, securities in the United States national
securities exchanges or over-the-counter markets, (b) any significant
adverse change in the trading prices for the Common Stock or in the
Company's other securities, or in any financial markets, (c) a material
impairment in the trading market for securities that could, in the sole
judgment of the Company, affect the Exchange Offer, the Equity Investment,
the Equity Self-Tender, the Distributions or the Financing Transactions, (d)
a declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States, (e) any limitation (whether or not
mandatory) by any government or governmental, administrative or regulatory
authority or agency, domestic or foreign, on (or other event that, in the
reasonable judgment of the Company, might affect) the extension of credit by
banks or other lending institutions, (f) a commencement of a war or armed
hostilities or other national or international calamity directly or
indirectly involving the United States, or (g) in the case of any of the
foregoing existing on the date hereof, a material acceleration or worsening
thereof.
The conditions to the Exchange Offer are for the sole benefit of the Company
and may be asserted by the Company in its sole discretion regardless of the
circumstances giving rise to such conditions (including any action or inaction
by the Company) or may be waived by the Company, in whole or in part, at any
time and from time to time, in its sole discretion, whether or not any other
condition of the Exchange Offer is also waived. The Company's failure at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such rights; the waiver of any such rights with respect to particular facts and
circumstances shall not be deemed a waiver with respect to any other facts and
circumstances; and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time. Any determination by the Company
concerning the events described in this section shall be final and binding upon
all persons.
EXPIRATION DATE; EXTENSION; AMENDMENT; TERMINATION
Upon the terms of the Exchange Offer, the Company will accept for exchange
all Notes validly tendered for exchange and not withdrawn prior to 12:00
midnight, New York City time, on May 29, 1998, or if extended by the Company, in
its sole discretion, the latest date and time to which extended (the "Expiration
Date"). The Company expressly reserves the right to extend the Exchange Offer on
a daily basis or for such period or periods as it may determine in its sole
discretion from time to time by giving written or oral notice to the Exchange
Agent and by making a public announcement by press release (which shall include
disclosure of the approximate principal amount of Notes tendered for exchange
during the Exchange Period) to the Dow Jones News Service no later than 9:00
a.m., New York City time,
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the next business day following the previously scheduled Expiration Date;
however, the Exchange Offer will not be extended beyond the expiration date for
the Equity Self-Tender. During any extension of the Exchange Offer, all Notes
previously tendered and not withdrawn will remain subject to the Exchange Offer.
The Company also expressly reserves the right, in its sole discretion,
subject to applicable law to (i) terminate the Exchange Offer, and not accept
for exchange any Notes and promptly return all Notes at any time for any reason,
including (without limitation) upon failure of any of the conditions specified
in "The Terms of the Exchange Offer--Conditions of the Exchange Offer," (ii)
waive any condition to the Exchange Offer and accept all Notes previously
tendered pursuant to the Exchange Offer, or (iii) amend or modify the terms of
the Exchange Offer in any manner. Any amendment applicable to the Exchange Offer
will apply to all Notes tendered pursuant to the Exchange Offer. The minimum
period during which the Exchange Offer must remain open following a material
change in the terms of the Exchange Offer or a waiver by the Company of a
material condition of the Exchange Offer will depend upon the facts and
circumstances, including the relative materiality of the change or waiver. Any
withdrawal or termination of the Exchange Offer will be followed as promptly as
practicable by public announcement thereof. In the event the Company withdraws
or terminates the Exchange Offer, it will give immediate notice to the Exchange
Agent, and all Notes theretofore tendered pursuant to the Exchange Offer will be
returned promptly to the tendering Holders thereof.
If the Company makes a material change in the terms of the Exchange Offer,
the Company will disseminate additional Exchange Offer materials and will extend
the Exchange Offer, in each case to the extent required by applicable law. For
purposes of the Exchange Offer, the term "business day" means any day other than
a Saturday, Sunday or federal holiday and consists of the time period from 12:01
a.m. through 12:00 midnight, New York City time.
EXCHANGE OF NOTES
Upon the terms of the Exchange Offer (including, if the Exchange Offer is
extended or amended, the terms and conditions of any such extension or
amendment) and applicable law, the Company will issue shares of Common Stock
with respect to all Notes validly tendered and not withdrawn for exchange
pursuant to the Exchange Offer promptly after the Expiration Date. Such exchange
will be made by the issuance of a certificate for the appropriate number of
shares of Common Stock or appropriate credit to the account of such Holder at
the Depository Trust Company ("DTC") with respect to such shares of Common Stock
in the name of, or pursuant to the instructions of, the Holder of the Note
tendered for exchange and the delivery of such certificate or certificates (or
credit to the account of such Holder at DTC) to or pursuant to the instructions
of the Holder.
In all cases, delivery of certificates or appropriate credit to the account
of such Holder at DTC with respect to such shares of Common Stock will be made
only after timely receipt by the Exchange Agent of (i) certificates representing
such Notes or timely confirmation of a book-entry transfer of such Notes into
the Exchange Agent's account at DTC pursuant to the procedures set forth herein,
(ii) a properly completed and duly executed Letter of Transmittal (or manually
signed facsimile thereof) or a properly transmitted Agent's Message (as defined
below), and (iii) any other documents required by the Letter of Transmittal.
If any Notes tendered are not accepted for exchange pursuant to the Exchange
Offer for any reason, such Notes not accepted for exchange will be returned
promptly, without expense, to the exchanging holder (or, in the case of Notes
tendered by book-entry transfer, such Notes will be credited to the account
maintained at DTC from which such Notes were delivered) after the expiration or
termination of the Exchange Offer.
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Holders who tender their Notes for exchange will not be obligated to pay
brokerage fees or commissions or, except as set forth in the instructions to the
Letter of Transmittal, transfer taxes on the exchange of Notes pursuant to the
Exchange Offer.
PROCEDURES FOR TENDER OF NOTES FOR EXCHANGE
Only Holders of record are authorized to tender their Notes for exchange.
The procedures by which the Notes may be tendered for exchange by beneficial
owners that are not Holders of record will depend upon the manner in which the
Notes are held.
The tender of Notes by a Holder thereof pursuant to one of the procedures
set forth below will constitute an agreement between such Holder and the Company
in accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
TENDER OF NOTES HELD IN PHYSICAL FORM. To effectively tender Notes held in
physical form pursuant to the Exchange Offer, a properly completed Letter of
Transmittal (or a facsimile thereof) duly executed by the holder thereof, and
any other documents required by the Letter of Transmittal, must be received by
the Exchange Agent at its address set forth on the back cover of this Offering
Circular/Prospectus (or delivery of Notes may be effected through the deposit of
Notes with DTC and making book-entry delivery as set forth below) on or prior to
the Expiration Date. LETTERS OF TRANSMITTAL AND NOTES SHOULD BE SENT ONLY TO THE
EXCHANGE AGENT AND SHOULD NOT BE SENT TO U.S. OFFICE PRODUCTS, THE INFORMATION
AGENT OR THE DEALER MANAGER.
TENDER OF NOTES HELD THROUGH A CUSTODIAN. To effectively tender Notes that
are held of record by a custodian bank, depositary, broker, dealer, commercial
bank, trust company or other nominee, the beneficial owner thereof must instruct
such Holder to tender the Notes on the beneficial owner's behalf. A Letter of
Instructions is included with this Offering Circular/Prospectus and may be used
by a beneficial owner in this process to give such instructions. Any beneficial
owner of Notes held of record by DTC or its nominee, through authority granted
by DTC, may direct the DTC participant through which such beneficial owner's
Notes are held in DTC to tender on such beneficial owner's behalf.
TENDER OF NOTES HELD THROUGH DTC. To effectively tender Notes that are held
through DTC, DTC participants should transmit their acceptance through DTC's
Automated Tender Offer Program ("ATOP"), and DTC will then edit and verify the
acceptance and send an Agent's Message to the Exchange Agent for its acceptance.
Delivery of tendered Notes must be made to the Exchange Agent pursuant to the
book-entry delivery procedures set forth below.
The method of delivery of Notes and Letter of Transmittal, any required
signature guarantees and all other required documents, including delivery
through DTC and any acceptance of an Agent's Message transmitted through the
ATOP Program, is at the election and risk of the person tendering Notes and
delivering the Letter of Transmittal and, except as otherwise provided in the
Letter of Transmittal, delivery will be deemed made only when actually received
by the Exchange Agent. If delivery is by mail, it is suggested that the holder
use properly insured, registered mail with return receipt requested, and that
the mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent prior to such date.
Except as provided below, unless the Notes being tendered for exchange are
deposited with the Exchange Agent on or prior to the Expiration Date
(accompanied by a properly completed and duly executed Letter of Transmittal or
a properly transmitted Agent's Message), the Company may, at its option, treat
such surrender as defective for purposes of the right to exchange pursuant to
the Exchange Offer. Exchange of the Notes will be made only against deposit of
the tendered Notes and delivery of all other required documents.
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BOOK-ENTRY DELIVERY PROCEDURES. The Exchange Agent will establish accounts
with respect to the Notes at DTC for purposes of the Exchange Offer within two
business days after the date of this Offering Circular/Prospectus, and any
financial institution that is a participant in DTC may make book-entry delivery
of the Notes by causing DTC to transfer such Notes into the Exchange Agent's
account in accordance with DTC's procedures for such transfer. However, although
delivery of Notes may be effected through book-entry transfer into the Exchange
Agent's account at DTC, the Letter of Transmittal (or facsimile thereof), with
any required signature guarantees or an Agent's Message in connection with a
book-entry transfer, and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at one or more of its
addresses set forth on the back cover of this Offering Circular/ Prospectus on
or prior to the Expiration Date, as applicable. Delivery of documents to DTC
does not constitute delivery to the Exchange Agent. The confirmation of a
book-entry transfer into the Exchange Agent's account at DTC as described above
is referred to herein as a "Book-Entry Confirmation."
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of the Book-Entry
Confirmation, which states that DTC has received an express acknowledgment from
the participants in DTC described in such Agent's Message stating the aggregate
principal amount of Notes which have been tendered by such participants pursuant
to the Exchange Offer and that such participants have received this Offering
Circular/Prospectus and the Letter of Transmittal and agree to be bound by the
terms of this Offering Circular/Prospectus and the Letter of Transmittal, and
U.S. Office Products may enforce such agreement against such participants.
SIGNATURE GUARANTEES. Signatures on all Letters of Transmittal must be
guaranteed by a recognized participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Program or
the Stock Exchange Medallion Program (a "Medallion Signature Guarantor"), unless
the Notes tendered thereby are tendered (i) by a registered Holder (or by a
participant in DTC whose name appears on a security position listing as the
owner of such Notes) who has not completed either the box entitled "Special
Delivery Instructions" or "Special Exchange Instructions" on the Letter of
Transmittal, or (ii) for the account of a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc. ("NASD") or a commercial bank or trust company having an office or
correspondent in the United States (each of the foregoing being referred to as
an "Eligible Institution"). See Instruction 1 of the Letter of Transmittal. If
the Notes are registered in the name of a person other than the signer of the
Letter of Transmittal or if Notes not accepted for exchange or not tendered are
to be returned or payment of cash in lieu of fractional shares is to be made to
a person other than the registered Holder, then the signatures on the Letter of
Transmittal accompanying the tendered Notes must be guaranteed by a Medallion
Signature Guarantor as described above. See Instructions 1 and 4 of the Letter
of Transmittal.
DETERMINATION OF VALIDITY. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of any tendered Notes
pursuant to any of the procedures described above will be determined by the
Company in its sole discretion (whose determination shall be final and binding).
The Company reserves the absolute right to reject any or all tenders of any
Notes determined by it not to be in proper form. The Company also reserves the
absolute right, in its sole discretion, to waive any defect or irregularity in
any tender for exchange with respect to the Notes of any particular Holder,
whether or not similar defects or irregularities are waived in the case of other
Holders. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) will be final and binding. No tender of Notes will be deemed to have
been validly made until all defects or irregularities have been cured or
expressly waived. None of U.S. Office Products, the Exchange Agent, the Dealer
Manager, the Information Agent, the Trustee or any other person will be under
any duty to give notification of any defects or irregularities in surrenders or
will incur any liability for failure to give any such notification. If U.S.
Office Products waives its right to reject a defective tender of Notes, the
Holder will be entitled to exchange pursuant to the terms of the Exchange Offer.
20
<PAGE>
WITHDRAWAL RIGHTS
Tenders of Notes may be withdrawn at any time on or prior to the Expiration
Date and, unless accepted for exchange by the Company, may be withdrawn at any
time after 5:00 p.m., New York City time, on the 40th business day after the
date of this Offering Circular/Prospectus.
In order for a withdrawal to be effective, a written, telegraphic, or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its addresses set forth on the back cover of this Offering
Circular/Prospectus on or prior to the Expiration Date. Any such notice of
withdrawal must specify the name of the person who tendered the Notes to be
withdrawn, that such person is withdrawing his election to have such Notes
exchanged, the aggregate principal amount of Notes to be withdrawn, and the name
of the registered Holder of the Notes as set forth on the Notes, if different
from that of the person who tendered such Notes. If Notes have been delivered or
otherwise identified to the Exchange Agent, then prior to the physical release
of such Notes, the tendering Holder must submit the serial numbers shown on the
particular Notes to be withdrawn and the signature on the notice of withdrawal
must be guaranteed by a Medallion Signature Guarantor, except in the case of
Notes tendered for the account of any Eligible Institution. If Notes have been
tendered pursuant to the procedures for book-entry transfer set forth in
"--Procedures for Tender of Notes for Exchange," the notice of withdrawal must
specify the name and number of the account at DTC to be credited with the
withdrawal of Notes, in which case a notice of withdrawal will be effective if
delivered to the Exchange Agent by written, telegraphic, or facsimile
transmission. Withdrawals of tenders of Notes may not be rescinded. Notes
properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be re-tendered at any subsequent time on or prior to the
Expiration Date by following the procedures described above under "--Procedures
for Tender of Notes for Exchange." All questions as to the validity of notice of
withdrawal, including time of receipt, will be determined by the Company, and
such determination shall be final and binding
PROCEDURE FOR TENDERING SHARES RECEIVED UPON EXCHANGE IN THE EQUITY SELF-TENDER
Holders who exchange Notes pursuant to the Exchange Offer may tender the
shares of Common Stock they are entitled to receive upon exchange in the Equity
Self-Tender by following the instructions included with the Tender Offer
Statement for the Equity Self-Tender. A Holder whose Notes are in certificated
form rather than book-entry form at the Expiration Date may not receive
certificates for shares of Common Stock in exchange for Notes in time to deliver
such shares prior to the expiration date of the Equity Self-Tender or the
expiration of the period for guaranteed delivery following the expiration date
of the Equity Self-Tender. A Holder whose Notes are in book-entry form at the
Expiration Date will receive shares of Common Stock in book-entry form and it is
expected that such holders will have adequate time to deliver such shares in the
Equity Self-Tender prior to the expiration date of the Equity Self-Tender or the
period for guaranteed delivery following the expiration date of the Equity
Self-Tender. If a Holder tenders shares in the Equity Self-Tender, certificates
for shares of Common Stock will be retained by the Depositary for the Equity
Self-Tender until the tender of shares in the Equity Self-Tender is validly
withdrawn or until the Depositary returns shares that are not accepted in the
Equity Self-Tender. Shares tendered in the Equity Self-Tender will be subject to
all of the terms and conditions of the Equity Self-Tender as set forth in the
Tender Offer Statement relating to the Equity Self-Tender. Holders who are
considering tendering shares into the Equity Self-Tender should read the Tender
Offer Statement carefully before deciding whether to tender shares. Copies of
the Tender Offer Statement and related materials will be delivered to Holders
upon commencement of the Equity Self-Tender.
MARKET AND TRADING INFORMATION
THE NOTES. The Notes were issued in February 1996, and there currently is a
limited trading market for the Notes. Quotations for securities that are not
widely traded, such as the Notes, may differ from
21
<PAGE>
actual trading prices and should be viewed as approximations. Holders are urged
to contact their brokers to obtain the best available information as to current
market prices.
To the extent that Notes are tendered and accepted for exchange in the
Exchange Offer, the trading market for Notes that remain outstanding may be
significantly more limited, which might adversely affect the liquidity of the
Notes. The extent of the public market and the availability of price quotations
would depend upon a number of factors, including the number of Holders of Notes
remaining at such time. An issue of securities with a smaller outstanding market
value available for trading (the "float") may command a lower price than would a
comparable issue of securities with a greater float. Therefore, the market price
for Notes that are not tendered for exchange in the Exchange Offer may be
affected adversely to the extent that the amount of Notes exchanged pursuant to
the Exchange Offer reduces the float. The reduced float also may tend to make
the trading prices of the Notes that are not exchanged more volatile.
THE COMMON STOCK. The Common Stock is traded on the Nasdaq National Market
System under the symbol "OFIS." On April 29, 1998, the closing sale price of the
Common Stock was $17.81 per share. The following table sets forth, for the
fiscal periods indicated, the range of high bid and low ask prices for the
Common Stock on the Nasdaq National Market. On November 6, 1997, the Company
effected a three-for-two split of the Common Stock. The prices given below are
adjusted retroactively to reflect this stock split.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED APRIL 30, 1996
First fiscal Quarter......................................................................... $ 10.58 $ 7.00
Second fiscal Quarter........................................................................ $ 12.08 $ 9.00
Third fiscal Quarter......................................................................... $ 17.58 $ 10.83
Fourth fiscal Quarter........................................................................ $ 26.67 $ 14.67
FISCAL YEAR ENDED APRIL 26, 1997
First fiscal Quarter......................................................................... $ 30.33 $ 16.33
Second fiscal Quarter........................................................................ $ 25.33 $ 16.50
Third fiscal Quarter......................................................................... $ 24.83 $ 17.50
Fourth fiscal Quarter........................................................................ $ 23.17 $ 13.33
FISCAL YEAR ENDED APRIL 25, 1998
First fiscal Quarter......................................................................... $ 20.58 $ 14.67
Second fiscal Quarter........................................................................ $ 25.92 $ 17.21
Third fiscal Quarter......................................................................... $ 24.83 $ 14.69
Fourth fiscal Quarter........................................................................ $ 19.81 $ 16.88
FISCAL YEAR ENDING APRIL 24, 1999
First fiscal Quarter (through April 29, 1998)................................................ $ 17.81 $ 16.69
</TABLE>
The value realized by Holders on exchange of the Notes will depend on the
market price of the Common Stock, which is subject to fluctuation. Holders are
urged to obtain current market quotations for the Common Stock. The market price
of the Common Stock will also be affected by the completion of the Strategic
Restructuring Plan, including the completion of the Equity Self-Tender and the
Distributions. See "Risk Factors--Impact of the Strategic Restructuring Plan on
Trading Prices of the Common Stock." The market price of the Common Stock also
may be affected by any failure to complete all or any elements of the Strategic
Restructuring Plan. See "Risk Factors--Failure to Complete Strategic
Restructuring Plan."
DEALER MANAGER
The Company has retained BancAmerica Robertson Stephens to act as Dealer
Manager in connection with the Exchange Offer. In its capacity as Dealer
Manager, BancAmerica Robertson Stephens may contact Holders regarding the
Exchange Offer and may request brokers, dealers, commercial banks, trust
companies and other nominees to forward this Offering Circular/Prospectus and
related materials to
22
<PAGE>
beneficial owners of Notes. BancAmerica Robertson Stephens will receive a fee
for its services as Dealer Manager in connection with the Exchange Offer that
will depend on the percentage of the aggregate principal amount of the Notes
that is tendered for exchange.
No fee will be paid on the first 60% of the aggregate principal amount of
the Notes tendered. Thereafter, a fee will be paid for each $1,000 principal
amount of Notes tendered. The fee is based on a sliding scale, with the higher
fee only paid on the incremental Notes tendered above specified thresholds. The
fees range from $3.75 per $1,000 principal amount up to a maximum of $30.00 per
$1,000 principal amount if more than 95% of the aggregate principal amount of
the Notes are tendered. Based on the foregoing fee structure, if all outstanding
Notes are tendered in the Exchange Offer, BancAmerica Robertson Stephens will
receive an aggregate fee of $619,507.
BancAmerica Robertson Stephens will also be reimbursed for its reasonable
out-of-pocket expenses incurred in connection with the Exchange Offer (including
the reasonable fees and disbursements of counsel). The Company has also agreed
to indemnify BancAmerica Robertson Stephens and its affiliates against certain
liabilities, including liabilities under the federal securities laws, caused by,
relating to or arising out of the Exchange Offer.
BancAmerica Robertson Stephens and BA Robertson Stephens International
Limited have also been selected by the Company to act as Dealer Managers with
respect to the 2003 Note Tender. BancAmerica Robertson Stephens has also been
selected as the managing underwriter for the public offering of common stock of
two of the Spin-Off Companies. BancAmerica Robertson Stephens has in the past
provided certain investment banking services to the Company, for which services
BancAmerica Robertson Stephens has received customary compensation, including
acting as lead manager for U.S. Office Products' public offering of the Notes
and placement agent for the private placement of the 2003 Notes.
The Dealer Manager does not assume any responsibility for the accuracy or
completeness of the information concerning the Company or its affiliates
contained herein or for any failure by the Company to disclose events which may
have occurred and may affect the significance or accuracy of such information.
Unless otherwise indicated, all information contained in this Offering
Circular/Prospectus has been supplied by the Company. The Company assumes full
responsibility for the accuracy or completeness of such information.
EXCHANGE AGENT AND INFORMATION AGENT
State Street Bank and Trust Company has been appointed Exchange Agent for
the Exchange Offer. All deliveries and correspondence sent to the Exchange Agent
should be directed to its address set forth on the back cover of this Offering
Circular/Prospectus. MacKenzie Partners, Inc. has been appointed Information
Agent for the Exchange Offer. Requests for assistance or additional copies of
this Offering Circular/Prospectus and the Letter of Transmittal should be
directed to the Information Agent at its address set forth on the back cover of
this Offering Circular/Prospectus. Holders of the Notes may also contact their
broker, dealer, commercial bank or trust company for assistance concerning the
Exchange Offer.
FEES AND EXPENSES
In addition to the fees and expenses payable to the Dealer Manager, the
Company will pay the Exchange Agent and the Information Agent reasonable and
customary fees for their services (and will reimburse them for their reasonable
out-of-pocket expenses in connection therewith), and will pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Offering
Circular/Prospectus and related documents to the beneficial owners of the Notes
and in handling or forwarding tenders for purchase. In addition, the Company has
agreed to indemnify the Exchange Agent against certain liabilities in connection
with their services, including liabilities arising under the federal securities
laws.
23
<PAGE>
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Notes pursuant to the Exchange Offer. If, however, certificates for
shares of Common Stock issued upon exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered holder
of the Notes, or if tendered Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the conversion of the Notes pursuant to the
Exchange Offer, then the amount of any such transfer tax (whether imposed on the
registered holder or any other person) will be payable by the surrendering
Holder.
ACCOUNTING TREATMENT OF THE EXCHANGE OFFER
As a result of the Exchange Offer, the Company will issue up to 1,324,000
shares of Common Stock in addition to the number of shares that would otherwise
be issuable if all of the Notes were converted at the Existing Conversion Price.
Based on the closing price of the Common Stock on April 29, 1998, such 1,324,000
shares have a market value of approximately $23.6 million. The actual market
value of the Common Stock at the date of the exchange will be recorded as
expense in the Company's consolidated financial statements at the time of the
exchange. The expense will not be deductible for income tax purposes.
FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE
For a discussion of the federal income tax consequences of the Exchange
Offer see "U.S. Federal Income Tax Considerations."
MISCELLANEOUS
In connection with the Exchange Offer, directors, officers and employees of
the Company (who will not be specifically compensated for such services) may
solicit tenders and consents by use of the mails, personally or by telephone,
telegram or facsimile transmissions.
None of the officers, directors or affiliates of the Company hold any of the
Notes.
DIVIDEND POLICY
The Company does not anticipate declaring and paying cash dividends on
Common Stock in the foreseeable future. The decision whether to apply any
legally available funds to the payment of cash dividends on the Common Stock
will be made by the Company's Board of Directors from time to time in the
exercise of its business judgment, taking into account the Company's financial
condition, results of operations, existing and proposed commitments for use of
the Company's funds and other relevant factors. U.S. Office Products' ability to
pay dividends may be restricted from time to time by financial covenants in its
credit agreements.
24
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at January
24, 1998: (i) on an actual basis; and (ii) on a pro forma basis to reflect (a)
the Equity Self-Tender, (b) the Distributions, (c) the Equity Investment, (d)
the purchase acquisitions completed subsequent to January 24, 1998, (e) the
Exchange Offer, (f) the 2003 Note Tender (assuming that all of the Notes are
exchanged in the Exchange Offer and all of the 2003 Notes are tendered and
accepted for purchase in the 2003 Note Tender) and (g) the Subordinated Debt
Offering and borrowings under the Credit Facility in connection with these
transactions ("New Borrowings") as if such transactions had occurred on January
24, 1998. The number of shares outstanding set forth below does not include
shares issuable upon exercise of approximately 22.0 million and 14.2 million
outstanding options on an actual and pro forma basis, respectively. See "The
Strategic Restructuring Plan--Adjustment to Employee Stock Options." This table
should be read in conjunction with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the historical consolidated
financial statements and the unaudited pro forma combined financial statements
of the Company, and the related notes to each thereof, all of which are included
in or incorporated by reference into this Offering Circular/Prospectus.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
------------- -------------
<S> <C> <C>
JANUARY 24, 1998
----------------------------
(IN THOUSANDS)
Short-term debt.................................................................... $ 332,636 $ --
------------- -------------
------------- -------------
Long-term debt..................................................................... $ 381,844 $ 1,155,509
Stockholders' equity:
Preferred stock, $0.001 par value, 500,000 shares authorized; none outstanding...
Common stock, $0.001 par value, 500,000,000 shares authorized, 133,041,979, and
146,931,899 shares issued, 133,041,979, and 146,331,374 shares outstanding,
none, and 600,525 shares held in treasury, respectively........................ 133 146
Additional paid-in capital....................................................... 1,463,523 707,905
Cumulative translation adjustment................................................ (113,022) (113,022)
Retained earnings (deficit)...................................................... 122,288 (4,237)
------------- -------------
Total stockholders' equity..................................................... 1,472,922 590,792
------------- -------------
Total capitalization......................................................... $ 1,854,766 $ 1,746,301
------------- -------------
------------- -------------
</TABLE>
25
<PAGE>
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------------ -----------
PRO FORMA
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25,
1993 1994 1995 1996 1997 1997 (2) 1997
----------- ----------- ----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $ 486,763 $ 523,755 $ 658,494 $1,061,528 $2,115,954 $2,794,009 $1,498,320
Cost of revenues.................. 350,647 377,494 485,955 789,436 1,518,287 1,988,315 1,077,408
----------- ----------- ----------- --------- --------- ----------- -----------
Gross profit.................. 136,116 146,261 172,539 272,092 597,667 805,694 420,912
Selling, general and
administrative expenses......... 124,065 132,320 152,176 231,569 488,215 646,867 344,474
Amortization expense.............. 601 733 801 2,711 12,416 25,138 8,072
Non-recurring acquisition costs... 8,057 8,001 8,001 7,316
Restructuring costs............... 682 4,201 4,201
----------- ----------- ----------- --------- --------- ----------- -----------
Operating income.............. 11,450 13,208 19,562 29,073 84,834 121,487 61,050
Interest expense.................. 2,914 2,519 3,401 8,132 36,047 103,996 27,540
Interest income................... (327) (411) (675) (3,506) (6,857) (6,048)
Other income...................... (1,463) (1,315) (1,456) (684) (4,233) (7,150) (4,073)
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 10,326 12,415 18,292 25,131 59,877 24,641 43,631
Provision for income taxes........ 1,594 1,727 2,800 6,032 27,939 18,481 18,238
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before extraordinary items...... 8,732 10,688 15,492 19,099 31,938 $ 6,160 25,393
-----------
-----------
Income from discontinued
operations, net of income taxes
(3)............................. 2,824 10,953 15,675 15,778 26,800 20,411
----------- ----------- ----------- --------- --------- -----------
Income before extraordinary
items........................... 11,556 21,641 31,167 34,877 58,738 45,804
Extraordinary items, net of income
taxes (4)....................... 701 1,450 612
----------- ----------- ----------- --------- --------- -----------
Net income........................ $ 11,556 $ 21,641 $ 31,167 $ 34,176 $ 57,288 $ 45,192
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Weighted average common shares
outstanding
Basic......................... 44,260 44,260 45,562 67,545 90,026 146,331(5) 85,978
Diluted....................... 44,260 44,260 45,704 68,374 91,761 148,066(5) 87,824
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.30
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.24 0.31 0.24
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.51 $ 0.64 $ 0.53
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.29
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.23 0.29 0.23
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.50 $ 0.62 $ 0.51
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Ratio of earnings to fixed charges
(6) 2.1x 2.3x 2.5x 1.9x 2.0x 1.2x 2.0x
<CAPTION>
PRO FORMA PRO FORMA
JANUARY 24, JANUARY 25, JANUARY 24,
1998 1997 (2) 1998 (2)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $1,930,113 $2,087,861 $2,070,655
Cost of revenues.................. 1,390,855 1,487,711 1,481,421
----------- ----------- -----------
Gross profit.................. 539,258 600,150 589,234
Selling, general and
administrative expenses......... 436,037 483,908 467,356
Amortization expense.............. 13,830 18,415 18,433
Non-recurring acquisition costs... 7,316
Restructuring costs...............
----------- ----------- -----------
Operating income.............. 89,391 90,511 103,445
Interest expense.................. 27,534 77,997 77,997
Interest income................... (1,545)
Other income...................... (6,369) (6,730) (6,711)
----------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 69,771 19,244 32,159
Provision for income taxes........ 32,535 14,433 20,903
----------- ----------- -----------
Income from continuing operations
before extraordinary items...... 37,236 $ 4,811 $ 11,256
----------- -----------
----------- -----------
Income from discontinued
operations, net of income taxes
(3)............................. 25,464
-----------
Income before extraordinary
items........................... 62,700
Extraordinary items, net of income
taxes (4).......................
-----------
Net income........................ $ 62,700
-----------
-----------
Weighted average common shares
outstanding
Basic......................... 114,758 146,331(5) 146,331(5)
Diluted....................... 117,185 148,177(5) 148,757(5)
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.23
Extraordinary items...........
-----------
Net income.................... $ 0.55
-----------
-----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.22
Extraordinary items...........
-----------
Net income.................... $ 0.54
-----------
-----------
Ratio of earnings to fixed charges
(6) 2.5x 1.2x 1.4x
</TABLE>
<TABLE>
<CAPTION>
JANUARY
APRIL 30, 24, 1998
------------------------------------------ APRIL 26, ---------
1993 1994 1995 1996 1997 ACTUAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 13,609 $ 51,344 $ 70,153 $ 274,124 $ 233,986 $ 107,210
Net assets of discontinued operations........................ 19,199 26,879 33,514 33,674 171,122 461,042
Total assets................................................. 130,666 172,656 259,904 805,978 1,706,991 2,469,442
Long-term debt, less current portion......................... 2,414 15,112 18,841 176,230 380,209 381,844
Stockholders' equity......................................... 27,986 77,735 128,512 394,746 921,148 1,472,922
<CAPTION>
PRO FORMA (7)
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 396,609
Net assets of discontinued operations........................
Total assets................................................. 2,006,085
Long-term debt, less current portion......................... 1,155,509
Stockholders' equity......................................... 590,792
</TABLE>
26
<PAGE>
- ------------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method (the "Purchased Companies") have been included from the dates of
their respective acquisitions. The pro forma financial data reflect purchase
acquisitions completed by the Company through March 20, 1998.
(2) Gives effect to the Strategic Restructuring Plan, the Exchange Offer, the
2003 Note Tender (assuming that all of the Notes are exchanged in the
Exchange Offer and all of the 2003 Notes are tendered and accepted for
purchase in the 2003 Note Tender), the New Borrowings and the purchase
acquisitions completed by the Company since May 1, 1996 as if such
transactions had been made on May 1, 1996. The pro forma statement of income
data are not necessarily indicative of the operating results that would have
been achieved had these events actually then occurred and should not be
construed as representative of the Company's future operating results.
(3) The results of the companies included in the Distributions are reflected as
discontinued operations for all periods presented in the Company's
consolidated statement of income.
(4) Extraordinary items represent the losses associated with the early
terminations of credit facilities, net of the related income tax benefits.
(5) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 25,
1997 and January 24, 1998, see Notes to Pro Forma Combined Financial
Statements incorporated by reference into this Offering Circular/
Prospectus.
(6) In computing the ratio of earnings to fixed charges: (i) earnings are based
on income from continuing operations before provision for income taxes and
extraordinary items and fixed charges; and (ii) fixed charges consist of
interest expense from continuing and discontinued operations, amortization
of deferred financing costs and the estimated interest component of rent
expense.
(7) Gives effect to the Strategic Restructuring Plan, the Exchange Offer, the
2003 Note Tender (assuming that all of the Notes are exchanged in the
Exchange Offer and all of the 2003 Notes are tendered and accepted for
purchase in the 2003 Note Tender), the New Borrowings and the purchase
acquisitions completed by the Company subsequent to January 24, 1998 as if
such transactions had been made on January 24, 1998. The pro forma balance
sheet data are not necessarily indicative of the financial position that
would have been achieved had these events actually then occurred and should
not be construed as representative of the Company's future financial
position.
27
<PAGE>
THE STRATEGIC RESTRUCTURING PLAN
The elements of the Strategic Restructuring Plan, and related transactions,
are summarized below.
EQUITY SELF-TENDER
The Company will offer to purchase 37,037,037 shares of Common Stock
(including shares that may be issued on exercise of vested and unvested stock
options with an exercise price of less than $27.00) at a price of $27.00 per
share (or, in the case of shares underlying stock options, at $27.00 minus the
exercise price of the options). The Company expects the Equity Self-Tender to
commence on May 4, 1998 and to expire on June 1, 1998, unless the Company
extends the expiration date.
The Board approved the Equity Self-Tender--and borrowing by the Company to
finance a substantial portion of the purchase price--to give stockholders the
opportunity to receive cash for a portion of their investment in the Company.
The Equity Self-Tender price of $27.00 per share represents a substantial
premium over the trading price of the Common Stock immediately prior to the
announcement of the Strategic Restructuring Plan. The Board subsequently decided
to allow employees to tender shares underlying options to reduce potential
dilution to stockholders of the Company and the Spin-Off Companies as well as to
permit employees to participate in the Equity Self-Tender without incurring the
cost (and potential tax liability) of exercising their options before they knew
whether their options would be accepted in the Equity Self-Tender. Because
shares underlying options can be tendered, the Company will not make any
adjustment to the exercise price or number of options that will be outstanding
after the Equity Self-Tender to take account of the effects of the Equity
Self-Tender. Based on information received from management and recommendations
of outside advisers, the Board concluded that after the Company is restructured,
it would be able to generate adequate cash flow to service the additional debt.
The Company will not be required to purchase shares of Common Stock in the
Equity Self-Tender unless the following conditions, and other standard
conditions, are satisfied:
- a minimum of 37,037,037 shares of Common Stock (including shares
underlying stock options) are validly tendered and not withdrawn;
- the Company has obtained enough financing to pay for the shares (including
shares issuable upon exercise of outstanding employee stock options) it
will purchase in the Equity Self-Tender;
- all conditions to the completion of Investor's purchase of the equity
securities have been satisfied or waived, except completion of the Equity
Self-Tender and Distributions; and
- registration statements covering the shares of the Spin-Off Companies to
be distributed to the Company stockholders in the Distributions have
become effective and all other conditions to the completion of the
Distributions have been satisfied, except completion of the Equity
Self-Tender.
The Company expects to pay for the shares with a combination of the money it
receives from the Equity Investment described below and money it obtains in the
Financing Transactions.
In the Equity Self-Tender, employees of the Company may tender shares
underlying vested (but unexercised) or unvested stock options with an exercise
price of less than $27.00 per share. The Company will allow employees to
conditionally exercise unvested options to the extent it purchases shares
underlying such unvested options in the Equity Self-Tender as long as the
employee also tenders all of his or her vested options. In the Equity
Self-Tender, tendered options will be prorated in the same proportion as
tendered shares. Unvested options that are not accepted for purchase in the
Equity Self-Tender will remain unvested after the Equity Self-Tender. The
Company will accept for purchase in the Equity Self-Tender shares underlying an
employee's vested options before accepting any shares underlying an employee's
unvested options. Up to approximately 22 million shares are issuable upon
exercise of outstanding options. U.S. Office Products will record a non-cash
compensation expense to reflect the difference between the tender
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offer price of $27.00 per share and the exercise price for options that are
purchased in the Equity Self-Tender. The amount of the compensation expense will
depend on the number of shares underlying options that are accepted in the
Equity Self-Tender and the exercise price of the associated options. If all
outstanding shares, plus all shares received for exchange for Notes (and
assuming all Notes are exchanged for shares in the Exchange Offer) and all
shares underlying all outstanding options are tendered, the Company currently
estimates that the non-cash expense will be approximately $65.0 million
On April 14, 1998, a stockholder purporting to represent a class composed of
all U.S. Office Products stockholders filed an action in the Delaware Chancery
Court. The action claims that the directors breached their fiduciary duty to the
stockholders of U.S. Office Products by changing the terms of the Equity
Self-Tender to include employee stock options. The complaint seeks injunctive
relief, damages and attorneys fees. U.S. Office Products believes that this
lawsuit is without merit and intends to vigorously contest it.
DISTRIBUTIONS
GENERAL. After acceptance of shares of Common Stock in the Equity
Self-Tender, the Company will distribute the common stock of the Spin-Off
Companies. These companies will hold substantially all of the businesses and
assets of, and will be responsible for substantially all of the liabilities
associated with, the Company's technology solutions (Aztec Technology Partners,
Inc.), print management (Workflow Management, Inc.), educational supplies
(School Specialty, Inc.) and corporate travel services (Navigant International,
Inc.) businesses. Each of the Spin-Off Companies intends to issue additional
common stock in an underwritten public offering that is expected to occur at
approximately the same time as the Distributions. The Distributions are intended
to qualify for tax-free treatment under Section 355 and will not be completed
unless the Company receives an opinion from Wilmer, Cutler & Pickering that the
Distributions will receive tax-free treatment. See "--U.S. Federal Income Tax
Consequences of the Distributions." No less than ten calendar days prior to the
expiration date of the Equity Self-Tender, the Company will distribute to each
Holder of record on such date a copy of the information statements of each
Spin-Off Company contained in the Spin-Off Company registration statements.
The Board determined that the separation of the businesses of the Spin-Off
Companies and the continuing business of the Company as part of the Strategic
Restructuring Plan would benefit the stockholders because it would have
advantages for the Spin-Off Companies and the Company. The advantages that the
Board considered included the following:
- The Distributions will allow each of the Company and the Spin-Off
Companies to adopt strategies and pursue objectives that are more
appropriate to their respective industries, geographic territories and
stages of growth.
- Each will be able to pursue an independent acquisition program that allows
for a more focused use of resources and, where stock is used as
consideration, provide stock of a public company that is in the same
industry as the businesses being acquired.
- Each can be recognized by the financial community as a distinct business
that can be evaluated more readily and compared more easily to industry
peers.
- Each can implement more focused incentive compensation packages that
respond to specific industry and market conditions and enhance employee
retention objectives.
- After the Distributions, the Company will be focused on a more narrow,
complementary group of businesses. Each of the Spin-Off Companies will be
focused primarily on their individual businesses.
In considering the Distributions, the Board also took into account that all
the Company's stockholders remaining after the Equity Self-Tender will receive
stock of the Spin-Off Companies. Accordingly, these stockholders will benefit
from any appreciation in value of the stocks of the Spin-Off Companies after the
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Distributions. The Board also considered the diversification opportunities the
Distributions would provide stockholders. Stockholders will be able to retain an
interest in those Spin-Off Companies they want to retain and to dispose of their
interests in the others.
The Company will distribute shares of the Spin-Off Companies to its
stockholders remaining after completion of the Exchange Offer and the Equity
Self-Tender. The Company has not yet determined the number of shares of each of
the Spin-Off Companies that will be distributed for each share of Common Stock,
but the Company will distribute all shares of the Spin-Off Companies it holds.
The number of shares of the Spin-Off Companies that a Company stockholder
receives in the Distributions will be based on the number of shares of Common
Stock that the stockholder holds after the Equity Self-Tender but prior to the
one-for-four reverse stock split.
Investor will not receive shares of the Spin-Off Companies in the
Distributions. At the same time, the Investment Agreement specifies certain
terms of the Distributions, and Investor has the right to reasonably approve
certain other terms of the Distributions. Investor may require terms of the
Distributions (such as responsibility for pre-distribution liabilities) that are
less favorable to the Spin-Off Companies than would be the case if Investor also
had an interest in the Spin-Off Companies. In addition, the Company has agreed
to indemnify Investor and its affiliates against losses resulting from any of
the Spin-Off Companies failing to satisfy their obligations to the Company under
certain agreements related to the Distributions.
In connection with the Distributions, the Company will enter into a series
of agreements with each Spin-Off Company to provide mechanisms for an orderly
transition and to define certain relationships among the Company and the
Spin-Off Companies after the Distributions. These agreements are: a distribution
agreement (the "Distribution Agreement") among the Company and the Spin-Off
Companies; a tax allocation agreement (the "Tax Allocation Agreement") among the
Company and the Spin-Off Companies; an employee benefits agreement (the
"Employee Benefits Agreement") among the Company and the Spin-Off Companies; and
a tax indemnification agreement (the "Tax Indemnification Agreement") among the
Spin-Off Companies. Each of these agreements is in the process of being
negotiated, and is subject to Investor's reasonable approval. There can be no
assurance that the terms of these agreements will contain the terms described
below.
DISTRIBUTION AGREEMENT. The Distribution Agreement will provide for the
transfer from the Company to the Spin-Off Companies of substantially all of the
equity interests in the Company's subsidiaries that are engaged in the business
of technology solutions, print management, educational supplies and corporate
travel services businesses as well as the transfer, in certain instances, of
other assets related to these businesses. The Distribution Agreement will also
allocate and provide for the assumption of financial responsibility for certain
liabilities (other than taxes and employee benefit matters which will be
governed by separate agreements) among the Company and the Spin-Off Companies.
It is expected that each Spin-Off Company may be responsible for (i) any
liabilities arising out of or in connection with its respective businesses as
they were formerly conducted by the Company and/or its subsidiaries, (ii) its
liabilities under the Distribution Agreement, the Tax Allocation Agreement and
the Employee Benefits Agreement and related agreements, (iii) its liabilities
for its portion of an aggregate of $130.0 million of debt allocated to the
Spin-Off Companies plus expenditures by such entities for acquisitions after the
date of the Investment Agreement, (iv) certain liabilities under the securities
laws and (v) any liabilities of the Spin-Off Company or its subsidiaries. In
addition, the Distribution Agreement is expected to provide that each of the
Company and the Spin-Off Companies will bear a portion of (i) any liabilities of
the Company under the securities laws arising from events prior to the
Distributions (other than claims relating solely to a specific Spin-Off Company
or relating specifically to the continuing businesses of the Company), (ii) the
Company's general corporate liabilities (other than debt, except for that
specifically allocated to the Spin-Off Companies) incurred prior to the
Distributions (i.e., liabilities not related to the management or conduct of a
particular distributed or retained subsidiary's business) and (iii) a portion of
transaction costs (including legal, accounting, investment banking and financial
advisory) and other fees incurred by the
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Company in connection with the Strategic Restructuring Plan equal to $1.0
million in the case of each Spin-Off Company.
TAX ALLOCATION AGREEMENT AND TAX INDEMNIFICATION AGREEMENT. The Tax
Allocation Agreement will provide that each Spin-Off Company is responsible for
its respective share of the Company's consolidated tax liability for the years
that each such corporation was included in the Company's consolidated U.S.
federal income tax return. The Tax Allocation Agreement will also provide for
sharing, where appropriate, of state, local and foreign taxes attributable to
periods prior to the Distributions. Under the Tax Allocation Agreement, the
Spin-Off Companies will jointly and severally indemnify the Company for any
losses associated with taxes ("Distribution Taxes") assessed against the Company
that are related to the Distributions if an action or omission (an "Adverse Tax
Act") of any of the Spin-Off Companies materially contributes to a final
determination that any or all of the Distributions are taxable. Further, the
Spin-Off Companies, but not the Company, will enter into the Tax Indemnification
Agreement which will require the Spin-Off Company that is responsible for the
Adverse Tax Act to indemnify the other Spin-Off Companies for any liability to
the Company under the Tax Allocation Agreement. If there is a final
determination that any or all of the Distributions are taxable and it is
determined that there has not been an Adverse Tax Act by either the Company or
any of the Spin-Off Companies, each of the Company and the Spin-Off Companies
will be liable for its pro rata portion of such Distribution Taxes based on the
value of each company's common stock after the Distributions. However, the
Company and the Spin-Off Companies have not agreed to indemnify the Company's
stockholders for any taxes resulting from the Distributions failing to qualify
for tax-free treatment.
EMPLOYEE BENEFITS AGREEMENT. In connection with the Distributions, the
Company will enter into the Employee Benefits Agreement with the Spin-Off
Companies to provide for an orderly transition of benefits coverage between the
Company and the Spin-Off Companies. Pursuant to this agreement, the respective
Spin-Off Companies will retain or assume liability for employment-related claims
and severance for persons currently or previously employed by the respective
Spin-Off Companies and their subsidiaries, while the Company and the businesses
which remain part of the Company after the Distributions will retain or assume
responsibility for their current and previous employees.
EQUITY INVESTMENT
Pursuant to the Investment Agreement, the Company will, following the Equity
Self-Tender and Distributions, issue and sell Common Stock and warrants to
purchase Common Stock to Investor for a purchase price of $270.0 million. As a
result of the Equity Investment, Investor will acquire: (a) shares of Common
Stock representing 24.9% of the outstanding shares of Common Stock after giving
effect to the issuance of such shares; (b) rights ("Special Warrants") to
receive for nominal consideration additional shares of Common Stock equal to
24.9% (after giving effect to issuance of such additional shares upon exercise
of the Special Warrants) of the additional shares that are issuable upon
conversion of any Notes that remain outstanding after the Strategic
Restructuring Plan is completed and certain shares of Common Stock that are
actually issued pursuant to certain contingent rights under existing acquisition
agreements, including the one referred to in the next sentence; and (c) warrants
representing the right to purchase one share of Common Stock for (i) each share
of Common Stock purchased by Investor at the date of closing under the
Investment Agreement (the "Equity Investment Closing Date") and (ii) each share
of Common Stock into which the Special Warrants become exercisable. The Special
Warrants will permit Investor to buy additional shares of Common Stock to
maintain its 24.9% ownership position in the event that the Company issues
additional shares of Common Stock to a former owner of Blue Star under the terms
of the agreement by which the Company acquired Blue Star. The former owner is
entitled to receive up to 3.0 million more shares (prior to any adjustment that
may be appropriate to take account of the effect of the Strategic Restructuring
Plan) depending on a number of future events, including the future trading price
of the Common Stock and the consolidated pre-tax earnings of Blue Star and its
New Zealand subsidiaries for the fiscal year ending April 1999. In view of the
uncertainty of these future events, the Company cannot
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reasonably estimate what portion, if any, of these additional shares may be
issued. The Special Warrants are exercisable from and after the Equity
Investment Closing Date until the twelfth anniversary thereof, subject to
certain limitations, and the warrants described in clause (c) above are
exercisable from and after the second anniversary of the Equity Investment
Closing Date until such twelfth anniversary thereof. If Investor exercises all
of the warrants described in clause (c) above, it will be required to pay the
Company an aggregate of $405.0 million. If no currently outstanding stock
options are exercised, exercise of these warrants would give Investor ownership
of approximately 39.9% of the Common Stock of the Company after implementation
of the Strategic Restructuring Plan (assuming that all of the Notes are
exchanged in the Exchange Offer and all of the 2003 Notes are tendered and
accepted for purchase in the 2003 Note Tender).
In accordance with the Investment Agreement, the Company's Board of
Directors will consist of nine directors, including the Chief Executive Officer
of the Company, three designees of Investor and five persons initially selected
by the Company's current Board of Directors. Investor's obligation to consummate
the Equity Investment is conditioned on two of the designees to the Company's
Board of Directors initially selected by the Company's current Board of
Directors being satisfactory to Investor. After closing, for so long as Investor
maintains certain levels of ownership of Common Stock, Investor will have the
right to nominate three members of the Company's Board of Directors and to
designate the Chairman of the Board. Certain Company Board of Directors'
decisions will be subject to super-majority voting provisions that, under
certain circumstances, may require the concurrence of at least one director
nominated by Investor. Investor will be subject to certain restrictions and
limitations with respect to transactions in Common Stock. See "--Information
About the Board of Directors After the Equity Investment."
Investor's obligation to consummate the Equity Investment is subject to the
satisfaction or waiver of various conditions. These include, among others: (i)
accuracy of the Company's representations and warranties and compliance by the
Company with its obligations under the Investment Agreement; (ii) receipt of
necessary antitrust and other regulatory clearance; (iii) absence of material
litigation; (iv) Company stockholder approval of the issuance of shares in the
Equity Investment; (v) consummation of the Distributions in accordance with the
Distribution Agreement containing certain terms specified in the Investment
Agreement and otherwise as reasonably approved by Investor; (vi) execution and
delivery of the Tax Allocation Agreement containing certain terms specified in
the Investment Agreement and otherwise as reasonably approved by Investor; (vii)
execution of documents relating to financing for the Equity Self-Tender
satisfactory in form and substance to Investor; (viii) consummation of the
Equity Self-Tender; (ix) execution of a consulting agreement with CD&R providing
for payment of an annual consulting fee of $500,000; (x) execution of a
registration rights agreement with Investor; (xi) absence of any development
since October 25, 1997 that would have a material adverse effect on the Company
(after giving effect to the Distributions); (xii) no person or group (other than
Investor) acquiring beneficial ownership of 15% or more of the Common Stock and
no person or group (other than Investor or its affiliates) having entered into
an agreement with the Company with respect to a tender or exchange offer for any
shares of Common Stock, or a merger, consolidation or other business combination
with or involving the Company; and (xiii) the Company's debt existing
immediately following completion of the transactions contemplated by the
Strategic Restructuring Plan shall not exceed $1.4 billion (assuming exchange of
all of the Notes) and the outstanding debt of the Spin-Off Companies shall be at
least $130.0 million plus expenditures by such entities for acquisitions after
the date of the Investment Agreement. If the Company does not proceed with the
Distributions, or if the Equity Investment does not occur for certain other
reasons, Investor can terminate the Investment Agreement and CD&R would receive
a termination fee of $25.0 million plus Investor's reasonable fees and expenses.
Upon completion of the Equity Investment, CD&R will receive a transaction fee of
$15.0 million and Investor will receive reimbursement for expenses it incurs in
connection with the transaction.
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Investor or the Company can terminate the Investment Agreement at any time
if they both agree in writing. Either one can terminate the agreement if
Investor has not purchased the equity securities by September 30, 1998 (if such
failure to close is not the result of a breach by the party seeking
termination), if the Company's stockholders do not approve the transaction, or
if any law or order prohibits the transaction.
In addition, Investor can terminate the Investment Agreement if (i) the
Company materially breaches or makes a material misrepresentation which is not
cured within 30 days after notice from Investor; (ii) the Company's Board of
Directors withdraws, modifies, or publicly announces the intention to withdraw
or modify, its approval of the Investment Agreement or related transactions or
recommends an alternative transaction proposal; (iii) the Board of Directors
publicly announces that it has decided not to complete the Distributions; (iv)
certain conditions--including the accuracy at closing of statements made by the
Company in the Investment Agreement--become impossible to fulfill and Investor
does not waive the conditions; (v) the Company makes substantive amendments to
the agreement setting out the terms of the Distributions or the Equity
Self-Tender; or (vi) Investor decides in its good faith reasonable judgment not
to proceed with the transaction based on its review of the agreements relating
to the Distributions or the Equity Self-Tender.
The Company can terminate the Investment Agreement if (i) Investor
materially breaches or makes a material misrepresentation which is not cured
within 30 days after notice from the Company; (ii) certain conditions--including
the accuracy at closing of statements made by Investor in the Investment
Agreement--become impossible to fulfill and the Company does not waive the
conditions; or (iii) the Company receives an unsolicited proposal for an
investment in the Company or purchase of assets of the Company that meet certain
criteria including that the proposal provides consideration that the Board of
Directors of the Company determines in good faith contains terms that are
financially superior to the Equity Investment.
The foregoing summary of the Investment Agreement does not purport to be
complete and is qualified in its entirety by reference to the Investment
Agreement, which is hereby incorporated by reference herein.
REVERSE STOCK SPLIT
In connection with the Strategic Restructuring Plan and subject to
stockholder approval, the Company plans to effect a one-for-four reverse stock
split to be effective upon completion of all other elements of the Strategic
Restructuring Plan.
THE FINANCING TRANSACTIONS
In connection with the Strategic Restructuring Plan, the Company expects to
refinance its existing senior bank debt and to borrow additional funds to
finance the cost of purchasing shares of Common Stock in the Equity Self-Tender,
purchasing 2003 Notes in the 2003 Note Tender, and paying fees and expenses
incurred in connection with the Strategic Restructuring Plan.
NEW CREDIT FACILITY. The Company has agreed to and accepted a commitment
letter from The Chase Manhattan Bank, Bankers Trust Company, and Merrill Lynch
Capital Corporation, as agents, and Chase Securities Inc., BT Alex. Brown
Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
co-arrangers, for a new bank loan facility (the "Credit Facility") that will
provide for an aggregate principal amount of $1.225 billion, consisting of (i)
seven-year term loan facilities totalling $300.0 million, (ii) an eight-year
term loan in the principal amount of $675.0 million, and (iii) a revolving
credit facility in the principal amount of $250.0 million. The Company and the
banks may agree to alter the allocated principal amount of two or more of the
loan facilities before signing definitive documents depending on market
conditions. The Credit Facility will be guaranteed by the Company's material
domestic subsidiaries and secured by substantially all assets of the Company and
its material domestic subsidiaries. Each loan will bear interest, at the
Company's option, at a short-term Eurodollar rate plus a margin of 2.25% or
2.50%
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(in the case of the eight-year term loan) or a floating alternate base rate plus
a margin of 1.25% or 1.50% (in the case of the eight-year term loan). The
applicable margins will be subject to agreed upon reductions in the future based
on the Company's financial performance. The Company will be required to enter
into arrangements to insure that the effective interest rate paid by the Company
on at least 50% of its outstanding bank and subordinated debt will not exceed a
certain rate. The loan documents likely will include financial and other
covenants. These will include, among others, restrictions on the Company's
ability to incur additional indebtedness, sell assets, pay dividends or engage
in certain other transactions, and requirements that the Company maintain
certain financial ratios, and other provisions customary for loans to highly
leveraged companies, including representations by the Company, conditions to
funding, cost and yield protections, restricted payment provisions, transfer
provisions, amendment provisions and indemnification provisions. The Credit
Facility will be subject to mandatory prepayment in a variety of circumstances,
including upon certain asset sales and financing transactions. The commitment
will terminate unless definitive loan documents are entered into, and the
Strategic Restructuring Plan and Financing Transactions completed, by June 30,
1998. No assurance can be given that the Credit Facility will be completed as
contemplated.
SENIOR SUBORDINATED NOTES. The Company also expects to issue Senior
Subordinated Notes in a principal amount of at least $400.0 million. These
Senior Subordinated Notes will be subordinated in right of payment to the Credit
Facility. U.S. Office Products expects to offer these in a private placement.
The Senior Subordinated Notes will not be registered under the Securities Act of
1933 and may not be offered or sold in the United States absent registration or
an applicable exemption from registration requirements. The availability of
subordinated debt financing will depend on a number of factors, including market
conditions and interest rates.
2003 NOTE TENDER. U.S. Office Products will make an offer to purchase any
and all of the 2003 Notes for a purchase price of 94.5% of the principal amount,
plus accrued interest. U.S. Office Products will not complete the 2003 Note
Tender unless (i) it obtains satisfactory financing for the 2003 Note Tender and
the Equity Self-Tender, (ii) obtains any necessary lender consents, and (iii)
satisfies relevant conditions to the Equity Investment and the Distributions.
The 2003 Note Tender will also be subject to other conditions that are customary
in such offers.
THE EXCHANGE OFFER. The Company is making the Exchange Offer hereby.
The Exchange Offer and the 2003 Note Tender will reduce debt that will
become due before the expected due dates for the Credit Facility and the Senior
Subordinated Notes. These transactions are also intended to reduce the number of
shares of Common Stock that might be issued after completion of the Strategic
Restructuring Plan. Each of the Notes and the 2003 Notes are convertible into
Common Stock. If these notes are purchased or exchanged before completion of the
Strategic Restructuring Plan, the number of shares of Common Stock that might be
issued after the Strategic Restructuring Plan will be less.
The indebtedness of the Company after the Strategic Restructuring Plan will
also include (i) any Notes that are not exchanged for Common Stock in the
Exchange Offer and (ii) any 2003 Notes that are not purchased in the 2003 Note
Tender.
AGREEMENTS WITH JONATHAN LEDECKY
Jonathan J. Ledecky, the founder, Chairman of the Board and former Chief
Executive Officer of the Company, will resign as Chairman of the Company when
the Distributions are completed. The Company's Board of Directors and Mr.
Ledecky concluded that it will be important for the Spin-Off Companies to have
greater access to Mr. Ledecky's skills and experience. Accordingly, the Company
entered into an agreement with Mr. Ledecky. This agreement will go into effect
only if the Distributions are completed. It will replace Mr. Ledecky's existing
employment agreement with the Company. As a result of this agreement, Mr.
Ledecky will remain employed with the Company but his role with the Company
after the Distributions will be substantially reduced. The principal terms of
this agreement, as it is expected to be amended prior to completion of the
Distributions, are summarized below.
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The new agreement with Mr. Ledecky governs his continuing obligations to the
Company. Under that agreement, Mr. Ledecky will report to the Company's Board of
Directors and will provide high-level acquisition negotiation services and
business strategic advice. Under the agreement, Mr. Ledecky will receive an
annual salary of $48,000 through June 30, 2001. Mr. Ledecky will also retain his
existing Company options; the number of shares subject to these options, and
their exercise price, will be adjusted to take account of the Distributions. See
"--Adjustment to Employee Stock Options." As a continuing employee, Mr. Ledecky
is entitled to retain his options despite his reduction in services to the
Company. The Company can terminate Mr. Ledecky's employment only for "cause."
Cause consists of (i) his conviction of or guilty or nolo contendere plea to a
felony, (ii) his engaging, despite notice, in conduct demonstrably and
materially injurious to the Company, or (iii) his violation of the
noncompetition agreement as it relates to the Company. If Mr. Ledecky resigns or
is terminated, he will cease to vest in his Company options and will have 90
days to exercise any vested options (as under his existing options).
It is expected that each Spin-Off Company will enter into an employment
agreement with Mr. Ledecky to implement its assigned portion of the agreement.
Under each employment agreement, Mr. Ledecky will report to the respective
boards of directors and senior management of the Spin-Off Companies. Mr. Ledecky
will provide high-level acquisition negotiation services and strategic business
advice to each of the Spin-Off Companies. Each Spin-Off Company can require his
performance of such services, consistent with his other contractual employment
obligations to Consolidation Capital Corporation (of which Mr. Ledecky is the
founder, chairman and chief executive officer), U.S. Office Products and the
other Spin-Off Companies. As an employee, Mr. Ledecky will also be subject to
the generally applicable personnel policies of each company and will be eligible
for each Spin-Off Company's benefit plans in accordance with their terms. Each
Spin-Off Company is expected to pay Mr. Ledecky an annual salary of up to
$48,000 for up to two years. Each Spin-Off Company may terminate Mr. Ledecky's
employment with or without "cause," where cause has the same definition as in
the agreement with U.S. Office Products, as modified to refer to the Spin-Off
Company. If without cause, the termination would entitle Mr. Ledecky to a
severance payment equal to his salary for the lesser of 12 months or the
remainder of the contract.
The agreement with the Company provides for non-competition and
non-solicitation restrictions that continue for four years after the
Distributions have been completed. These provisions generally restrict Mr.
Ledecky from, among other things, investing in or working for or on behalf of
any business that sells products or services in direct competition with the
Company or the Spin-Off Companies, within 100 miles of any location where the
Company or the Spin-Off Companies conduct business. (For this purpose, "products
or services" are those that U.S. Office Products offered on January 13, 1998.)
The agreement prohibits Mr. Ledecky from trying to hire away managerial
employees of the Company or the Spin-Off Companies, or calling upon customers of
the Company or the Spin-off Companies to solicit or sell products or services in
direct competition with the Company or the Spin-Off Companies. Mr. Ledecky also
may not hire away for Consolidation Capital Corporation (of which Mr. Ledecky is
the founder, chairman and chief executive officer) any person then or in the
preceding year employed by the Company or the Spin-Off Companies. The Company is
permitted to (and will) assign to the Spin-Off Companies the ability to enforce
the non-competition provisions described above as they apply to the Spin-Off
Companies' respective businesses, which will then constitute part of his
employment agreements with the Spin-Off Companies.
Mr. Ledecky will receive options from each Spin-Off Company for each of the
Spin-Off Companies' common stock on the date of the Distributions. The options
are intended to compensate Mr. Ledecky for his services to each of the Spin-Off
Companies as an employee. The options will cover up to 7.5% of each of the
Spin-Off Companies' outstanding common stock, determined as of the date of the
Distributions without regard to any concurrent public offerings. For each
Spin-Off Company, the options will have a per-share exercise price equal to the
initial public offering price for the Spin-Off Company. The estimated value of
these options depends on the initial public offering prices of the Spin-Off
Companies and the trading volatility of the Spin-Off Companies. U.S. Office
Products cannot make a reliable estimate of the
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value of these options until it obtains an estimate of the initial public
offering prices for the Spin-Off Companies. U.S. Office Products believes that
the value of these options will be substantially greater than the annual cash
compensation paid to officers of the Spin-Off Companies, but moderate in
relation to the total annual expenses of the Spin-Off Companies. An estimate of
the dollar value of the options will be included in the information statements
relating to each Distribution, which U.S. Office Products will send to each
Holder of record no less than ten calendar days prior to the Expiration Date.
It is expected that, for each Spin-Off Company, Mr. Ledecky's options will
be fully vested when granted but will not be exercisable until 12 months after
the Distributions are completed. Mr. Ledecky's options from the Spin-Off
Companies will all become exercisable immediately if he dies before the option
expires or, in the case of a particular Spin-Off Company, if that company
accelerates the exercise schedule of options for substantially all management
option holders. (In this latter case, Mr. Ledecky's option will become
exercisable on the same accelerated schedule as the other management option
holders.) All unexercised portions of the option will expire ten years after the
date of grant of the option or, if applicable, as of the date Mr. Ledecky
violates his non-competition agreement with a Spin-Off Company.
ADJUSTMENT TO EMPLOYEE STOCK OPTIONS
The Company has previously granted stock options to management and
employees. The Company expects that the number and exercise price of these
options will be adjusted following completion of the Strategic Restructuring
Plan to take account of the effects of the Distributions on the underlying value
of the Common Stock. Options held after the Equity Self-Tender and Distributions
by employees who remain with U.S. Office Products will remain exercisable for
shares of Common Stock. Options held after the Equity Self-Tender and
Distributions by employees who will become employees of a Spin-Off Company will
be converted into options exercisable for shares of that particular Spin-Off
Company. The adjustments will be made by a formula that takes account of the
difference between the price of the Company's Common Stock before and after the
Distributions have been completed (and, in the case of options for Spin-Off
Company shares, the price of Spin-Off Company shares in the public offerings
expected to be completed by the Spin-Off Companies (the "Spin-Off Company
Offering Price")). The formula will not affect when the options vest or when
employees can exercise the options. The respective option exercise prices will
be adjusted by this formula:
<TABLE>
<S> <C> <C>
Trading Price
Post-Distributions
Exercise Price (New) = Exercise Price X ---------------------------
(Old) Trading Price
Pre-Distributions
</TABLE>
The respective numbers of shares subject to option will be adjusted by this
formula:
<TABLE>
<S> <C> <C>
Trading Price
Pre-Distributions
Option Shares (New) = Option Shares (Old) X ---------------------------
Trading Price
Post-Distributions
</TABLE>
For all optionees, the "Trading Price Pre-Distributions" will be the average
closing price of the Common Stock for the lesser of ten business days preceding
the Distributions or the business days falling between the expiration of the
Equity Self-Tender and the completion of the Distributions. For continuing
employees of the Company, the "Trading Price Post-Distributions" will be the
average closing price of the Common Stock for the ten business days after and
including the date on which the Distributions are completed. For employees of a
Spin-Off Company, the "Spin-Off Company Offering Price" will be substituted for
"Trading Price Post-Distributions" in this formula. The exercise price and
number of options will not be adjusted as a result of the Equity Self-Tender,
but instead are adjusted solely for the Distributions and the reverse stock
split.
36
<PAGE>
The number of shares underlying options for continuing employees will also
be adjusted to take account of the reverse stock split; that is, the new number
of shares underlying options will be divided by four and the new exercise price
will be multiplied by four. The number of shares underlying options for
employees of a Spin-Off Company will also be adjusted for the distribution ratio
applied in the Spin-Off Company Distributions; that is, the new number of shares
underlying options in the Spin-Off Company will be divided by the distribution
ratio and the exercise price will be multiplied by the distribution ratio. The
intrinsic value of the adjusted options will be no greater than the intrinsic
value of the options immediately before the Distributions and the reverse stock
split, and the ratio of exercise price to market price will be no less than the
ratio immediately before the Distributions and the reverse stock split.
As a result of the adjustments, employee stock options will likely represent
a greater percentage interest in the Company after these transactions than they
did before. See "Risk Factors -- Increase in Outstanding Shares." At April 20,
l998, the Company's management and employees held options to purchase a total of
approximately 22.0 million shares, of which approximately 3.7 million were held
by employees that are expected to be employees of a Spin-Off Company. The number
of options that will be outstanding after the Strategic Restructuring Plan will
depend on the number of shares subject to options that are accepted in the
Equity Self-Tender and also on the trading prices of the Common Stock around the
time of the Distributions and the offering prices of the Spin-Off Companies'
shares. As a result, the ultimate number of such options cannot be determined at
this time. The fair value of the options may also change as a result of these
adjustments, but the fair value as measured by standard models will depend on
the adjusted exercise price, the adjusted number of shares, and the trading
prices and volatility of the Common Stock after completion of the Strategic
Restructuring Plan. Because the adjustments are designed to compensate for the
effects of the transactions in the Strategic Restructuring Plan, the Company
does not currently expect that the adjustments will have a significant effect on
the fair value of the options, but cannot assure stockholders that the change
will not be significant.
INFORMATION ABOUT THE BOARD OF DIRECTORS AFTER THE EQUITY INVESTMENT
Investor has the right to designate three members of the Board of Directors
of the Company who will serve from the Equity Investment Closing Date until the
next annual meeting of stockholders. In addition, the Chief Executive Officer of
the Company, Thomas Morgan, will be a director. Two of the remaining directors
at closing must be satisfactory to Investor. The existing members of the Board
will select the new directors who will serve on the Board after closing until
the next Annual Meeting of Stockholders. Investor has informed the Company that
it intends to designate Charles P. Pieper, Kevin J. Conway and Brian D. Finn as
the three directors it is entitled to designate. Investor has the right to
designate the Chairman of the Board as long as it retains a specified percentage
of the shares it acquires in the Equity Investment. Mr. Pieper will serve as
Chairman of the Board after closing. In addition, Michael Dooling, Timothy J.
Flynn, Jonathan J. Ledecky, Clifton B. Phillips and John A. Quelch have advised
the Board that they intend to resign as Directors of the Company effective as of
the Equity Investment Closing Date. The Board intends to appoint Frank P. Doyle
and L. Dennis Kozlowski as two new independent directors, and Investor has
advised the Company that it approves of them. Milton H. Kuyers, Allon H.
Lefever, Edward J. Mathias and Thomas Morgan will remain as directors of the
Company after closing of the Equity Investment.
Set forth below is information about the directors of the Company after
consummation of the Strategic Restructuring Plan:
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- ----------------------- -------------------------- --------- --------------------------------------------------------
<S> <C> <C> <C>
Kevin J. Conway Director 39 Mr. Conway will be named a director of the Company
effective upon completion of the Strategic Restructuring
Plan. Mr. Conway has been a principal and a director of
Clayton, Dubilier & Rice since 1994 and March 1998,
respectively. Prior to
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- ----------------------- -------------------------- --------- --------------------------------------------------------
joining Clayton, Dubilier & Rice in 1994, Mr. Conway
worked for 10 years at Goldman, Sachs & Co., an
investment banking firm. He also serves as a director of
Riverwood International Corporation and North American
Van Lines, Inc., companies in which CD&R Fund V has an
investment. Mr. Conway is a graduate of Amherst College,
Columbia University School of Business and Columbia Law
School.
<S> <C> <C> <C>
Frank P. Doyle Director 66 Mr. Doyle will be named a director of the Company
effective upon completion of the Strategic Restructuring
Plan. Mr. Doyle is a private consultant who retired from
his position as Executive Vice President of General
Electric Company on January 1, 1996. As Executive Vice
President, he was one of a three member Corporate
Executive Office to which all of GE's operating
businesses and staff reported. Mr. Doyle served as
Executive Vice President of GE from 1991, and prior to
that time he was Senior Vice President at GE with
responsibility for Corporate Marketing and Advertising
from 1981. Mr. Doyle is a director of Digital Equipment
Corporation, Paine Webber Group, Roadway Express and
Educational Testing Services.
Brian D. Finn Director 37 Mr. Finn will be named a director of the Company
effective upon completion of the Strategic Restructuring
Plan. Mr. Finn has been a principal and a director of
Clayton, Dubilier & Rice since June 1997 and March 1998,
respectively. Prior to joining Clayton, Dubilier & Rice
in 1997, Mr. Finn worked for 15 years at Credit Suisse
First Boston, an investment banking firm, most recently
as co-head of the Mergers and Acquisitions division. He
holds a B.S. in Economics from the University of
Pennsylvania's Wharton School.
L. Dennis Kozlowski Director 51 Mr. Kozlowski will be named a director of the Company
effective upon completion of the Strategic Restructuring
Plan. Mr. Kozlowski is Chairman and Chief Executive
Officer of Tyco International Ltd., a multinational
company involved in manufacturing, distribution and
servicing of fire protection and security systems,
disposable medical products, flow control and electronic
products worldwide. He has served as Chief Executive
Officer of Tyco since July 1, 1992 and as Chairman since
January 1, 1993. Prior to July 1992, he was President
and Chief Operating Officer of Tyco since 1989 and a
director of Tyco since 1987. Mr. Kozlowski is a direcor
of RJR Nabisco, Applied Power and Raytheon Corp.
Milton H. Kuyers Director 60 Mr. Kuyers has been a director of the Company since
April 1995. He is a part owner and executive
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- ----------------------- -------------------------- --------- --------------------------------------------------------
officer of a number of privately held companies
including: Zero Zone, Inc., a manufacturer of commercial
refrigeration units; Desert Air Corp., a manufacturer of
commercial dehumidification equipment; Northwest
Coatings, Inc., a manufacturer of coating products;
Grayline, Inc., a manufacturer of tubing used in the
appliance and electrical industries; Digicorp Inc., a
distributor of business telephone systems and cellular
telephones; and Faustel, Inc., a manufacturer of custom
coating equipment. Prior to 1993, Mr. Kuyers served as
the President of Star Sprinkler Corp., a manufacturer of
sprinkler heads for fire protection systems. Mr. Kuyers
previously served on the board of Medical Advances,
Inc., a manufacturer of parts for medical diagnostic
applications, until its sale in March 1997. Prior to its
acquisition by the Company, Mr. Kuyers also served as a
director of the The H.H. West Company, a wholly owned
subsidiary of the Company. Mr. Kuyers holds an
undergraduate degree in business administration and an
M.B.A. from the University of Michigan.
<S> <C> <C> <C>
Allon H. Lefever Director 50 Mr. Lefever has served as a director of the Company
since February 1995. He has been Vice President of the
Affiliated Companies for High Industries, Inc., since
April 1988. From 1988 until its acquisition by the
Company, Mr. Lefever served as the Chairman of the Board
and Chief Executive Officer of The Office Works, Inc.,
and he currently serves on the boards of directors of
several private companies. In addition, he is a director
of Red Rose SuperNet and Goodville Insurance Co. and
serves on the Business Advisory Board of Millersville
State University. Mr. Lefever received his undergraduate
degree from Millersville State University and a Masters
in Economics from Pennsylvania State University.
Edward J. Mathias Director 55 Mr. Mathias has been a director of the Company since
February 1995. Currently, Mr. Mathias is a Managing
Director of The Carlyle Group, a merchant bank based in
Washington, D.C. From 1971 through 1993, Mr. Mathias was
employed by
T. Rowe Price Associates, Inc., a major investment
management organization, most recently as a Managing
Director. Mr. Mathias presently serves on the boards of
directors of Sirrom Capital Corporation, Pathogenesis
and The Fortress Group, Inc. as well as on the boards of
directors of several private companies. Mr. Mathias
holds an undergraduate degree from The University of
Pennsylvania and an M.B.A. from Harvard Business School.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- ----------------------- -------------------------- --------- --------------------------------------------------------
<S> <C> <C> <C>
Thomas Morgan President, Chief Executive 44 Mr. Morgan joined U.S. Office Products in February 1997
Officer and Director as President of U.S. Office Products' North American
Office Products Group. He was promoted to Chief
Operating Officer in June 1997 and to Chief Executive
Officer in November 1997. Before joining U.S. Office
Products, he spent more than 20 years with Genuine Parts
Company where he was most recently Executive Vice
President of S.P. Richards Company.
Charles P. Pieper Chairman of the Board of 51 Mr. Pieper will be named Chairman of the Company
Directors effective upon completion of the Strategic Restructuring
Plan. Mr. Pieper has been a principal and a director of
CD&R since March 1997 and March 1998, respectively.
Previously, Mr. Pieper was President and Chief Executive
Officer of GE Lighting Europe and GE Japan, GE Korea, GE
Taiwan, GE Medical Systems Asia, Yokogawa Medical
Systems and GE Trading Co. Mr. Pieper is Chairman of
North American Van Lines, Inc., a corporation in which
CD&R Fund V has an investment, and a director of Alliant
Foodservice, Inc. and its parent CDRF Holding, Inc., a
corporation in which a CD&R-managed investment fund has
an investment.
</TABLE>
Three-fourths of the directors must approve certain transactions. These are:
(i) the sale by the Company of equity securities, other than (A) a specified
amount made available under employee benefit plans, such as option plans, or (B)
a specified amount issued to acquire companies or issued in public offerings;
(ii) any merger, tender offer involving the Company's equity securities or sale,
lease, or disposition of all or substantially all of the Company's assets, or
other business combination involving the Company, unless the consideration for
such sale is all cash or is freely tradable common stock of a public company
with a specified level of market capitalization; (iii) any major
recapitalization; (iv) certain amendments to shareholder rights plans; (v) any
dissolution or partial liquidation of the Company; or (vi) any modification to
the Company's charter or by-laws that is inconsistent with Investor's rights
under the Investment Agreement or other agreements described in this Offering
Circular/Prospectus. The effect of this provision is that so long as Investor
can nominate three directors, at least one of them must vote in favor of any of
these actions in order for it to be approved.
This table shows Investor's rights with respect to the nomination of
directors and how they will change if Investor disposes of equity securities.
This table also shows when the three-fourths majority requirement will apply.
40
<PAGE>
SUMMARY OF CORPORATE GOVERNANCE PROVISIONS
<TABLE>
<CAPTION>
NUMBER OF
DIRECTORS INVESTOR THREE-FOURTHS
IS BOARD
PORTION OF SHARES ACQUIRED ENTITLED TO RIGHT TO APPROVAL FOR
AT CLOSING RETAINED BY NOMINATE DESIGNATE CERTAIN
INVESTOR (1) (OUT OF NINE) CHAIRMAN TRANSACTIONS
- ------------------------------------------------------------------- ------------------- ------------- -----------------
<S> <C> <C> <C>
66 2/3% to 100%.................................................... Three Yes Yes
33 1/3% to 66 2/3%................................................. Two Yes Yes
Less than 33 1/3% but Investor holds at least 5% of the then-
outstanding voting stock......................................... One No No
Less than 5% of the then-outstanding voting stock.................. None No No
</TABLE>
- ------------------------
(1) This includes shares Investor can acquire by exercising Special Warrants.
Investor can approve one additional nominee to the Board if the Chief
Executive Officer of the Company is not a member of the Board or is not a Board
nominee. The Company can increase the size of the Board of Directors to as many
as 12 persons, but the number of persons Investor can nominate will increase at
least proportionally. For example, if there are 12 members, Investor could
nominate four directors (assuming it still held all of its shares). Investor
also will be entitled to at least proportionate representation on all Board
committees, unless it is precluded from such membership by law or stock exchange
rules.
All of Investor's corporate governance rights will expire on the earlier of
the fifth anniversary of closing or if Investor ever acquires more than 50% of
the voting power represented by the Company's then-outstanding voting
securities.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTIONS
EFFECT ON THE COMPANY AND THE STOCKHOLDERS OF THE COMPANY. Wilmer, Cutler &
Pickering expects to deliver an opinion (the "Spin-Off Opinion") at the time of
the Distributions stating that for U.S. federal income tax purposes the
Distributions will qualify as tax-free spin-offs under Section 355 of the Code
and will not be taxable under Section 355(e) of the Code. The Company will not
complete the Distributions unless it receives the Spin-Off Opinion. The Spin-Off
Opinion will be based on the accuracy as of the time of the Distributions of
factual representations made by the Company, the Spin-Off Companies and
Investor, and certain other information, data, documentation and other materials
that Wilmer, Cutler & Pickering has deemed necessary.
The Spin-Off Opinion will represent Wilmer, Cutler & Pickering's best
judgment of how a court would rule. However, the Spin-Off Opinion is not binding
upon either the IRS or any court. A ruling has not been, and will not be, sought
from the IRS with respect to the U.S. federal income tax consequences of the
Distributions.
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e), no gain or loss will be recognized by
the Company or the stockholders of the Company (except with respect to cash
received in lieu of fractional shares) as a result of the Distributions.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION. As noted
above, the Spin-Off Opinion is not binding on the IRS or the courts. Holders
should be aware that the requirements of Section 355 pertaining to business
purpose, active trade or business, and absence of a device for distribution of
earnings and profits, as well as the requirements of Section 355(e) pertaining
to a plan or series of related transactions to acquire 50% or more by vote or
value of a company, are highly dependent on factual interpretations, are to a
significant extent subjective in nature, and have a relative absence of
authority addressing their application to the particular facts presented by the
Distributions. Accordingly, the IRS and/or a court could reach a conclusion that
differs from the conclusions in the Spin-Off Opinion.
41
<PAGE>
BUSINESS PURPOSE. In order for a Distribution to qualify as a tax-free
spin-off under Section 355, it must be motivated, in whole or substantial part,
by one or more corporate business purposes. The Company will represent that the
Distributions were motivated, in whole or substantial part, to allow the Company
and the Spin-Off Companies to adopt strategies and pursue objectives that are
more appropriate to their respective industries and stages of growth; to allow
the Spin-Off Companies to pursue independent acquisition programs with a more
focused use of resources and, where stock is used as consideration, to allow the
Spin-Off Companies to provide stock of a public company that is in the same
industry as the business being acquired; to allow the Company and the Spin-Off
Companies to offer their respective employees more focused compensation
packages; and to make possible the Equity Investment which the Board of
Directors of the Company concluded would contribute to the Company's
development, based on the skills and experience of CD&R. Based on these
representations and certain other information, data, documentation and other
materials, Wilmer, Cutler & Pickering expects to deliver an opinion at the time
of the Distributions that each Distribution satisfies the business purpose
requirement of Section 355. However, although similar rationales have been
accepted by the IRS in other circumstances as sufficient to meet the business
purpose requirement of Section 355, there can be no assurance that the IRS will
not assert that the business purpose requirement is not satisfied.
ACTIVE TRADE OR BUSINESS. In order for the distribution of the stock of a
Spin-Off Company (other than Navigant International, Inc. ("Navigant")) to
qualify as a tax-free spin-off under Section 355, both the Spin-Off Company and
the Company must be engaged in an active trade or business that has been
actively conducted for the five-year period preceding the Distribution, taking
into account only businesses that have been acquired in transactions in which no
gain or loss was recognized. In order for the distribution of the stock of
Navigant to qualify as a tax-free spin-off under Section 355, substantially all
of the assets of Navigant must consist of the stock of Professional Travel
Corporation ("Professional Travel"), and Professional Travel and the Company
must meet the requirements described in the preceding sentence. Whether current
and historical business activity constitutes an active trade or business, and
whether any gain or loss should have been recognized in an acquisition
structured and reported as a nontaxable transaction, turn in some instances on
the application of subjective legal standards and on factual determinations,
such as intentions of the parties involved. Based on the representations of the
Company and the Spin-Off Companies, Wilmer, Cutler & Pickering expects to
deliver an opinion at the time of the Distributions that each Distribution will
satisfy the active trade or business requirement. However, because of the
inherently subjective nature of important elements of the active trade or
business requirement, and because the IRS may challenge the representations upon
which Wilmer, Cutler & Pickering relies, there can be no assurance that the IRS
will not assert that the active trade or business requirement is not satisfied.
ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. A
Distribution will not qualify as a tax-free spin-off under Section 355 if the
Distribution was used principally as a device for the distribution of the
earnings and profits of the Company or the Spin-Off Company. Treasury
regulations provide that this test is applied based on all the facts and
circumstances, including the presence or absence of factors described in the
Regulations as "device factors" and "nondevice factors." Application of this
test is uncertain in part because of its subjective nature. Based on the
representations of the Company and the Spin-Off Companies, Wilmer, Cutler &
Pickering expects to deliver an opinion at the time of the Distributions that
none of the Distributions is a transaction used principally as a device for the
distribution of earnings and profits of either the Company or any of the
Spin-Off Companies. However, because of the inherently subjective nature of the
device test (including the subjectivity involved in assigning weight to various
factors), and because the IRS may challenge the representations upon which
Wilmer, Cutler & Pickering relies, there can be no assurance that the IRS will
not assert that any or all of the Distributions are transactions used
principally as a device for the distribution of earnings and profits.
If a Distribution fails to qualify under Section 355 as a tax-free spin-off,
each holder of Common Stock on the record date of the Distributions will be
treated as having received a taxable corporate distribution in
42
<PAGE>
an amount equal to the fair market value (on the Distribution Date) of the
Spin-Off Companies' common stock distributed to such holder of Common Stock,
including fractional shares. In addition, the Company will recognize gain equal
to the difference between the fair market value of the Common Stock of the
Spin-Off Company and the Company's adjusted tax basis in the Common Stock of the
Spin-Off Company (on the Distribution Date). If the Company were to recognize
gain on one or more Distributions, such gain would likely be substantial.
EFFECT OF POST-DISTRIBUTION TRANSACTIONS. Section 355(e), which was added
in 1997, generally provides that a company that distributes shares of a
subsidiary in a spin-off that is otherwise tax-free will incur U.S. federal
income tax liability if 50% or more, by vote or value, of the capital stock of
either the company making the distribution or the subsidiary is acquired by one
or more persons acting pursuant to a plan or a series of related transactions
that includes the spin-off. Stock acquired by certain related persons is
aggregated in determining whether this 50% test is met. There is a presumption
that any acquisition of 50% or more, by vote or value, of the capital stock of
the company or the subsidiary occurring two years before or after the spin-off
is pursuant to a plan that includes the spin-off. However, the presumption may
be rebutted by establishing that the spin-off and the acquisition are not part
of a plan or a series of related transactions. Based on the representations of
the Company, the Spin-Off Companies and the Investor, and the assumption that no
Distribution is part of a plan that is outside the knowledge of U.S. Office
Products and the Spin-Off Companies pursuant to which one or more persons will
acquire directly or indirectly 50% or more by vote or value of the capital stock
of the Company or of any Spin-Off Company, Wilmer, Cutler & Pickering expects to
deliver an opinion at the time of the Distributions that the Distributions will
not be taxable under Section 355(e). However, there can be no assurance that the
IRS will not assert that any or all of the Distributions are taxable under
Section 355(e).
If a Distribution is taxable under Section 355(e), the Company will
recognize gain equal to the difference between the fair market value of the
Common Stock of the Spin-Off Company and the Company's adjusted tax basis in the
Common Stock of the Spin-Off Company (on the Distribution Date). However, no
gain or loss will be attributable to holders of Common Stock (except with
respect to cash received in lieu of fractional shares). If the Company were to
recognize gain on one or more Distributions, such gain would likely be
substantial.
The Company, but not the holders of the Common Stock, will be indemnified by
the Spin-Off Companies if the actions or omissions of the Spin-Off Companies
materially contribute to a determination that the Company is subject to a tax
liability in connection with the Distributions. See "The Strategic Restructuring
Plan--Distributions--Tax Allocation Agreement and Tax Indemnification
Agreement". However, there can be no assurance that the Company will be
successful in recovering the full amount of such tax liability under the
indemnification arrangements with the Spin-Off Companies.
FOR A DESCRIPTION OF THE TAX CONSEQUENCES OF EXCHANGING THE NOTES FOR COMMON
STOCK, SEE "U.S. FEDERAL INCOME TAX CONSIDERATIONS."
43
<PAGE>
EFFECT OF THE STRATEGIC RESTRUCTURING PLAN ON THE
CONVERSION PRICE FOR THE NOTES
The Indenture provides for three adjustments to the Existing Conversion
Price as a result of the Equity Self-Tender, Distributions and the one-for-four
reverse stock split of the Common Stock, respectively. These adjustments will
apply to any Notes that remain outstanding after completion of the Exchange
Offer. The adjustments are summarized below. This summary is qualified by
reference to the terms of the Indenture in its entirety.
EQUITY SELF-TENDER ADJUSTMENT
Under the Indenture, the Existing Conversion Price will be adjusted to
account for the purchase by the Company of its shares in the Equity Self-Tender
by multiplying the Existing Conversion Price by a fraction (the "Equity
Self-Tender Adjustment Factor"). The numerator of the fraction will be the
number of shares of Common Stock outstanding (including any tendered shares)
upon expiration of the Equity Self-Tender (the "Expiration Time") multiplied by
the Current Market Price (as defined in the last sentence of this paragraph) of
the Common Stock after the Expiration Time. The denominator will be the sum of
(x) the fair market value of the aggregate consideration payable to stockholders
based on the acceptance (up to the maximum specified in the terms of the Equity
Self-Tender) of all shares validly tendered and not withdrawn as of the
Expiration Time (the shares so accepted, up to any such maximum, being referred
to as the "Purchased Shares") plus (y) the product of the number of shares of
Common Stock outstanding (less any Purchased Shares) on the Expiration Time and
the Current Market Price of the Common Stock. For purposes of the Equity
Self-Tender Adjustment Factor, the "Current Market Price" is the average of the
daily closing prices per share of Common Stock for three trading days following
the Expiration Time. Shares underlying stock options that are accepted in the
Equity Self-Tender will be outstanding for purposes of calculating the Equity
Self-Tender Adjustment Factor.
SPIN-OFF ADJUSTMENT
Under the Indenture, the Existing Conversion Price will also be adjusted to
account for the Distributions by multiplying the Existing Conversion Price (as
adjusted by the Equity Self-Tender Adjustment Factor) by a separate fraction
(the "Spin-Off Adjustment Factor"). The numerator of the fraction will be the
Current Market Price (as defined in the next sentence) on the record date for
the Distributions less the fair market value (as determined by the Board of
Directors) on the record date of the portion of the shares of the Spin-Off
Companies so distributed applicable to one share of Common Stock and the
denominator will be the Current Market Price. For purposes of the Spin-Off
Adjustment Factor, "Current Market Price" is defined as the average of the daily
closing prices per share of Common Stock for the ten consecutive trading days
immediately prior to the record date for the Distributions, except that the
closing price for each trading day prior to or including the Expiration Time for
the Equity Self-Tender will be adjusted by multiplying it by the Equity
Self-Tender Adjustment Factor. Further, for purposes of the Spin-Off Adjustment
Factor, the Board of Directors has determined that the "fair market value" of
each Spin-Off Company will be equal to the price at which the shares of common
stock of the Spin-Off Companies are offered to the public (without reduction for
underwriting discounts or commissions) in underwritten primary offerings on or
about the record date for the Distributions.
Because the Equity Self-Tender Adjustment Factor and the Spin-Off Adjustment
Factor are calculated by reference to closing prices of the Common Stock and the
offering price of the Spin-Off Companies' stock, the actual adjustments cannot
be calculated in advance. It is likely that the Equity Self-Tender Adjustment
Factor and the Spin-Off Adjustment Factor could result in an Existing Conversion
Price (as adjusted) that is less than the Reduced Conversion Price.
ADJUSTMENT FOR REVERSE STOCK SPLIT
Concurrently with the Distributions, the Company will, subject to
stockholder approval, effect a one-for-four reverse stock split. Under the
Indenture, the Existing Conversion Price (as adjusted by the Equity Self-Tender
Adjustment Factor and the Spin-Off Adjustment Factor) will be proportionately
adjusted to account for the reverse stock split.
44
<PAGE>
U.S. FEDERAL INCOME TAX CONSIDERATIONS
Wilmer, Cutler & Pickering has opined (the "Tax Opinion") on the material
U.S. federal income tax considerations relating to the exchange of Notes for
Common Stock pursuant to the Exchange Offer. The Tax Opinion is based on the
Code and regulations, rulings, and judicial decisions as of the date hereof, all
of which may be repealed, revoked, or modified so as to result in U.S. federal
income tax consequences different from those described below. Such changes could
be applied retroactively in a manner that could adversely affect a Holder. In
addition, the authorities on which the Tax Opinion is based are subject to
various interpretations. It is therefore possible that the U.S. federal income
tax treatment of the exchange of Notes for Common Stock may differ from the
treatment described below.
The Tax Opinion does not address all aspects of U.S. federal income taxation
that may be relevant to Holders in light of their particular circumstances, nor
does it address any tax consequences arising under the laws of any state, local,
or foreign tax jurisdiction. The Tax Opinion applies only to Holders who are
U.S. persons and hold Notes as a capital asset (generally, property held for
investment) within the meaning of Section 1221 of the Code. A U.S. person is the
beneficial owner of a Note that is (i) for U.S. federal income tax purposes a
citizen or resident of the United States (including certain former citizens and
former long-term residents), (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate the income of which is subject to
U.S. federal income taxation regardless of its source or (iv) a trust with
respect to the administration of which a court within the United States is able
to exercise primary supervision and one or more U.S. fiduciaries have the
authority to control all substantial decisions of the trust. The Tax Opinion
does not address tax considerations applicable to a Holder's particular
circumstances or to a Holder that may be subject to special tax rules (such as
Holders subject to the alternative minimum tax) or other special situations,
such as those of dealers in securities or currencies, financial institutions,
insurance companies, persons holding Common Stock as part of a hedging or
conversion transaction or a straddle, and persons whose "functional currency" is
not the U.S. dollar. The Tax Opinion takes into account the Equity Self-Tender
(the tax consequences of which are described in the Tender Offer Statement) and
the fact that the Company will not complete the Distributions unless Wilmer,
Cutler & Pickering delivers the Spin-Off Opinion, as described in "The Strategic
Restructuring Plan -- U.S. Federal Income Tax Consequences of the Distribution,"
that the Distributions will qualify as tax-free spin-offs under Section 355 of
the Code and will not be taxable under Section 355(e) of the Code.
Subject to the foregoing, the Tax Opinion states Wilmer, Cutler &
Pickering's opinion that for U.S. federal income tax purposes the exchange of
Notes for Common Stock pursuant to the Exchange Offer is an exchange of
securities for common stock that will constitute a recapitalization under
Section 368(a)(1)(E) of the Code and that will therefore be tax-free to the
Holders (except with respect to cash received in lieu of fractional shares and
in respect of unpaid interest accrued on the Notes through the Expiration Date
not previously included in income). The Tax Opinion is based on certain
assumptions and the accuracy of factual representations made by U.S. Office
Products. A ruling has not been, and will not be, sought from the IRS with
respect to the U.S. federal income tax consequences of the exchange of Notes for
Common Stock pursuant to the Exchange Offer. Thus, no assurances can be given
that a position taken in reliance on the Tax Opinion will not be challenged by
the IRS or rejected by a court. Assuming the exchange of Notes for Common Stock
pursuant to the Exchange Offer is a tax-free recapitalization, the following
U.S. federal income tax consequences apply:
(1) A Holder will not recognize any gain or loss (except with respect to
cash received in lieu of fractional share and in respect of unpaid interest
accrued on the Notes through the Expiration Date and not previously included in
income) by reason of the exchange of Notes for Common Stock.
(2) The Common Stock received by a Holder upon the exchange of Notes will
have an aggregate basis equal to the aggregate basis of the Notes that are
exchanged for Common Stock (reduced by any basis allocable to a fractional
share).
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<PAGE>
(3) A Holder's holding period in the Common Stock issued upon the exchange
of Notes will include the period during which the Holder held the Notes prior to
the exchange.
(4) A Holder who receives cash in lieu of a fractional share of Common Stock
upon exchange of Notes will be taxable as if the fractional share had been
issued and then redeemed for cash. The receipt of cash for a fractional share
will result in capital gain or loss measured by the difference between the basis
of such fractional share interest and the cash received.
(5) Cash received by a Holder in respect of unpaid interest accrued on the
Notes through the Expiration Date that has not previously been included in
income of the Holder will be taxable as ordinary income to the Holder.
(6) A Holder that does not exchange its Notes for Common Stock will not
recognize gain or loss by reason of the Exchange Offer.
THE FOREGOING DESCRIPTION OF WILMER, CUTLER & PICKERING'S TAX OPINION DOES
NOT PURPORT TO COVER ALL U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MIGHT APPLY
TO EVERY HOLDER. ALL HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
PARTICULAR U.S. FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES TO THEM OF
THE EXCHANGE.
FOR INFORMATION CONCERNING THE TAX CONSIDERATIONS TO EXCHANGING HOLDERS OF
THE DISTRIBUTIONS AND PARTICIPATION IN THE EQUITY SELF-TENDER, SEE "THE
STRATEGIC RESTRUCTURING PLAN -- U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE
DISTRIBUTIONS" AND THE INFORMATION STATEMENT/PROSPECTUSES RELATING TO THE
DISTRIBUTIONS AND THE TENDER OFFER STATEMENT DISTRIBUTED WITH THIS OFFERING
CIRCULAR/PROSPECTUS.
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<PAGE>
DESCRIPTION OF THE NOTES
The Notes were issued under an indenture dated as of February 7, 1996 (the
"Indenture"), between U.S. Office Products and State Street Bank and Trust
Company, as trustee (the "Trustee"). The terms of the Notes include those stated
in the Indenture and those made a part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "TIA"), as in effect on the date of
the Indenture. The Notes are subject to all such terms, and Holders are referred
to the Indenture and the TIA for a statement of such terms. The following is a
summary of important terms of the Notes and does not purport to be complete.
Reference should be made to all provisions of the Indenture, including the
definitions therein of certain terms and all terms made a part of the Indenture
by reference to the TIA. As used in this "Description of the Notes," the
"Company" refers only to U.S. Office Products Company and does not, unless the
context otherwise indicates, include any of its subsidiaries.
GENERAL
The Notes are general unsecured obligations of U.S. Office Products
subordinate in right of payment to certain other obligations of U.S. Office
Products as described under "-- Subordination," and convertible into Common
Stock as described under "-- Conversion." The aggregate principal amount of the
Notes issued and outstanding is $143,750,000. The notes were issued in fully
registered form only in denominations of $1,000 and integral multiple thereof
and will mature on February 1, 2001, unless earlier redeemed at the option of
U.S. Office Products or repurchased by U.S. Office Products at the option of the
Holder upon a Designated Event (as defined below).
The Notes bear interest from February 7, 1996 at an annual rate of 5 1/2%,
payable semi-annually on February 1 and August 1, to holders of record at the
close of business on the preceding January 15 and July 15, respectively, other
than with respect to a Note or portion thereof called for redemption on a
redemption date, or repurchased in connection with a Designated Event on a
repurchase date, during the period from a record date to (but excluding) the
next succeeding interest payment date (in which case accrued interest shall be
payable (unless such Note or portion thereof is converted) to the Holder of the
Note or portion thereof redeemed or repurchased). Interest is computed on the
basis of a 360-day year comprised of 12 30-day months.
Principal of and premium, if any, and interest on the Notes are payable, and
the transfer of Notes is registrable, and the Notes may be presented for
conversion, at the office or agency of U.S. Office Products maintained for such
purposes, which is currently the Corporate Trust Office of the Trustee. In
addition, payment of interest may, at the option of U.S. Office Products, be
made by check mailed to the address of the person entitled thereto as it appears
in the Note register, PROVIDED that the Holder with an aggregate principal
amount in excess of $5,000,000 shall, at the election of such Holder, be paid by
wire transfer in immediately available funds.
No service charge will be made for a registration or transfer or exchange of
Notes, but U.S. Office Products may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith. U.S.
Office Products is not required to exchange or register the transfer of (i) any
Note for a period of 15 days next preceding any selection of Notes to be
redeemed, (ii) any Note or portion thereof selected for redemption, (iii) any
Note or portion thereof surrendered for conversion, or (iv) any Note or portion
thereof surrendered for repurchase in connection with a Designated Event.
The Indenture does not contain any restrictions on the payment of dividends
or the repurchase of securities of U.S. Office Products or any financial
covenants. The Indenture contains no covenants or other provisions to afford
protection to Holders in the event of a highly leveraged transaction or a change
in control of U.S. Office Products except to the extent described under "--
Repurchase at Option of Holders Upon a Designated Event" below.
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CONVERSION
Holders are entitled at any time before the close of business on the last
trading day prior to the final maturity date of the Notes, subject to prior
redemption or repurchase, to convert any Notes or portions thereof (in
denominations of $1,000 or multiples thereof) into Common Stock of U.S. Office
Products, at the conversion price of $19.00 per share, subject to adjustment as
described below. Except as described below, no adjustment will be made on
conversion of any Notes for interest accrued thereon or for dividends on any
Common Stock issued. If Notes are converted after a record date for the payment
of interest and prior to the next succeeding interest payment date, such Notes,
other than Notes called for redemption during such period, when submitted for
conversion by the Holder, must be accompanied by funds equal to the interest
payable on such succeeding interest payment date on the principal amount so
converted. U.S. Office Products is not required to issue fractional shares of
Common Stock upon conversion of Notes and, in lieu thereof, will pay a cash
adjustment based upon the market price of the Common Stock during the last 10
trading days prior to the date of conversion. In the case of Notes called for
redemption, conversion rights will expire at the close of business on the
trading day preceding the date fixed for redemption, unless U.S. Office Products
defaults in payment of the redemption price in which the conversion right will
terminate at the close of business on the date such default is cured. In the
event any Holder exercises its repurchase right upon a Designated Event, such
holder's conversion right will terminate upon submission of written notice of
exercise of such repurchase right together with the Notes as to which such right
is being exercised. See "-- Repurchase at Option of Holders Upon a Designated
Event."
The conversion price of $19.00 per share of Common Stock is subject to
adjustment (under formulas set forth in the Indenture) in certain events,
including: (i) the issuance of Common Stock as a dividend or distribution on
Common Stock of U.S. Office Products; (ii) certain subdivisions and combinations
of the Common Stock; (iii) the issuance to all holders of Common Stock of
certain rights or warrants to purchase Common Stock at less than the current
market price of the Common Stock; (iv) the dividend or other distribution to all
holders of Common Stock of shares of capital stock of U.S. Office Products
(other than Common Stock) or evidences of indebtedness of U.S. Office Products
or assets (including securities, but excluding those rights, warrants, dividends
and distributions referred to in clauses (i) and (iii) above and dividends and
distributions paid exclusively in cash); (v) dividends or other distributions
consisting exclusively of cash (excluding any cash portion of distributions
referred to in clause (iv)) to all holders of Common Stock in an aggregate
amount that, combined together with (A) all other such all-cash distributions
made within the preceding 12 months in respect of which no adjustment has been
made plus (B) any cash and the fair market value of other consideration payable
in respect of any tender offers by U.S. Office Products or any of its
subsidiaries for Common Stock concluded within the preceding 12 months in
respect of which no adjustment has been made, exceeds 10% of the Company's
market capitalization (being the product of the then current market price of the
Common Stock times the number of shares of Common Stock then outstanding) on the
record date for such distribution; (vi) the purchase of Common Stock pursuant to
a tender offer made by U.S. Office Products or any of its subsidiaries which
involves an aggregate consideration that, together with (X) any cash and the
fair market value of any other consideration payable in any other tender offer
by U.S. Office Products or any of its subsidiaries for Common Stock expiring
within the 12 months preceding such tender offer in respect of which no
adjustment has been made plus (Y) the aggregate amount of any such all-cash
distributions referred to in clause (v) above to all holders of Common Stock
within the 12 months preceding the expiration of such tender offer in respect of
which no adjustments have been made, exceeds 10% of the Company's market
capitalization on the expiration of such tender offer; and (vii) payment in
respect of a tender offer or exchange offer by a person other than U.S. Office
Products or any subsidiary of U.S. Office Products in which, as of the closing
of the offer, the Board of Directors is not recommending rejection of the offer.
U.S. Office Products is entitled, in lieu of making certain adjustments under
clause (v) above, to provide that, subject to satisfying certain conditions,
upon conversion of the Notes, the Holders will receive, in addition to the
Common Stock issuable upon conversion of such Notes, the amount of such
distribution
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<PAGE>
referred to in clause (v). The adjustment referred to in clause (vii) above will
only be made if the tender offer or exchange offer is for an amount which
increases that person's ownership of Common Stock to more than 25% of the total
shares of Common Stock outstanding and, if the cash and value of any other
consideration included in such payment per share of Common Stock exceeds the
current market price per share of Common Stock on the trading day next
succeeding the last date on which tenders or exchanges may be made pursuant to
such tender or exchange. The adjustment referred to in clause (vii) above will
not be made, however, if, as of the closing of the offer, the offering documents
with respect to such offer disclose a plan or an intention to cause U.S. Office
Products to engage in any transaction of the type described in "Consolidation,
Merger or Assumption."
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then in
effect; PROVIDED that any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the conversion price will not be adjusted for the
issuance of Common Stock or any securities convertible into or exchangeable for
Common Stock or carrying the right to purchase any of the foregoing.
The Strategic Restructuring Plan will result in an adjustment to the
conversion price as set forth in "Effect of the Strategic Restructuring Plan on
Conversion of the Notes." The Strategic Restructuring Plan will not, however,
affect the Reduced Conversion Price because the Exchange Period will end before
any element of the Strategic Restructuring Plan that would result in an
adjustment.
Subject to the rights of Holders described below under "-- Repurchase at
Option of Holders upon a Designated Event," in the case of (i) any
reclassification or change of the outstanding Common Stock (other than changes
in par value or resulting from a subdivision or combination of Common Stock) or
(ii) a consolidation, merger, or combination involving U.S. Office Products or a
sale or conveyance to another corporation of the property and assets of U.S.
Office Products as an entirety or substantially as an entirety, in each case as
a result of which holders of Common Stock shall be entitled to receive stock,
other securities, other property or assets (including cash) with respect to or
in exchange for such Common Stock, the Holders then outstanding will be entitled
thereafter to convert such Notes into the kind and amount of shares of stock,
other securities or other property or assets which they would have owned or been
entitled to receive upon such reclassification, change, consolidation, merger,
combination, sale or conveyance had such Notes been converted into Common Stock
immediately prior to such reclassification, change, consolidation, merger,
combination, sale or conveyance (assuming, in a case in which the Company's
stockholders may exercise rights of election, that a Holder would not have
exercised any rights of election as to the stock, other securities or other
property or assets receivable in connection therewith and received per share the
kind and amount received per share by a plurality of non-electing shares). If
the provisions of this paragraph apply to any reclassification, change of Common
Stock, consolidation, merger, combination, sale or conveyance, then the
adjustments to the conversion price described above will not be made with
respect to such reclassification, change of Common Stock, consolidation, merger,
combination, sale or conveyance.
In the event of a taxable distribution to holders of Common Stock (or other
transaction) which results in any adjustment of the conversion price, the
Holders may, in certain circumstances, be deemed to have received a distribution
subject to United States income tax as a dividend. In certain other
circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock.
U.S. Office Products from time to time may, to the extent permitted by law,
reduce the conversion price of the Notes by any amount for any period of at
least 20 days, in which case U.S. Office Products shall give at least 15 days'
notice of such reduction, if the Board of Directors has made a determination
that such decrease would be in the best interests of U.S. Office Products, which
determination shall be conclusive. U.S. Office Products also may, at its option,
make such reductions in the conversion price, in addition to those set forth
above, as the Board of Directors deems advisable to avoid or diminish any
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income tax to holders of Common Stock or rights to purchase Common Stock
resulting from any dividend or distribution of stock (or rights to acquire
stock) or from any event treated as such for income tax purposes.
OPTIONAL REDEMPTION BY U.S. OFFICE PRODUCTS
The Notes are redeemable at the option of the Company on at least 20 but not
more than 60 days' notice, as a whole or, from time to time in part, at the
following prices (expressed in percentages of the principal amount), together
with accrued interest to, but excluding, the date fixed for redemption;
PROVIDED, HOWEVER, that U.S. Office Products may not redeem the Notes prior to
February 2, 1999 unless the closing price of the Common Stock on the principal
stock exchange or market on which the Common Stock is then quoted or admitted to
trading equals or exceeds 150% of the conversion price for at least 20 trading
days within a period of 30 consecutive trading days ending on the fifth trading
day prior to the date the notice of redemption is first mailed to the Holders,
PROVIDED FURTHER that if a redemption date is an interest payment date, the
semi-annual payment of interest becoming due on such date shall be payable to
the holder of record as of the relevant record date. As of April 3, 1998, the
closing price of the Common Stock had not satisfied the conditions in the
foregoing sentence.
If redeemed during the 12-month period beginning February 1:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
1998........................................................................ 103.3%
1999........................................................................ 102.2%
2000........................................................................ 101.1%
</TABLE>
and 100% at February 1, 2001.
If fewer than all the Notes are to be redeemed, the Trustee will select the
Notes to be redeemed in principal amounts of $1,000 or multiples thereof by lot
or, in its sole discretion, on a pro rata basis. If any Note is to be redeemed
in part only, a new Note or Notes in principal amount equal to the unredeemed
principal portion thereof will be issued. If a portion of a Holder's Notes is
selected for partial redemption and such Holder converts a portion of such
Notes, such converted portion shall be deemed to be taken from the portion
selected for redemption.
No sinking fund is provided for the Notes.
REPURCHASE AT OPTION OF HOLDERS UPON A DESIGNATED EVENT
The Indenture provides that if a Designated Event (as defined) occurs, each
Holder shall have the right, at the Holder's option, to require U.S. Office
Products to repurchase all of such holder's Notes, or any portion thereof that
is a multiple of $1,000, on the date (the "repurchase date") that is 40 days
after the date of the Company Notice (as defined below), for cash at a price
equal to 100% of the principal amount of the Notes, together with accrued
interest, if any, to the repurchase date (the "repurchase price"), PROVIDED,
HOWEVER, that if a repurchase date is an interest payment date, the semi-annual
payment of interest becoming due on such date shall be payable to the Holder of
record as of the relevant record date.
Within 15 days after the occurrence of a Designated Event, U.S. Office
Products is obligated to mail to all holders of record of the Notes a notice
(the "Company Notice") of the occurrence of such Designated Event and of the
repurchase right arising as a result thereof. U.S. Office Products must deliver
a copy of the Company Notice to the Trustee and cause a copy or a summary or
such notice to be published in a newspaper of general circulation in the city of
New York. To exercise the repurchase right, a Holder must deliver, on or before
the 30th day after the date of the Company Notice, irrevocable written notice to
U.S. Office Products (or an agent designated by U.S. Office Products for such
purpose) and the Trustee of
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the holder's exercise of such right, together with the Notes with respect to
which the right is being exercised, duly endorsed for transfer. The submission
of such notice together with such Notes pursuant to the exercise of a repurchase
right will be irrevocable on the part of the Holder (unless U.S. Office Products
fails to repurchase the Notes on the repurchase date) and the right to convert
such Notes will expire upon such submission. The Strategic Restructuring Plan
does not constitute a Designated Event.
"Designated Event" means a Change in Control (as defined below) or
Termination of Trading (as defined below).
"Change in Control" means an event or series of events as a result of which
(i) any "person" or "group" (as such terms are used in Sections 13(d)(3) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act) of shares representing more than
50% of the combined voting power of the then outstanding securities entitled to
vote generally in elections of directors of U.S. Office Products ("Voting
Stock"); (ii) the stockholders of U.S. Office Products approve any plan or
proposal for the liquidation, dissolution or winding up of U.S. Office Products;
(iii) U.S. Office Products consolidates with or merges into any other
corporation, or conveys, transfers or leases all or substantially all of its
assets to any person, or any other corporation merges into U.S. Office Products,
and, in the case of any such transaction, the outstanding common stock of U.S.
Office Products is changed or exchanged as a result, unless the stockholders of
U.S. Office Products immediately before such transaction own, directly or
indirectly immediately following such transaction, at least 51% of the combined
voting power of the outstanding voting securities of the corporation resulting
from such transaction in substantially the same proportion as their ownership of
the Voting Stock immediately before such transaction; or (iv) the Continuing
Directors (as defined below) do not constitute a majority of the Board of
Directors of U.S. Office Products (or, if applicable, a successor corporation to
U.S. Office Products); PROVIDED that a Change in Control shall not be deemed to
have occurred if either (x) the last sale price of the Common Stock for any five
trading days during the 10 trading days immediately preceding the Change in
Control is at least equal to 105% of the conversion price in effect on such day,
(y) at least 90% of the consideration (excluding cash payments for fractional
shares) in the transaction or transactions constituting the Change in Control
consists of common stock or securities convertible into common stock that are,
or upon issuance will be, traded on a United States national securities exchange
or approved for trading on an established automated over-the-counter trading
market in the United States. A Change of Control also shall not be deemed to
have occurred if Jonathan J. Ledecky or a group that includes Jonathan J.
Ledecky (a "Permitted Investor") becomes the beneficial owner of more than 50%
of the Voting Stock, PROVIDED that, if as a consequence of any transaction
involving a Permitted Investor, or in which a Permitted Investor has an
interest, less than 30% of the shares of Common Stock outstanding upon the
issuance of the Notes are neither listed for trading upon a national securities
exchange nor approved for trading or on an established over-the-counter trading
market in the United States, then a Change of Control shall be deemed to have
occurred upon the consummation of such transaction.
"Continuing Director" means at any date a member of the Company's Board of
Directors (i) who was a member of such board on February 12, 1996 or (ii) who
was nominated or elected by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or whose
election to the Company's Board of Directors was recommended or endorsed by at
least a majority of the directors who were Continuing Directors at the time of
such nomination or election. (Under this definition, if the current Board of
Directors of U.S. Office Products were to approve a new director or directors
and then resign, no Change in Control would occur even though the current Board
of Directors would thereafter cease to be in office.)
A "Termination of Trading" shall have occurred if the Common Stock (or other
common stock into which the Notes are then convertible) is neither listed for
trading on a United States national securities exchange nor approved for trading
on an established automated over-the-counter trading market in the United
States.
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No quantitative or other established meaning has been given to the phrase
"all or substantially all" (which appears in the definition of Change in
Control) by courts which have interpreted this phrase in various contexts. In
interpreting this phrase, courts, among other things, make a subjective
determination as to the portion of assets conveyed, considering such factors as
the value of assets conveyed, the proportion of an entity's income derived from
the assets conveyed and the significance of those assets to the ongoing business
of the entity. To the extent the meaning of such phrase is uncertain,
uncertainty will exist as to whether or not a Change in Control may have
occurred (and, accordingly, as to whether or not the Holders will have the right
to require U.S. Office Products to repurchase their Notes).
In the event of a Designated Event, any repurchase of the Notes could be
prevented by the subordination provisions of the Indenture. See
"--Subordination" below. The Company's repurchase of Notes as a result of the
occurrence of a Designated Event currently is prohibited, absent a waiver, under
the terms of the Company's existing credit facility and the expected terms of
the Credit Facility (in either case, the "Line of Credit"). As a result, U.S.
Office Products will be precluded from making payment of the repurchase price
unless such provisions are waived by the lender or unless the Line of Credit has
been repaid in full and terminated. Repurchase may also be prohibited or limited
by the subordination provisions applicable to the Notes or be prohibited or
limited by, or create an event of default under, the terms of other agreements
relating to borrowings which constitute Senior Indebtedness which may be entered
into, amended, supplemented or replaced from time to time. Failure of U.S.
Office Products to repurchase Notes at the option of the Holder upon a
Designated Event would result in an Event of Default with respect to the Notes
whether or not such repurchase is prohibited by the subordination provisions or
the terms of Senior Indebtedness. No Notes may be repurchased by U.S. Office
Products at the option of holders upon a Designated Event if there has occurred
and is continuing an Event of Default described under "Events of Default and
Remedies" below (other than a default in the payment of the repurchase price
with respect to such Notes on the repurchase date).
Certain leveraged transactions (as defined by the Indenture) that are
sponsored by the Company's management or an affiliate of U.S. Office Products
could constitute a Change in Control that would give rise to the repurchase
right. The Indenture does not provide the Company's Board of Directors with the
right to limit or waive the repurchase right in the event of any such leveraged
transaction. Conversely, U.S. Office Products could, in the future, enter into
certain transactions, including certain recapitalizations of U.S. Office
Products, that would not constitute a Change in Control (such as the Strategic
Restructuring Plan) but that would increase the amount of Senior Indebtedness
(or other indebtedness) outstanding at such time. There are no restrictions in
the Indenture or the Notes on the creation of additional Senior Indebtedness (or
any other indebtedness) of U.S. Office Products or any of its subsidiaries and
the incurrence of significant amounts of additional indebtedness could have an
adverse impact on the Company's ability to service its debt, including the
Notes. The Notes are subordinate in right of payment to all existing and future
Senior Indebtedness as described under "Subordination" below.
The right to require U.S. Office Products to repurchase Notes as a result of
a Designated Event could have the effect of delaying, deferring or preventing a
Change of Control or other attempts to acquire control of U.S. Office Products
unless arrangements have been made to enable U.S. Office Products to repurchase
all of the Notes at the repurchase date. Consequently, the right may render more
difficult or discourage a merger, consolidation or tender offer (even if such
transaction is supported by the Company's Board of Directors or is favorable to
the stockholders), the assumption of control by a holder of a large block of the
Company's shares and the removal of incumbent management.
No modification of the Indenture regarding the provisions on repurchase at
the option of any Holder is permissible without the consent of the Holder so
affected.
Rule 13e-4 under the Exchange Act requires, among other things, the
dissemination of certain information to security holders in the event of an
issuer tender offer and may apply in the event that the
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<PAGE>
repurchase option becomes available to Holders. The Company will comply with
this rule to the extent applicable at that time.
SUBORDINATION
The indebtedness evidenced by the Notes is, to the extent provided in the
Indenture, subordinate to the prior payment in full of all Senior Indebtedness
(as defined below). Upon any distribution of assets of U.S. Office Products upon
any dissolution, winding up, liquidation or reorganization of U.S. Office
Products, the payment of the principal of, or premium, if any, and interest on
the Notes is to be subordinated to the extent provided in the Indenture in right
of payment to the prior payment in full of all Senior Indebtedness. Moreover, in
the event of any acceleration of the Notes because of an Event of Default, the
holders of any Senior Indebtedness then outstanding would be entitled to payment
in full of all obligations in respect of such Senior Indebtedness before the
Holders are entitled to receive any payment or distribution in respect thereof.
U.S. Office Products also may not make any payment upon or in respect of the
Notes if (i) a default in the payment of principal of, premium, if any,
interest, or other payment due on Senior Indebtedness occurs and is continuing
beyond any applicable period of grace or (ii) any other default occurs and is
continuing with respect to Designated Senior Indebtedness (as defined below)
that permits holders of the Designated Senior Indebtedness as to which such
default related to accelerate its maturity and the Trustee and U.S. Office
Products receive a notice of such default (a "Payment Blockage Notice") under
the Line of Credit or from a holder of at least $5 million in outstanding
principal amount of Designated Senior Indebtedness. Payments on the Notes may
and shall be resumed (a) in case of payment default, on the date on which such
default is cured or waived and (b) in case of a nonpayment default, on the
earlier of the date on which such nonpayment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is received.
No new period of payment blockage may be commenced pursuant to a Payment
Blockage Notice unless (i) 365 days have elapsed since the effectiveness of the
immediately prior Payment Blockage Notice and (ii) all scheduled payments of
principal, premium, if any, and interest on the Notes that have become due have
been paid in full in cash or the Trustee or the Holders shall not have
instituted proceedings to enforce the Holders' right to receive such payments.
No nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice shall be, or be made, the basis for a subsequent
Payment Blockage Notice.
By reason of the subordination, in the event of the Company's bankruptcy,
dissolution, liquidation or reorganization, holders of Senior Indebtedness may
receive more, ratably, and Holders may receive less, ratably, than the other
creditors of U.S. Office Products. Such subordination will not prevent the
occurrence of an Event of Default under the Indenture.
Subject to the qualifications described below, the term "Senior
Indebtedness" means the principal of, premium, if any, interest on, and any
other payment due pursuant to, any of the following, whether outstanding on the
date of the Indenture or thereafter incurred or created:
(a) All secured indebtedness of U.S. Office Products for money borrowed
(including (A) any indebtedness secured by a security interest, mortgage,
conditional sales contract or other lien on the assets of U.S. Office
Products which is (i) given to secure all or part of the purchase price of
property subject thereto, whether given to the vendor of such property or to
another, or (ii) existing on property at the time of acquisition thereof and
(B) secured indebtedness for borrowed money from banks, insurance companies
and other financial institutions);
(b) All secured indebtedness of U.S. Office Products evidenced by notes,
debentures, bonds or other securities (including, but not limited to, those
which are convertible or exchangeable for securities of U.S. Office
Products);
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(c) All secured indebtedness of U.S. Office Products due and owing with
respect to letters of credit and bank guarantees (including, but not limited
to, reimbursement obligations with respect thereto);
(d) All secured indebtedness or other secured obligations of U.S. Office
Products due and owing with respect to interest rate and currency swap
agreements, cap, floor and collar agreements, currency spot and forward
contracts and other similar agreements and arrangements;
(e) All secured indebtedness consisting of commitment or standby fees
due and payable to lending institutions with respect to credit facilities or
letters of credit available to U.S. Office Products;
(f) All secured indebtedness of others of the kinds described in any of
the preceding clauses (a), (b), (c), (d) or (e) assumed by or guaranteed in
any manner by U.S. Office Products or in effect guaranteed by U.S. Office
Products through an agreement to purchase, contingent or otherwise; and
(g) All secured renewals, extensions, refundings, deferrals, amendments
or modifications of secured indebtedness of the kinds described in any of
the preceding clauses (a), (b), (c), (d), (e) or (f);
unless in the case of any particular indebtedness, obligation, renewal,
extension, refunding, amendment or modification the instrument or other document
creating or evidencing the same or the assumption or guarantee of the same
expressly provides that such indebtedness, obligation, renewal, extension,
refunding, amendment or modification is subordinate to, is PARI PASSU with, or
is not superior to, the Notes. Notwithstanding the foregoing, Senior
Indebtedness shall not include (i) any indebtedness of any kind of U.S. Office
Products to any subsidiary of U.S. Office Products, a majority of the voting
stock of which is owned, directly or indirectly, by U.S. Office Products, (ii)
indebtedness of U.S. Office Products for trade payables or constituting the
deferred purchase price of assets or services incurred in the ordinary course of
business and (iii) conditional obligations of U.S. Office Products based on
future performance (including, without limitation, earn out agreements or
similar arrangements) entered into in connection with acquisitions.
The term "Designated Senior Indebtedness" means U.S. Office Products' Line
of Credit and any other Senior Indebtedness if the instrument creating or
evidencing the same or the assumption or guarantee thereof (or related
agreements or documents to which U.S. Office Products is a party) expressly
provides that such Indebtedness shall be "Designated Senior Indebtedness" for
purposes of the Indenture (provided that such instrument, agreement or other
document may place limitations and conditions on the right of holders of such
Senior Indebtedness to exercise the rights of Designated Senior Indebtedness).
It is expected that as a result of the financing associated with the Strategic
Restructuring Plan, a total of approximately $774.9 million of indebtedness will
constitute Designated Senior Indebtedness.
In the event that, notwithstanding the foregoing, the Trustee or any Holder
receives any payment or distribution of assets of U.S. Office Products of any
kind in contravention of any of the terms of the Indenture, whether in cash,
property or securities, including, without limitation, by way of set-off or
otherwise, in respect of the Notes before all Senior Indebtedness is paid in
full, then such payment or distribution will be held by the recipient in trust
for the benefit of the holders of Senior Indebtedness of U.S. Office Products,
and will be immediately paid over or delivered to the holders of Senior
Indebtedness of U.S. Office Products or their representative or representatives
to the extent necessary to make payment in full of all Senior Indebtedness of
U.S. Office Products remaining unpaid, after giving effect to any concurrent
payment or distribution, or provision therefor, to or for the holder of Senior
Indebtedness of U.S. Office Products.
The Notes are obligations exclusively of U.S. Office Products. As certain of
the Company's operations are conducted through subsidiaries, the cash flow and
the consequent ability to service debt of U.S. Office Products, including the
Notes, may be dependent upon the earnings of its subsidiaries and the
distribution of those earnings to, or upon loans, royalties, license fees, or
other payments of funds by those subsidiaries
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to, U.S. Office Products. The subsidiaries are separate and distinct legal
entities and have no obligation, contingent or otherwise, to pay any amounts due
pursuant to the Notes or to make any funds available therefor, whether by
dividends, loans or other payments. In addition, the payment of dividends and
the making of loans and advances to U.S. Office Products by its subsidiaries may
be subject to statutory or contractual restrictions, are dependent upon the
earnings of those subsidiaries and are subject to various business
considerations.
Any right of U.S. Office Products to receive assets of any of its
subsidiaries upon their liquidation or reorganization (and the consequent right
of the Holders to participate in these assets) will be effectively subordinated
to the claims of that subsidiary's creditors (including trade creditors), except
to the extent that U.S. Office Products is itself recognized as a creditor of
such subsidiary, in which case the claims of U.S. Office Products would still be
subordinate to any security interests in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by U.S. Office Products.
As of February 21, 1998, U.S. Office Products had approximately $361.8
million of indebtedness outstanding (excluding accrued interest) that
constituted Senior Indebtedness. As of February 21, 1998, there was also
outstanding approximately $24.8 million of indebtedness and other obligations of
subsidiaries of U.S. Office Products (excluding intercompany liabilities and
liabilities of a type not required to be reflected as a liability on the balance
sheet of such subsidiaries in accordance with GAAP) as to which the Notes were
effectively structurally subordinated. The amount of Senior Indebtedness may
change in the future and indebtedness of subsidiaries may change in the future.
The amount of Senior Indebtedness will increase substantially if the Strategic
Restructuring Plan is completed. On a pro forma basis, assuming completion of
all elements of the Strategic Restructuring Plan (including the purchase of 100%
of the 2003 Notes in the 2003 Note Tender and the incurrence of additional
indebtedness in connection with the Strategic Restructuring Plan), Senior
Indebtedness would have been approximately $774.9 million as of January 24,
1998. The indenture does not limit the amount of additional indebtedness,
including Senior Indebtedness, which U.S. Office Products can create, incur,
assume or guarantee, nor does the Indenture limit the amount of indebtedness
which any subsidiary of U.S. Office Products can create, incur, assume or
guarantee.
U.S. Office Products is obligated to pay reasonable compensation to the
Trustee and to indemnify the Trustee against any losses, liabilities or expenses
incurred by it in connection with its duties relating to the Notes. The
Trustee's claims for such payments will be senior to those of Holders in respect
of all funds collected or held by the Trustee.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being default in payment
of the principal of, or premium, if any, on the Notes whether or not such
payment is prohibited by the subordination provisions of the Indenture; default
for 30 days in payment of any installment of interest on the Notes whether or
not such payment is prohibited by the subordination provisions of the Indenture;
default in the payment of the repurchase price in respect of any Note on the
repurchase date therefor whether or not such payment is prohibited by the
subordination provisions of the Indenture; failure by U.S. Office Products to
comply with any of its other agreements in the Notes or the Indenture upon the
receipt by U.S. Office Products of notice of such default by the Trustee or by
Holders of not less than 25% in aggregate principal amount of the Notes then
outstanding and the Company's failure to cure such default within 45 days after
receipt by U.S. Office Products of such notice (which period may be extended for
an additional 45 days if U.S. Office Products is contesting in good faith the
existence of such default); default by U.S. Office Products under and
acceleration of the maturity of, or failure to pay at maturity, certain other
indebtedness of U.S. Office Products for money borrowed aggregating in excess of
$5 million and continuance of such default for 30 days after notice; or certain
events involving bankruptcy, insolvency or reorganization of U.S. Office
Products or any Significant Subsidiary (as defined).
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The Indenture provides that the Trustee shall, within 90 days after the
occurrence of a default, give to the registered Holders notice of all defaults
known to it unless such defaults have been cured or waived before the giving of
such notice, but the Trustee shall be protected in withholding such notice if it
in good faith determines that the withholding of such notice is in the best
interest of such registered Holders, except in the case of a default in the
payment of the principal of, or premium, if any, or interest on, any of the
Notes.
The Indenture provides that if any Event of Default shall have occurred and
be continuing, the Trustee or the Holders of not less than 25% in principal
amount of the Notes then outstanding may declare the principal of and premium,
if any, and accrued interest on the Notes to be due and payable immediately, but
if U.S. Office Products shall cure all defaults (except the nonpayment of
interest on, premium, if any, and principal of any Notes which shall have become
due by acceleration) and certain other conditions are met, such declaration may
be canceled and past defaults may be waived by the holders of a majority in
principal amount of Notes then outstanding. If an Event of Default resulting
from certain events of bankruptcy, insolvency or reorganization were to occur,
all unpaid principal of, premium, if any, and accrued interest on the
outstanding Notes will become due and payable immediately without any
declaration or other act on the part of the Trustee or any Holders, subject to
certain limitations.
The Indenture provides that the Holders of a majority in principal amount of
the outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, subject to certain limitations specified in the
Indenture. Before proceeding to exercise any right or power under the Indenture
at the direction of such Holders, the Trustee shall be entitled to receive from
such holders reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in complying with any such direction.
The right of a Holder to institute a proceeding with respect to the Indenture is
subject to certain conditions precedent, including the written notice by such
Holder of a Event of Default and an offer to indemnify to the Trustee, along
with the written request by the holders of not less than 25% in principal amount
of the outstanding Notes that such a proceeding be instituted, but the Holder
has an absolute right to institute suit (i) for the enforcement of payment of
the principal of, and premium, if any, and interest on, such Holder's Notes when
due and (ii) to enforce such Holder's right to convert such Notes.
The Holders of not less than a majority in principal amount of the
outstanding Notes may on behalf of the Holders of all Notes waive any past
defaults, except (i) a default in payment of the principal of, or premium, if
any, or interest on, any Note when due, (ii) a failure by U.S. Office Products
to convert any Notes into Common Stock or (iii) in respect of certain provisions
of the Indenture which cannot be modified or amended without the consent of the
holders of all Notes then outstanding.
U.S. Office Products is required to furnish to the Trustee annually a
statement of certain officers of U.S. Office Products stating whether or not to
the best of their knowledge U.S. Office Products is in default in the
performance and observation of certain terms of the Indenture and, if they have
knowledge that U.S. Office Products is in default, describing such default and
its status.
CONSOLIDATION, MERGER OR ASSUMPTION
U.S. Office Products may, without the consent of the Holders, consolidate
with, merge into, or transfer all or substantially all of its properties to any
other corporation organized under the laws of the United States or any political
subdivision thereof or therein, PROVIDED that the successor corporation assumes
all obligations of U.S. Office Products under the Indenture and the Notes and
that certain other conditions are met.
MODIFICATIONS OF THE INDENTURE
The Indenture contains provisions permitting U.S. Office Products and the
Trustee, with the consent of the Holders of not less than a majority in
principal amount of the Notes at the time outstanding, to
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modify the Indenture or any supplemental indenture or the rights of the Holders,
except that no such modification shall (i) extend the fixed maturity of any
Note, reduce the rate or extend the time of payment of interest thereon, reduce
the principal amount thereof or premium, if any, thereon, reduce any amount
payable upon redemption or repurchase thereof, change or impair the obligation
of U.S. Office Products to make repurchase of any Note upon the happening of a
Designated Event, impair or affect the right of a Holder to institute suit for
the payment thereof, change the currency in which the Notes are payable, or
change or impair the right to convert the Notes into Common Stock subject to the
terms set forth in the Indenture or modify the provisions of the Indenture with
respect to the subordination of the Notes in a manner adverse to the Holders,
without the consent of the Holder of each Note so affected, or (ii) reduce the
aforesaid percentage of Notes, without the consent of the Holders of all of the
Notes then outstanding.
SATISFACTION AND DISCHARGE
U.S. Office Products may discharge its obligations under the Indenture while
Notes remain outstanding if (i) all outstanding Notes will become due and
payable at their scheduled maturity within one year or (ii) all outstanding
Notes are scheduled for redemption within one year, and, in either case, U.S.
Office Products has deposited with the Trustee an amount sufficient to pay and
discharge all outstanding Notes on the date of their scheduled maturity or the
scheduled date of redemption.
GOVERNING LAW
The Indenture and Notes are governed by and construed in accordance with the
laws of the State of New York.
CONCERNING THE TRUSTEE
State Street Bank and Trust Company, the Trustee under the Indenture, has
been appointed by U.S. Office Products as the paying agent, conversion agent and
registrar with regard to the Notes. U.S. Office Products and its subsidiaries
may maintain deposit accounts and conduct other banking transactions with the
Trustee or its affiliates in the ordinary course of business, and the Trustee
and its affiliates may from time to time in the future provide banking and other
services to U.S. Office Products in the ordinary course of their business.
During the existence of an Event of Default, the Trustee will be required to
exercise such rights and powers vested in it under the Indenture and use the
same degree and care and skill in its exercise as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to such provisions, the Trustee is under no obligation to exercise any
of its rights or powers under the Indenture at the request of any of the
Holders, unless they shall have offered to the Trustee security and indemnity
satisfactory to it.
The Indenture and the TIA contain certain limitations on the rights of the
Trustee, should it become a creditor of U.S. Office Products, to obtain payment
of claims in certain cases or to realize on certain property received in respect
of any such claim as security or otherwise. Subject to the TIA, the Trustee will
be permitted to engage in other transactions, PROVIDED, HOWEVER, that if it
acquires any conflicting interest (as described in the TIA), it must eliminate
such conflict or resign.
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DESCRIPTION OF THE COMMON STOCK
GENERAL
As of March 26, 1998, the Company's authorized capital stock consisted of
500,000,000 shares of Common Stock, par value $.001 per share, and 500,000
shares of preferred stock, par value $.001 per share (the "Preferred Stock"). As
of March 26, 1998, the Company had outstanding approximately 133,225,298 shares
of Common Stock and no shares of Preferred Stock. In connection with the
Strategic Restructuring Plan and subject to stockholder approval, the Company
intends to effect a one-for-four reverse stock split. Assuming completion of all
elements of the Strategic Restructuring Plan, including the one-for-four reverse
stock split, and exchange of all of the Notes pursuant to the Exchange Offer,
the Company will have outstanding approximately 36,600,000 shares of Common
Stock and no shares of Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of the Common Stock are entitled to such dividends as may be declared in
the discretion of the Board of Directors out of funds legally available
therefor. See "Dividend Policy." The holders of Common Stock are entitled to
share ratably in the net assets of the Company upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. The holders of Common Stock generally have no
preemptive rights to purchase shares of stock of the Company, although Investor
will have certain contractual preemptive rights pursuant to the Investment
Agreement. Shares of Common Stock are not subject to any redemption provisions
and are not convertible into any other securities of the Company. All
outstanding shares of Common Stock are, and the shares of Common Stock to be
issued by the Company upon exchange of the Notes will be, fully paid and
non-assessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Amended and Restated Certificate of Incorporation and
limitations prescribed by law, the Board of Directors is expressly authorized to
adopt resolutions to issue the shares, to fix the number of shares and to change
the number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences of the shares constituting
any class or series of the Preferred Stock, in each case without any further
action or vote by the stockholders. The Company has no current plans to issue
any shares of Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
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STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate or associate of such
person who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation if such affiliate or associate was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. The Company has not adopted such an
amendment to its Amended and Restated Certificate of Incorporation or Amended
and Restated Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Amended and Restated Certificate of Incorporation
and under Delaware law, directors of the Company are not liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases illegal under
Delaware law or any transaction in which a director has derived an improper
personal benefit.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
LEGAL MATTERS
The validity of the issuance of the Common Stock to be issued upon exchange
of the Notes has been passed on for the Company by Wilmer, Cutler & Pickering,
Washington, D.C. Wilmer, Cutler & Pickering has also given its opinion as to
certain tax matters described herein. Certain legal matters will be passed upon
for the Dealer Manager by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California, and Winston & Strawn, Chicago, Illinois.
EXPERTS
The historical financial statements incorporated in this Offering
Circular/Prospectus by reference to the Company's definitive Proxy Statement
filed on Schedule 14A on April 30, 1998 (except as they relate to the unaudited
interim periods) have been audited by various independent accountants. The
companies and periods covered by these audits are indicated in the individual
accountants' reports. Such financial statements have been so incorporated in
reliance on the reports of the various independent accountants given on the
authority of such firms as experts in auditing and accounting.
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AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-4 under the Securities Act with respect to the
securities offered hereby and a statement on Schedule 13E-4 with respect to the
Equity Self-Tender. This Offering Circular/Prospectus, which constitutes part of
the Registration Statement and is an exhibit to the statement on Schedule 13E-4,
omits certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Commission pursuant to the
Securities Act, and the rules and the regulations of the Commission thereunder.
Statements contained in this Offering Circular/Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, and each such statement is
qualified in all respects by such reference. The Company is subject to the
informational requirements of the Exchange Act and, in accordance therewith,
files reports, proxy statements, and other information with the Commission. In
addition, in connection with the Distributions, each Spin-Off Company has filed
a Registration Statement on Form S-1. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following Regional Offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048; and
500 West Madison Avenue, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the public reference section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, or from the
Commission's Internet web site at http://www.sec.gov.
In addition, no less than ten calendar days prior to the Expiration Date,
the Company will distribute to each Holder on such date, a copy of the
information statements of each Spin-Off Company contained in the Spin-Off
Company Registration Statements.
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Facsimile copies of the Letter of Transmittal, properly completed and validly
executed, will be accepted. Letters of Transmittal, certificates for Notes and
any other required documents should be sent or delivered by each Holder of Notes
or such Holder's broker, dealer, commercial bank or trust company to the
Exchange Agent at one of its addresses set forth below:
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
STATE STREET BANK & TRUST COMPANY
<TABLE>
<S> <C> <C>
BY MAIL: BY OVERNIGHT COURIER: BY HAND:
Corporate Trust Department Corporate Trust Department Corporate Trust Department
Two International Place, Two International Place, Two International Place,
4th Floor 4th Floor 4th Floor
Boston, MA 02110 Boston, MA 02110 Boston, MA 02110
Attention: Kellie Mullen Attention: Kellie Mullen Attention: Kellie Mullen
</TABLE>
BY FACSIMILE:
(617) 664-5290
Attention: Kellie Mullen
FACSIMILE CONFIRMATION ONLY:
(617) 664-5587
Attention: Kellie Mullen
Requests for assistance or additional copies of this Offering
Circular/Prospectus, the Letter of Transmittal, and other related documents
should be directed to the Information Agent at its telephone number and location
set forth below. You may also contact your broker, dealer, commercial bank,
trust company or nominee for assistance concerning the Exchange Offer.
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
abcdef
156 Fifth Avenue
New York, New York 10010
(212) 929-5500
or
Call Toll Free (800) 322-2885
THE DEALER MANAGER FOR THE EXCHANGE OFFER IS:
BANCAMERICA ROBERTSON STEPHENS
555 California Street
Suite 2600
San Francisco, CA 94104
(415) 693-3215
or
Call Toll Free (800) 234-2663
Attn: Dan White
or
Jeff Wineker
The date of this Offering Circular/Prospectus is May 1, 1998
<PAGE>
CUSIP 912 325 AA5
LETTER OF TRANSMITTAL
WITH RESPECT TO THE
OFFER TO EXCHANGE COMMON
STOCK FOR
5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2001
OF
U.S. OFFICE PRODUCTS COMPANY
PURSUANT TO THE OFFERING CIRCULAR/PROSPECTUS DATED MAY 1, 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON MAY 29, 1998, UNLESS EXTENDED
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
STATE STREET BANK & TRUST COMPANY
<TABLE>
<S> <C> <C>
BY MAIL: BY OVERNIGHT COURIER: BY HAND:
Corporate Trust Department Corporate Trust Department Corporate Trust Department
Two International Place, Two International Place, Two International Place,
4th Floor 4th Floor 4th Floor
Boston, MA 02110 Boston, MA 02110 Boston, MA 02110
Attention: Kellie Mullen Attention: Kellie Mullen Attention: Kellie Mullen
</TABLE>
BY FACSIMILE:
(617) 664-5290
Attention: Kellie Mullen
FACSIMILE CONFIRMATION ONLY:
(617) 664-5587
Attention: Kellie Mullen
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD
BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal should be used only to tender the 5 1/2%
Convertible Subordinated Notes due 2001 (the "Notes") for exchange pursuant to
the Exchange Offer as described in the Offering Circular/ Prospectus of U.S.
Office Products Company, dated May 1, 1998 (as the same may be amended or
supplemented from time to time, the "Offering Circular/Prospectus"). Holders
that wish to tender in the Equity Self-Tender (as defined in the Offering
Circular/Prospectus) shares received upon exchange of Notes should complete the
Letter of Transmittal included with the Tender Offer Statement for the Equity
Self-Tender.
This Letter of Transmittal is to be used (i) if Notes are to be physically
delivered to the Exchange Agent, or (ii) if, subject to the provisions of the
following paragraph, delivery of Notes is to be made by book-entry transfer to
the account maintained by the Exchange Agent at the Depository Trust Company
("DTC") pursuant to the procedures set forth in the Offering Circular/Prospectus
under the caption "The Terms of the Exchange Offer--Procedures for Tender of
Notes for Exchange--Book-Entry Delivery Procedures."
Holders that are tendering Notes by book-entry transfer to the Exchange
Agent's account at DTC can execute the tender for exchange through the DTC
Automated Tender Offer Program (the "ATOP"), for
<PAGE>
which the transaction will be eligible. DTC participants that are accepting the
Exchange Offer should transmit their acceptance to DTC, which will edit and
verify the acceptance and execute a book-entry delivery to the Exchange Agent's
account at DTC. DTC will then send an Agent's Message to the Exchange Agent for
its acceptance. Delivery of the Agent's Message by DTC will satisfy the terms of
the Exchange Offer as to execution and delivery of a Letter of Transmittal by
the participant identified in the Agent's Message and there shall be no
requirement for such Holder to deliver a Letter of Transmittal to DTC or the
Exchange Agent. DTC participants may also accept the Exchange Offer by
submitting a notice of guaranteed delivery through ATOP.
DELIVERY OF DOCUMENTS TO DTC, THE COMPANY OR THE DEALER MANAGER DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL NOTES BEING TENDERED
PURSUANT TO THE EXCHANGE OFFER BE ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY
JURISDICTION IN WHICH THE MAKING OR ACCEPTING OF THE EXCHANGE OFFER WOULD NOT BE
IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION.
Holders who wish to tender their Notes pursuant to the Exchange Offer must
complete the box below entitled "Method of Delivery" and complete columns (1)
through (3) in the box herein entitled "Description of Notes Being Tendered for
Exchange" and sign in the appropriate box below.
Only registered Holders of Notes may validly tender their Notes pursuant to
the Exchange Offer.
All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Offering Circular/Prospectus.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE OFFERING
CIRCULAR/PROSPECTUS CAREFULLY BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ANY ADDITIONAL COPIES OF THE
OFFERING CIRCULAR/PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO
THE EXCHANGE AGENT.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
METHOD OF DELIVERY
/ / CHECK HERE IF NOTES TENDERED FOR EXCHANGE ARE ENCLOSED HEREWITH.
/ / CHECK HERE IF NOTES TENDERED FOR EXCHANGE ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT
WITH A BOOK-ENTRY TRANSFER FACILITY SPECIFIED ABOVE AND COMPLETE THE FOLLOWING:
/ / NAME OF INSTITUTION TENDERING FOR EXCHANGE:
NAME OF BOOK-ENTRY TRANSFER FACILITY:
/ / THE DEPOSITORY TRUST COMPANY
ACCOUNT NUMBER: VOI NUMBER:
- ------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF NOTES BEING TENDERED FOR EXCHANGE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NAME(S) AND ADDRESS(ES) OF HOLDER(S)
(PLEASE FILL IN, IF BLANK, NOTES BEING TENDERED FOR EXCHANGE
EXACTLY AS NAME(S) APPEAR(S) ON NOTES) (ATTACH ADDITIONAL SCHEDULE, IF NECESSARY)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(1) (2) (3)
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OF NOTES
SECURITY NUMBER(S)* TENDERED FOR EXCHANGE**
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
* Need not be completed by Holders tendering for exchange by book-entry
transfer.
** Unless otherwise specified, the entire aggregate principal amount
represented by the Notes described above will be deemed to be tendered for
exchange.
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
By execution hereof, the undersigned hereby acknowledges receipt of the
Offering Circular/Prospectus dated May 1, 1998 (as the same may be amended or
supplemented from time to time, the "Offering Circular/Prospectus") of U.S.
Office Products Company (the "Company") and this Letter of Transmittal and
instructions hereto (the "Letter of Transmittal," which with the Offering
Circular/Prospectus constitutes the "Exchange Offer" ) relating to the Company's
offer to exchange shares of its common stock, par value $.001 per share (the
"Common Stock") for its outstanding 5 1/2% Convertible Subordinated Notes due
February 1, 2001 (the "Notes") at a temporarily reduced conversion price upon
the terms and subject to the conditions set forth in the Exchange Offer.
Upon the terms and subject to the conditions of the Exchange Offer as set
forth in the Offering Circular/Prospectus, the undersigned hereby tenders to the
Company the Notes for exchange. Subject to, and effective upon, the acceptance
for exchange of the Notes tendered herewith, the undersigned hereby exchanges,
assigns and transfers to, or upon the order of the Company, all right, title and
interest in and to such Notes.
The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent as the true and lawful agent and attorney-in-fact of the undersigned (with
full knowledge that the Exchange Agent also acts as the agent of the Company)
with respect to such Notes, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest) to
deliver such Notes for exchange pursuant to the terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender for exchange the Notes tendered hereby and that,
when such Notes are accepted for exchange, the Company will acquire good title
to such Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim or right. The undersigned,
upon request, will execute and deliver all additional documents deemed by the
Exchange Agent or the Company to be necessary or desirable to complete the
tender of the Notes for exchange pursuant to the terms and conditions of the
Exchange Offer.
The undersigned understands that tendering of Notes pursuant to any of the
procedures described in the Offering Circular/Prospectus under the caption "The
Terms of the Exchange Offer--Procedures for Tender of Notes for Exchange" and in
the instructions hereto will constitute the undersigned's acceptance of the
terms and conditions of the Exchange Offer. The Company's acceptance of such
Notes for exchange will constitute a binding agreement between the undersigned
and the Company upon the terms and subject to the conditions of the Exchange
Offer.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death or incapacity of the undersigned and every
obligation of the undersigned under this Letter of Transmittal shall be binding
upon the undersigned's heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives.
The undersigned understands that the delivery and tender of any Notes is not
effective, and the risk of loss of the Notes does not pass to the Exchange
Agent, until receipt by the Exchange Agent of this Letter of Transmittal (or a
manually signed facsimile hereof), properly completed and duly executed,
together with all accompanying evidences of authority and any other required
documents in form satisfactory to the Company. All questions as to the form of
all documents and the validity (including the time of receipt) and exchange of
Notes will be determined by the Company, in its sole discretion, which
determination shall be final and binding.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions," the undersigned hereby requests that the Exchange Agent issue the
shares of Common Stock issuable upon exchange of the tendered Notes and return
any certificates for Notes not tendered for exchange and any payment for cash in
lieu of fractional shares or of accrued interest in the name of the registered
holder(s) appearing above under "Description of Notes Being Tendered for
Exchange." Similarly, unless otherwise indicated herein in the box entitled
"Special Delivery Instructions," the undersigned hereby requests that the
Exchange Agent mail the shares of Common Stock, together with any certificates
for Notes not tendered for exchange and any payment for cash in lieu of
fractional shares or of accrued interest (and any accompanying documents, as
appropriate) to the address(es) of the registered holder(s) appearing above
under "Description of Notes Being Tendered for Exchange." If both the "Special
Exchange Instructions" box and the "Special Delivery Instructions" box are
completed, the undersigned hereby requests that the Exchange Agent issue the
Notes and return any certificates for Notes not tendered for exchange and any
payment for cash in lieu of fractional shares or of accrued interest in the
name(s) of, and mail any such certificates to, the person(s) at the address(es)
so indicated. The undersigned recognizes that shares of the Spin-Off Companies
distributed in the Distributions will be distributed to the person designated in
the "Special Exchange Instructions."
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL EXCHANGE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 2, 4, 5 AND 6)
To be completed ONLY if certificates for Notes in a principal amount not
tendered for exchange and/ or certificates for Common Stock issuable upon
exchange and/or payment of cash in lieu of fractional shares or of accrued
interest are to be issued in the name of someone other than the undersigned,
or if Notes are to be returned by credit to an account maintained by DTC.
Issue certificates for Common Stock and/or Notes to:
Name: ______________________________________________________________________
(Please print)
Address: ___________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
Zip Code
____________________________________________________________________________
(Taxpayer Identification or Social Security Number)
(see accompanying Substitute Form W-9)
REQUIRES SIGNATURE GUARANTEE
Credit Notes or Common Stock with respect to Notes surrendered by book-entry
transfer to:
/ / The Depository Trust Company account set forth below:
____________________________________________________________________________
(account number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 2, 4, 5 AND 6)
To be completed ONLY if certificates for Notes in a principal amount not
tendered for exchange and/ or the certificates for Common Stock issuable
upon exchange and/or payment of cash in lieu of fractional shares or of
accrued interest are to be sent to someone other than the undersigned at an
address other than that shown above.
Deliver certificates for Common Stock and/or Notes to:
Name: ______________________________________________________________________
(Please print)
Address: ___________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
Zip Code
____________________________________________________________________________
(Taxpayer Identification or Social Security Number)
(See accompanying Substitute Form W-9)
REQUIRES SIGNATURE GUARANTEE
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SIGN HERE
(TO BE COMPLETED BY ALL HOLDERS OF NOTES
TENDERING FOR EXCHANGE REGARDLESS OF WHETHER
NOTES ARE BEING PHYSICALLY DELIVERED HEREWITH)
SEE ACCOMPANYING SUBSTITUTE FORM W-9
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
(SIGNATURE(S) OF HOLDER(S) OR AUTHORIZED SIGNATORY)
Dated: __________________, 1998
Must be signed by the registered Holder(s) of Notes exactly as their
name(s) appear(s) on certificate(s) for the Notes or by person(s) authorized
to become registered holder(s) by endorsement and documents transmitted with
this Letter of Transmittal or, if the Notes are held of record by DTC, the
person in whose name such Notes are registered on the books of DTC. If
signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, agent or other person acting in
a fiduciary or representative capacity, please provide the following
information and see Instruction 4 herein.
Name(s): ___________________________________________________________________
____________________________________________________________________________
(PLEASE PRINT)
__________________________________________________________________________
Capacity (full title): _____________________________________________________
Address: ___________________________________________________________________
____________________________________________________________________________
(INCLUDING ZIP CODE)
Area Code and Telephone No.: _______________________________________________
Tax Identification or Social Security No.: _________________________________
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SIGNATURE GUARANTEE (SEE INSTRUCTIONS 1 AND 4 BELOW)
____________________________________________________________________________
(NAME OF MEDALLION SIGNATURE GUARANTOR GUARANTEEING SIGNATURE(S))
__________________________________________________________________________
(ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NO. (INCLUDING AREA CODE) OF
FIRM)
__________________________________________________________________________
(AUTHORIZED SIGNATURE)
__________________________________________________________________________
(PRINTED NAME)
__________________________________________________________________________
(TITLE)
Dated: __________________, 1998
----------------------------------------------
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Offer
1. GUARANTEE OF SIGNATURES. All signatures on this Letter of Transmittal
must be guaranteed by a Medallion Signature Guarantor (as defined in the
Offering Circular/Prospectus) unless (i) this Letter of Transmittal is signed by
the registered Holder(s) (which term, for purposes of this Letter of
Transmittal, shall include DTC) of the Notes tendered herewith and neither the
"Special Exchange Instructions" box nor the "Special Delivery Instructions" box
of this Letter of Transmittal has been completed or (ii) such Notes are tendered
for the account of an Eligible Institution (as defined in the Offering Circular/
Prospectus). See Instruction 4 herein.
2. DELIVERY OF LETTER OF TRANSMITTAL AND NOTES. This Letter of Transmittal
is to be completed by Holders if (i) certificates representing Notes are to be
physically delivered to the Exchange Agent herewith by such Holders; or (ii)
tender of Notes for exchange is to be made by book-entry transfer to the
Exchange Agent's account at DTC pursuant to the procedures set forth under the
caption "The Terms of the Exchange Offer--Procedures for Tender of Notes--Tender
of Notes Held Through DTC" in the Offering Circular/Prospectus. A confirmation
of a book-entry transfer into the Exchange Agent's account at DTC of all Notes
delivered electronically, or physical delivery of Notes together with a properly
completed and duly executed Letter of Transmittal (or manually signed facsimile
thereof) and any other documents required by this Letter of Transmittal, must be
received by the Exchange Agent at its address set forth herein prior to 12:00
midnight, New York City time, on the Expiration Date, as applicable. Delivery of
documents to DTC does not constitute delivery to the Exchange Agent.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE NOTES AND ALL
OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THROUGH DTC AND ANY
ACCEPTANCE OR AGENTS MESSAGE DELIVERED THROUGH ATOP, IS AT THE OPTION AND RISK
OF THE TENDERING HOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED BY THE EXCHANGE AGENT. If delivery is by mail, registered mail with
return receipt requested, properly insured, is recommended. In all cases,
sufficient time should be allowed for such documents to reach the Exchange
Agent. Except as otherwise provided in this Instruction 2, delivery will be
deemed made only when actually received by the Exchange Agent.
No alternative, conditional or contingent tenders of Notes for exchange will
be accepted. All tendering Holders, by execution of this Letter of Transmittal
(or a facsimile thereof), waive any right to receive any notice of the
acceptance of their Notes for exchange.
If Holders wish to exchange less than the entire principal amount evidenced
by any Note submitted, such Holders must fill in the principal amount that is to
be exchanged in the column entitled "Principal Amount of Notes Tendered for
Exchange," but only in integral multiples of $1,000. In the case of a partial
exchange of Notes, as soon as practicable after the exchange, new certificates
for the remainder of the Notes that were evidenced by such Holder's old
certificates will be sent to such Holder, unless otherwise provided in the
appropriate box on this Letter of Transmittal. The entire amount that is
represented by Notes delivered to the Exchange Agent will be deemed to have been
surrendered for exchange, unless otherwise indicated. (This paragraph does not
apply to Notes tendered by book-entry transfer.)
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Notes will be resolved by the Company, whose
determination will be final and binding. The Company reserves the absolute right
to reject any or all tenders of Notes for exchange that are not in proper form
or the acceptance of which would, in the opinion of the Company or counsel for
the Company, be unlawful. The Company also reserves the right to waive any
irregularities of a tender for exchange as to particular Notes. The Company's
interpretation of the terms of the Exchange Offer (including the instructions in
this Letter of Transmittal) will be final and binding. Unless waived, any
irregularities in connection with tenders of Notes must be cured within such
time as the Company shall determine. Tenders of Notes for exchange will not be
deemed to have been made until such irregularities have been cured or waived.
Any Notes received by the Exchange Agent that are not properly tendered or
delivered and to which the irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holder unless otherwise provided
in this Letter of Transmittal as soon as practicable following the Expiration
Date.
None of the Company, the Exchange Agent, the Information Agent, the Dealer
Manager, the Trustee or any other person shall be obligated to give notification
of defects or irregularities in any tender or delivery or shall incur any
liability for failure to give any such notification.
<PAGE>
3. INADEQUATE SPACE. If the space provided herein under "Description of
Notes Being Tendered for Exchange" is inadequate, the certificate numbers of the
Notes and the principal amount of Notes surrendered should be listed on a
separate schedule and attached hereto.
4. SIGNATURES ON LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered Holder(s) of the Notes
tendered hereby, the signature(s) must correspond to the name(s) as written on
the face of the Notes without alteration, enlargement or any other change
whatsoever. If this Letter of Transmittal is signed by a participant in DTC
whose name is shown as the owner of the Notes tendered hereby, the signature
must correspond with the name shown on the security position listing as the
owner of the Notes.
If any Notes tendered hereby are owned of record by two or more persons, all
such persons must sign this Letter of Transmittal.
If any Notes tendered hereby are registered in the names of different
Holders, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal, and any necessary accompanying documents, as there are
different registrations of such Notes.
If this Letter of Transmittal is signed by the registered Holder of Notes
tendered for exchange hereby, no endorsements of such Notes or separate bond
powers are required, unless Common Stock or Notes not tendered for exchange are
to be issued in the name of a person other than the registered Holder(s), in
which case the Notes tendered for exchange hereby must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name(s) of the registered Holder(s) appear(s) on such Notes. Signatures on such
Notes and bond powers must be guaranteed by a Medallion Signature Guarantor. See
Instruction 1 herein.
If this Letter of Transmittal or any Notes or bond powers are signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and proper evidence satisfactory to
the Company of such person's authority so to act must be submitted with this
Letter of Transmittal.
5. TRANSFER TAXES. Except as set forth in this Instruction 5, the Company
will pay all transfer taxes, if any, applicable to the exchange of Notes
pursuant to the Exchange Offer. If, however, Notes for principal amounts not
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered Holder(s) of the Notes, or
if tendered Notes are registered in the name of any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the exchange of Notes pursuant to the Exchange Offer, then the
amount of any such transfer tax (whether imposed on the registered Holder(s) or
any other person) will be payable by the tendering Holder(s). The Company shall
not be required to issue or deliver any certificates for Common Stock unless and
until the person or persons requesting the issue thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
6. SPECIAL EXCHANGE AND DELIVERY INSTRUCTIONS. If Common Stock issued upon
exchange of any Notes is to be issued, or if Notes not tendered or not accepted
for exchange are to be issued, or if payment of cash in lieu of fractional
shares or of accrued interest is to be made in the name of a person other than
the person(s) signing this Letter of Transmittal, or if certificates for such
Common Stock or any such Note or payment of cash in lieu of fractional shares or
of accrued interest are to be sent to someone other than the person(s) signing
this Letter of Transmittal or to the person(s) signing this Letter of
Transmittal but at an address other than that shown in the box entitled
"Description of Notes Being Tendered for Exchange," the appropriate boxes in
this Letter of Transmittal must be completed. If no such instruction is given,
the certificates for the Common Stock and/or Notes not tendered, will be sent to
the person signing this Letter of Transmittal. Common Stock with respect to
Notes tendered by book-entry transfer and Notes not tendered for exchange will
be delivered by crediting the account at DTC designated above as the account
from which such Notes were delivered.
7. CONFLICTS. In the event of any conflict between the terms of the Offering
Circular/Prospectus and the terms of this Letter of Transmittal, the terms of
the Offering Circular/Prospectus will control.
8. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. If a Holder desires to tender
Notes for exchange pursuant to the Exchange Offer, but any such Note has been
mutilated, lost, stolen or destroyed, such Holder should write to or telephone
the Trustee, at the address listed below, concerning the procedures for
<PAGE>
obtaining replacement certificates for such Note, arranging for indemnification
or any other matter that requires handling by the Trustee:
State Street Bank and Trust Company
Two International Place
Fourth Floor
Boston, MA 02110
Attn: Corporate Trust Department--Kellie Mullen
(800) 531-0368
9. WITHDRAWAL OF TENDERS. Tenders of Notes (or any portion of such Notes in
integral multiples of $1,000) may be withdrawn at any time on or prior to the
Expiration Date and, unless accepted by the Company, may be withdrawn at any
time after 40 business days after the date of this Exchange Offer.
For a withdrawal of a tender of Notes to be effective, a written,
telegraphic, or facsimile transmission notice of withdrawal must be received by
the Exchange Agent on or prior to the Expiration Date (or such later date as may
be permitted by the preceding paragraph) at its address set forth on the back
cover of the Offering Circular/Prospectus. Any such notice of withdrawal must
specify the name of the person who tendered the Notes to be withdrawn, that such
person is withdrawing his or her election to tender such Notes, the aggregate
principal amount of the Notes to be withdrawn, and the name of the registered
Holder of the Notes as set forth on the Notes, if different from that of the
person who tendered such Notes. If Notes have been delivered or otherwise
identified to the Exchange Agent, then prior to the physical release of such
Notes, the tendering Holder must submit the serial numbers shown on the
particular Notes to be withdrawn and the signature on the notice of withdrawal
must be guaranteed by an Eligible Institution, except in the case of Notes
tendered for the account of any Eligible Institution. If Notes have been
tendered pursuant to the procedures for book-entry transfer set forth in
"Procedures for Tender of Notes for Exchange--Book-Entry Delivery Procedures,"
the notice of withdrawal must specify the name and number of the account at DTC
to be credited with such withdrawal of Notes and must otherwise comply with such
book-entry transfer facility's procedures, in which case a notice of withdrawal
will be effective if delivered to the Exchange Agent by written, telegraphic, or
facsimile transmission. Withdrawals of tenders of Notes may not be rescinded.
Notes properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any subsequent time on or prior to the
Expiration Date by following any of the procedures described above under
"Procedures for Tender of Notes for Exchange."
All questions as to the validity (including time of receipt) of notices of
withdrawal will be determined by the Company, in the Company's sole discretion
(whose determination shall be final and binding). No withdrawal of Notes will be
deemed to have been properly made until all defects or irregularities have been
cured or expressly waived. None of the Company, the Exchange Agent, the Dealer
Manager, the Information Agent, the Trustee or any other person will be under
any duty to give notification of any defects or irregularities in any notice of
withdrawal, or incur any liability for failure to give any such notification.
Withdrawal of Notes can only be accomplished in accordance with the
foregoing procedures.
10. TAXPAYER IDENTIFICATION NUMBER. Each Holder tendering Notes for exchange
is required to provide the Depository with the Holder's correct taxpayer
identification number ("TIN"), generally, the Holder's Social Security or
Federal Employer Identification number, on Substitute Form W-9, which is
provided under "Important Tax Information" below, and to certify whether such
person is subject to backup withholding of federal income tax.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering, as well as requests for additional copies of the
Offering Circular/Prospectus and the related Letter of Transmittal, may be
directed to the Information Agent, MacKenzie Partners, Inc., 156 Fifth Avenue,
New York, New York 10010, (800) 322-2885, or collect (212) 929-5500. A Holder
may also contact the Dealer Manager at its telephone number set forth on the
back cover page of this Letter of Transmittal or such Holder's broker, dealer,
commercial bank or trust company or nominee for assistance concerning the
Exchange Offer.
<PAGE>
IMPORTANT TAX INFORMATION
To prevent backup withholding on any consideration paid to an owner or other
payee in for accrued but unpaid interest or lieu of fractional shares, the owner
is required to notify the Exchange Agent of the owner's current TIN (or the TIN
of any other payee) by completing the form below, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such owner is awaiting a
TIN), and that either (i) the owner has not been notified by the Internal
Revenue Service that the owner is subject to backup withholding as a result of
failure to report all interest or dividends or (ii) the Internal Revenue Service
has notified the owner that the owner is no longer subject to backup
withholding. If such owner is an individual, the TIN is his or her social
security number. If the Exchange Agent is not provided with the correct TIN, the
owner or other payee may be subject to a $50 penalty imposed by the Internal
Revenue Service. In addition, any consideration paid to such owner or other
payee in lieu of fractional shares may be subject to 31% backup withholding tax.
Certain owners of Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. If backup withholding applies, the Exchange Agent is
required to withhold 31% of any consideration paid to the owner or other payee
in lieu of fractional shares. Backup withholding is not an additional tax.
Rather, the U.S. federal income tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained from the Internal
Revenue Service provided the required information is furnished.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the owner of the Notes. If
the Notes are registered in more than one name or are not registered in the name
of the actual owner, consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which number to report.
THE FOREGOING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATION
DOES NOT CONSIDER THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY HOLDER'S
SITUATION OR STATUS. THE SUMMARY IS BASED ON THE PROVISIONS OF THE CODE,
REGULATIONS, PROPOSED REGULATIONS, RULINGS AND JUDICIAL DECISIONS NOW IN EFFECT,
ALL OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE BASIS. HOLDERS OF
NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN
AND OTHER LAWS, OF THE EXCHANGE OF THE NOTES INTO COMMON STOCK PURSUANT TO THE
EXCHANGE OFFER. FOR ADDITIONAL INFORMATION, SEE "U.S. FEDERAL INCOME TAX
CONSIDERATIONS" IN THE OFFERING CIRCULAR/PROSPECTUS.
<PAGE>
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------
PAYER'S NAME: [ ]
- ----------------------------------------------------------------------------------------
SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR Social Security Number or
FORM W-9 TIN IN THE BOX AT RIGHT AND Employer Identification
DEPARTMENT OF THE TREASURY CERTIFY BY SIGNING AND DATING Number
INTERNAL REVENUE SERVICE BELOW
-------------------------------------------------------------
Part 2 -- Certification-Under penalties of perjury, I certify
that:
(1) The number shown on this form is my correct taxpayer
identification number (or I am waiting for a number to be
issued to me) and
(2) I am not subject to backup withholding because: (a) I am
exempt from backup withholding, or (b) I have not been
PAYER'S REQUEST FOR notified by the Internal Revenue Service (IRS) that I am
TAXPAYER IDENTIFICATION
NUMBER "TIN"
subject to backup withholding as a result of a failure to
report all interest or dividends, or (c) the IRS has
notified me that I am no longer subject to backup
withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out Item (2)
above if you have been notified by the IRS that you are
currently subject to backup withholding because of under
reporting interest or dividends on your tax return.
-------------------------------------------------------------
SIGNATURE: Part 3
Awaiting TIN / /
DATE:
- -----------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31
PERCENT OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL
DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of payment, 31% of all reportable cash payments made to me thereafter
will be withheld until I provide a taxpayer identification number.
Signature
--------------------------------------------------------------
Date
-----------------------------------------------------------------
<PAGE>
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
[LOGO]
156 Fifth Avenue
New York, New York 10010
(212) 929-5000
or
(800) 322-2885
THE DEALER MANAGER FOR THE EXCHANGE OFFER IS:
BANCAMERICA ROBERTSON STEPHENS
555 California Street
Suite 2600
San Francisco, CA 94104
(415) 693-3215
(800) 234-2663
Attn: Dan White
or Jeff Wineker
<PAGE>
CUSIP 912 325 AA5
U.S. OFFICE PRODUCTS COMPANY
OFFER TO EXCHANGE UP TO 8,889,920 SHARES OF COMMON STOCK FOR
5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2001
AT A TEMPORARILY REDUCED NOTE CONVERSION PRICE
DATED MAY 1, 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, MAY 29, 1998, UNLESS EXTENDED
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
Enclosed for your consideration is an Offering Circular/Prospectus dated May
1, 1998 (the "Offering Circular/Prospectus") and a form of Letter of Transmittal
(the "Letter of Transmittal" which, together with the Offering
Circular/Prospectus constitutes the "Exchange Offer"), relating to the offer by
U.S. Office Products Company (the "Company") to exchange shares of its Common
Stock for its outstanding 5 1/2% Convertible Subordinated Notes due 2001 (the
"Notes") at a temporarily reduced conversion price. Capitalized terms used
herein but not defined herein shall have the meanings ascribed to such terms in
the Offering Circular/Prospectus.
The Notes are currently convertible into shares of Common Stock at a rate of
one share for each $19.00 principal amount of the Notes (the "Existing
Conversion Price"). During the Exchange Period, holders of the Notes (the
"Holders") will be able to exchange the Notes for Common Stock at an exchange
rate of 61.843 shares per $1,000 principal amount of the Notes pursuant to the
Exchange Offer, which effectively reduces the conversion price to $16.17 per
share (the "Reduced Conversion Price"). The Company will pay in cash unpaid
interest accrued on the Notes through the Expiration Date (as defined below)
with respect to all Notes tendered pursuant to the Exchange Offer.
We are asking you to contact your clients for whom you hold Notes registered
in your name or in the name of your nominee. In addition, we ask you to contact
your clients who, to your knowledge, hold Notes registered in their own names.
The Company will pay all transfer taxes, if any, applicable to the tender for
exchange of Notes, except as otherwise provided in the Offering
Circular/Prospectus and the Letter of Transmittal.
Enclosed herewith are copies of the following documents:
1. An Offering Circular/Prospectus dated May 1, 1998 relating to the
Exchange Offer;
2. A Letter of Transmittal for your use and for the information of your
clients in connection with the Exchange Offer; and
3. A form of a letter which may be sent to your clients for whose account
you hold the Notes in your name or in the name of a nominee, with space provided
for obtaining such clients' instructions with regard to the Exchange Offer and
the Equity Self-Tender referred to in the Offering Circular/Prospectus.
DTC participants will be able to tender Notes through the DTC Automated
Tender Offer Program ("ATOP").
PLEASE NOTE THAT THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
12:00 MIDNIGHT, NEW YORK CITY TIME, ON MAY 29, 1998, UNLESS EXTENDED (THE
"EXPIRATION DATE"). WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE
IN ORDER TO OBTAIN THEIR INSTRUCTIONS.
The Company will not pay any fees or commissions to any broker or dealer or
other person for soliciting exchange of the Notes pursuant to the Exchange
Offer. You will be reimbursed for customary
<PAGE>
mailing and handling expenses incurred by you in forwarding the enclosed
materials to your clients as described in the Offering Circular/Prospectus under
the caption "The Terms of the Exchange Offer--Fees and Expenses."
Additional copies of the enclosed materials may be obtained from the
Information Agent, at its address and telephone number set forth on the back
cover of the enclosed Offering Circular/Prospectus.
Very truly yours,
BancAmerica Robertson Stephens
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY OTHER PERSON AS THE AGENT OF THE COMPANY, THE EXCHANGE AGENT, THE
INFORMATION AGENT, THE TRUSTEE OR THE DEALER MANAGER OR AUTHORIZE YOU OR ANY
OTHER PERSON TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF ANY
OF THEM WITH RESPECT TO THE EXCHANGE OFFER WHICH IS NOT CONTAINED IN THE
OFFERING CIRCULAR/PROSPECTUS OR THE LETTER OF TRANSMITTAL.
<PAGE>
CUSIP 912 325 AA5
U.S. OFFICE PRODUCTS COMPANY
OFFER TO EXCHANGE SHARES OF COMMON STOCK FOR
ALL OUTSTANDING 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE
2001 AT A TEMPORARILY REDUCED CONVERSION PRICE
DATED MAY 1, 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, MAY 29, 1998, UNLESS EXTENDED
To Our Clients:
Enclosed for your consideration is the Offering Circular/Prospectus dated
May 1, 1998 (as the same may be amended or supplemented from time to time, the
"Offering Circular/Prospectus") and related Letter of Transmittal and
instructions thereto (the "Letter of Transmittal" which, together with the
Offering Circular/Prospectus constitutes the "Exchange Offer") relating to the
offer by U.S. Office Products Company (the "Company") to exchange shares of
Common Stock for its outstanding 5 1/2% Subordinated Convertible Notes due
2001(the "Notes") at a temporarily reduced conversion price pursuant to the
Exchange Offer. You will also receive separately a Tender Offer Statement
relating to the Company's offer to purchase 37,037,037 shares of Common Stock
(the "Equity Self-Tender"), which is expected to commence May 4, 1998.
The Notes are currently convertible into shares of Common Stock at a rate of
one share for each $19.00 principal amount of the Notes (the "Existing
Conversion Price"). During the Exchange Period, holders of the Notes (the
"Holders") will be able to exchange the Notes for Common Stock at an exchange
rate of 61.843 shares per $1,000 principal amount of the Notes pursuant to the
Exchange Offer, which effectively reduces the conversion price to $16.17 per
share (the "Reduced Conversion Price"). The Company will pay in cash unpaid
interest accrued on the Notes through the Expiration Date (as defined below)
with respect to all Notes tendered pursuant to the Exchange Offer.
Capitalized terms used herein and not defined herein shall have the meanings
ascribed to them in the Offering Circular/Prospectus.
THIS MATERIAL RELATING TO THE EXCHANGE OFFER AND THE EQUITY SELF-TENDER IS
BEING FORWARDED TO YOU AS THE BENEFICIAL OWNER OF NOTES CARRIED BY US FOR YOUR
ACCOUNT OR BENEFIT BUT NOT REGISTERED IN YOUR NAME. A TENDER FOR EXCHANGE OF ANY
SUCH NOTES CAN BE MADE ONLY BY US AS THE REGISTERED HOLDER AND PURSUANT TO YOUR
INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION
ONLY AND CANNOT BE USED BY YOU TO SURRENDER NOTES HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish us to tender for
exchange any or all such Notes held by us for your account pursuant to the terms
and conditions set forth in the Offering Circular/ Prospectus and the Letter of
Transmittal. We urge you to read the Offering Circular/Prospectus and the Letter
of Transmittal carefully before instructing us to tender your Notes for
exchange.
Shares of Common Stock that you are entitled to receive upon exchange of
Notes in the Exchange Offer can be tendered into the Equity Self-Tender. You
should read carefully the information in the separate statement relating to the
Equity Self-Tender for shares of Common Stock. If you wish to tender all or a
portion of the shares of Common Stock you would receive upon exchange of the
Notes, please indicate on the attached instructions.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to tender Notes on your behalf in accordance with the provisions of
the Exchange Offer. The Exchange Offer will expire at 12:00 midnight, New York
City time, on May 29, 1998, unless extended (the "Expiration Date").
<PAGE>
Your attention is directed to the following:
1. The Exchange Offer applies to all outstanding Notes.
2. Holders must tender their Notes on or prior to 12:00 midnight, New York
City time, May 29, 1998 in order to have their Notes exchanged at the exchange
rate of 61.843 shares per $1,000 principal amount of Notes.
3. Any transfer taxes incident to the exchange of Notes will be paid by the
Company, except as provided in the Offering Circular/Prospectus and the
instructions to the Letter of Transmittal.
4. The Exchange Offer is not being made to (nor will the tender of Notes for
exchange be accepted from or on behalf of) Holders in any jurisdiction in which
the making or acceptance of the Exchange Offer would not be in compliance with
the laws of such jurisdiction.
5. The exchange of such Notes for shares of Common Stock will be made as
promptly as practicable after the Expiration Date of the Exchange Offer.
If you wish to have us tender any or all of the Notes held by us for your
account please so instruct us by completing, executing and returning to us the
instruction form that follows.
<PAGE>
INSTRUCTIONS REGARDING THE EXCHANGE OFFER WITH RESPECT TO THE
5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2001
OF
U.S. OFFICE PRODUCTS COMPANY
The undersigned acknowledge(s) receipt of your letter and the enclosed
documents referred to therein relating to the Exchange Offer of U.S. Office
Products Company.
This will instruct you whether to tender for exchange the principal amount
of Notes indicated below held by you for the account of the undersigned pursuant
to the terms of and conditions set forth in the Offering Circular/Prospectus and
the Letter of Transmittal.
Box 1 / / Please tender for exchange the indicated Notes held by you
for my account.
Box 2 / / Please do not tender for exchange any Notes held by you for
my account.
Box 3 / / Please tender shares issuable upon exchange of Notes in the
Company's self-tender for shares, as follows:
Box 3.a / / Tender all shares issuable upon exchange of Notes
Box 3.b / / Tender only the following number of shares: ____________
Box 3.c / / Do not tender shares issuable upon exchange unless at
least the following number of shares will be
purchased: _____________________________________________
Date: ______ , 1998
____________________________________
Signature(s)
____________________________________
____________________________________
Please print name(s) here
Principal amount of Notes to Be Tendered for Exchange:
________________________________
________________________________________________________________________________
$ ________________ *
(must be in principal amounts equal to $1,000 or
________________________________________________________________________________
integral multiples thereof)
Please type or print address
________________________________
Area Code and Telephone Number
________________________________________________________________________________
Taxpayer Identification or
Social Security Number
________________________________________________________________________________
My Account Number with You
- ------------------------
* UNLESS OTHERWISE INDICATED, SIGNATURE(S) HEREON BY BENEFICIAL OWNER(S) SHALL
CONSTITUTE AN INSTRUCTION TO THE NOMINEE TO TENDER ALL NOTES OF SUCH
BENEFICIAL OWNER(S).
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
- --------------------------------------------------------------------------------
For immediate release - May 1, 1998 Release No. 98-010
U.S. OFFICE PRODUCTS COMPANY Contact: Donald H. Platt
(NASDAQ - "OFIS") U.S. Office Products
(202) 339-6700 or (800) 330-6347
or Edelman Financial
Silvia Rosselli (Media)
(212) 704-8217
U.S. OFFICE PRODUCTS SETS MAY 22 FOR SPECIAL
MEETING OF STOCKHOLDERS
Company to Mail Proxy Statement and
Commence Exchange Offer for 2001 Notes Today
Washington, D.C., May 1, 1998 - U.S. Office Products Company (NASDAQ: OFIS)
today announced that its Board of Directors has set Friday, May 22, 1998, as
the date for a Special Meeting of Stockholders to be held in connection with
the Company's planned strategic restructuring. The meeting will be held at
10:00 a.m. Eastern Time at the Latham Hotel Georgetown, 3000 M Street, N.W.,
Washington, D.C. 20007. Holders of U.S. Office Products Company ("USOP")
common stock as of the close of business on March 26, 1998, which is the
record date for the Special Meeting, will be entitled to vote at the Special
Meeting.
The Company also announced that it had filed its definitive Proxy Statement
for the Special Meeting with the Securities and Exchange Commission (the
"SEC") late yesterday and would begin mailing the Proxy Statement to its
stockholders today.
At the Special Meeting, stockholders will be asked to vote on two proposals.
The first proposal is to approve the sale of shares of the Company's common
stock and warrants to purchase additional shares of common stock to an
affiliate of an investment fund managed by Clayton, Dubilier & Rice, Inc.
("CD&R"). The second proposal is to approve a one-for-four reverse stock
split of the Company's common stock, to be effective upon the completion of
the Company's strategic restructuring transactions.
"I am delighted with these significant steps forward," said Thomas Morgan,
USOP Chief Executive Officer and President. "The strategic restructuring
transactions and the related financings are on track, and we look forward to
introducing the 'New USOP' and the four new spin-off companies to our
stockholders and to the marketplace."
- More -
<PAGE>
The Company also announced that it will commence today its offer to exchange
shares of its common stock for its outstanding 5-1/2% Convertible
Subordinated Notes due 2001 (the "2001 Notes"). The exchange offer will
expire on May 29, 1998, unless extended. As previously announced, USOP will
offer to exchange shares of common stock for its outstanding 2001 Notes at an
exchange rate that will effectively reduce the conversion price of the 2001
Notes to $16.17 per share, down from $19.00 currently. (This exchange rate is
approximately 61.84 shares of USOP common stock for each $1,000 principal
amount of 2001 Notes.) The Company has approximately $144 million aggregate
principal amount of the 2001 Notes outstanding. The exchange offer is one of
a number of financing transactions that the Company has said it expects to
complete in connection with the strategic restructuring.
The expiration of the exchange offer will be timed so that holders of the 2001
Notes who elect to accept the offer and exchange their notes will be able to
tender the shares of common stock that they receive in the Company's upcoming
equity self-tender offer. To the extent that shares received in the exchange
offer are not purchased in the equity self-tender, note holders who exchange
their notes for shares of common stock in the exchange offer also will
receive shares of stock in four companies that USOP will be spinning off to
its stockholders as part of the strategic restructuring. The exchange offer
will be subject to certain conditions, including that neither the bank
financing commitment for the restructuring plan nor the anticipated equity
investment by an affiliate of an investment fund managed by CD&R has been
terminated.
This press release shall not constitute an offer to exchange or the
solicitation of an offer to exchange nor shall there be any exchange of the
2001 Notes in any state in which such offer, solicitation or exchange would be
unlawful prior to registration or qualification under the securities laws of
any such state.
The Company also said today that it expects to commence the planned equity
self-tender and the cash tender offer for its outstanding 5-1/2% Convertible
Subordinated Notes due 2003 early next week.
USOP is one of the fastest growing suppliers of a broad range of office
products and business services to corporate, commercial, industrial and
educational customers. USOP operates in the United States, as well as in New
Zealand, Australia, Canada and the United Kingdom, selling a full range of
more than 34,000 office and educational products and services to its
customers. USOP also owns Mail Boxes Etc. ("MBE"), the largest franchiser of
business communication and postal service centers, with approximately 3,600
centers operating worldwide, and with master licensing arrangements in place
for the development of MBE business centers in 58 countries around the world.
MBE centers are owned and operated by licensed franchisees of MBE or its
master licensees. On January 13, 1998, USOP announced the adoption by its
Board of Directors of a strategic restructuring plan that includes the
spin-off of USOP shareholders of the Company's educational supplies, print
management, technology solutions and travel services divisions, a tender
offer by the Company for approximately 37 million of its shares (including
shares underlying stock options) at a price of $27 a share, and the purchase
by an affiliate of an investment fund managed by CD&R of an equity interest in
the restructured USOP for a price of $270 million. The Company expects the
restructuring transactions to be completed in the second calendar quarter of
1998.
- More -
<PAGE>
* * *
This press release includes "forward looking statements" that involve
uncertainties and risks. There can be no assurance that actual results will
not differ materially from the Company's expectations. Factors that could
cause such differences include the effects and the timing of the Company's
strategic restructuring plan and other risks described in the Company's
definitive Proxy Statement filed April 30, 1998 with the SEC, its Annual
Report on Form 10-K, its Quarterly Reports on Form 10-Q, and its other
filings with the SEC.
- End -
<PAGE>
INVESTMENT AGREEMENT
DATED AS OF JANUARY 12, 1998
AMENDED AS OF FEBRUARY 3, 1998
BETWEEN
U.S. OFFICE PRODUCTS COMPANY
AND
CDR-PC ACQUISITION, L.L.C.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE I
Purchase and Sale of Shares, Special Warrants and Warrants................................................. B-2
1.01 Purchase and Sale of Shares, Special Warrants and Warrants.......................................... B-2
1.02 Time and Place of the Closing....................................................................... B-3
1.03 Transactions at the Closing......................................................................... B-3
ARTICLE II
Covenants.................................................................................................. B-3
2.01 Covenants of the Company............................................................................ B-3
ARTICLE III
Representations and Warranties............................................................................. B-4
3.01 Representations and Warranties of the Company....................................................... B-4
3.02 Representations and Warranties of Purchaser......................................................... B-14
ARTICLE IV
Corporate Governance....................................................................................... B-15
4.01 Composition of the Board of Directors............................................................... B-16
4.02 Supermajority Voting Provisions..................................................................... B-16
4.03 Committees.......................................................................................... B-17
4.04 By-laws............................................................................................. B-17
4.05 Termination of Article IV........................................................................... B-17
ARTICLE V
Equity Purchases from the Company.......................................................................... B-17
5.01 Subscription Rights................................................................................. B-17
5.02 Issuance and Delivery of New Securities and Voting Stock............................................ B-18
ARTICLE VI
Limitations on Purchases of Additional Equity Securities................................................... B-18
6.01 Purchases of Equity Securities...................................................................... B-18
6.02 Additional Limitations.............................................................................. B-18
ARTICLE VII
Transfer of Common Stock................................................................................... B-19
7.01 Transfer of Common Stock............................................................................ B-19
ARTICLE VIII
Covenants and Additional Agreements........................................................................ B-20
8.01 Covenants of the Company............................................................................ B-20
8.02 Transaction Proposals............................................................................... B-22
8.03 Modification of Transaction Agreements; Abandonment of Distributions................................ B-23
8.04 Transaction Agreements and Schedules................................................................ B-23
8.05 Company Stockholder Approval; Proxy Statement....................................................... B-24
8.06 Retained Companies Financing........................................................................ B-24
8.07 Tender Offer........................................................................................ B-25
8.08 Information Statements.............................................................................. B-25
8.09 [Intentionally omitted.]............................................................................ B-26
8.10 Tax Standstill...................................................................................... B-26
</TABLE>
B-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
8.11 Access and Information.............................................................................. B-26
8.12 Further Actions..................................................................................... B-26
8.13 Further Assurances.................................................................................. B-27
ARTICLE IX
Conditions Precedent....................................................................................... B-27
9.01 Conditions to Each Party's Obligations.............................................................. B-27
9.02 Conditions to the Obligations of the Company........................................................ B-28
9.03 Conditions to the Obligations of Purchaser.......................................................... B-29
ARTICLE X
Termination................................................................................................ B-30
10.01 Termination........................................................................................ B-30
10.02 Effect of Termination.............................................................................. B-31
ARTICLE XI
Indemnification............................................................................................ B-31
11.01 Indemnification of Purchaser....................................................................... B-31
11.02 Indemnification Procedures......................................................................... B-32
ARTICLE XII
Interpretation; Definitions................................................................................ B-33
12.01 Interpretation..................................................................................... B-33
12.02 Definitions........................................................................................ B-33
ARTICLE XIII
Miscellaneous.............................................................................................. B-39
13.01 Severability....................................................................................... B-39
13.02 Specific Enforcement............................................................................... B-39
13.03 Entire Agreement................................................................................... B-39
13.04 Counterparts....................................................................................... B-39
13.05 Notices............................................................................................ B-39
13.06 Amendments......................................................................................... B-40
13.07 Cooperation........................................................................................ B-40
13.08 Successors and Assigns............................................................................. B-41
13.09 Expenses and Remedies.............................................................................. B-41
13.10 Transfer of Shares and Warrants.................................................................... B-41
13.11 Governing Law...................................................................................... B-42
13.12 Publicity.......................................................................................... B-42
13.13 No Third Party Beneficiaries....................................................................... B-42
13.14 Consent to Jurisdiction............................................................................ B-42
EXHIBITS
Exhibit 1 Terms of Special Warrants B-46
Exhibit 2 Terms of Warrants B-47
Exhibit 3 Terms of Registration Rights Agreement B-48
Schedule 8.07 B-49
</TABLE>
B-iii
<PAGE>
THIS INVESTMENT AGREEMENT (this "Agreement"), dated as of January 12, 1998,
amended as of February 3, 1998, is entered into between CDR-PC Acquisition,
L.L.C., a Delaware limited liability company ("Purchaser"), and U.S. Office
Products Company, a Delaware corporation (the "Company").
WHEREAS the Board of Directors of the Company has approved a series of
transactions pursuant to which:
(a) the Company will conduct a tender offer (the "Tender Offer") to
repurchase 37,037,037 shares of common stock, par value $.001 per share, of
the Company (the "Common Stock"), at $27 per share,
(b) the Company will enter into arrangements for new high-yield and bank
financing in connection with the Tender Offer and the other transactions
contemplated hereby (the "Proposed Financings"),
(c) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's education division ("School"), to the
holders of record of the Common Stock after completion of the Tender Offer
on a pro rata basis (the "School Distribution"),
(d) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's corporate travel services division
("Travel"), to the holders of record of the Common Stock after completion of
the Tender Offer on a pro rata basis (the "Travel Distribution"),
(e) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's technology solutions division
("Technology"), to the holders of record of the Common Stock after
completion of the Tender Offer on a pro rata basis (the "Technology
Distribution"), and
(f) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's print management division ("Print"), to the
holders of record of the Common Stock after completion of the Tender Offer
on a pro rata basis (the "Print Distribution", and, together with the School
Distribution, the Travel Distribution and the Technology Distribution, the
"Distributions");
WHEREAS, in connection with the Distributions, the Company expects:
(a) (i) to execute and deliver a distribution agreement to effect the
School Distribution (the "School Distribution Agreement"), (ii) to cause
School to execute and deliver the School Distribution Agreement, and (iii)
after the satisfaction or waiver of all of the conditions to the Company's
obligation to consummate the School Distribution set forth in the School
Distribution Agreement, and pursuant to the terms of the School Distribution
Agreement, to effect the School Distribution,
(b) (i) to execute and deliver a distribution agreement to effect the
Travel Distribution (the "Travel Distribution Agreement"), (ii) to cause
Travel to execute and deliver the Travel Distribution Agreement, and (iii)
after the satisfaction or waiver of all of the conditions to the Company's
obligation to consummate the Travel Distribution set forth in the Travel
Distribution Agreement, and pursuant to the terms of the Travel Distribution
Agreement, to effect the Travel Distribution,
(c) (i) to execute and deliver a distribution agreement to effect the
Technology Distribution (the "Technology Distribution Agreement"), (ii) to
cause Technology to execute and deliver the Technology Distribution
Agreement, and (iii) after the satisfaction or waiver of all of the
conditions to the Company's obligation to consummate the Technology
Distribution set forth in the Technology
<PAGE>
Distribution Agreement, and pursuant to the terms of the Technology
Distribution Agreement, to effect the Technology Distribution,
(d) (i) to execute and deliver a distribution agreement to effect the
Print Distribution (the "Print Distribution Agreement", and, together with
the School Distribution Agreement, the Travel Distribution Agreement and the
Technology Distribution Agreement, the "Distribution Agreements"), (ii) to
cause Print to execute and deliver the Print Distribution Agreement, and
(iii) after the satisfaction or waiver of all of the conditions to the
Company's obligation to consummate the Print Distribution set forth in the
Print Distribution Agreement, and pursuant to the terms of the Print
Distribution Agreement, to effect the Print Distribution, and
(e) to execute and deliver, and to cause each of School, Travel,
Technology and Print (together, the "Distributed Companies") to execute and
deliver, a tax allocation agreement (the "Tax Allocation Agreement") and
certain other Transaction Agreements;
WHEREAS, prior to the Distributions and pursuant to the terms of the
Distribution Agreements, the Company and the Distributed Companies will
consummate the Pre-Distribution Transactions (as herein defined);
WHEREAS, following the Pre-Distribution Transactions and the record date for
the Distributions:
(a) Purchaser wishes to purchase from the Company, and the Company
wishes to sell to Purchaser, shares of Common Stock and warrants having the
terms and conditions set forth in Exhibit 1 (the "Special Warrants")
entitling the holder thereof to purchase shares of Common Stock together
representing 24.9% of the shares of Common Stock as of the Closing Date (as
herein defined) that would be outstanding after giving effect to the
issuance of such shares (and assuming the conversion into Common Stock of
all of the Company's issued and outstanding 5 1/2% Convertible Subordinated
Notes Due 2001 issued pursuant to an Indenture, dated as of February 7,
1996, between the Company and State Street Bank and Trust Company (the "2001
Notes") that are outstanding on the Closing Date, and after giving effect to
the issuance of any Contingent Stock (as defined herein)), and warrants
entitling the holder thereof to purchase one share of Common Stock for each
share and Special Warrant so purchased on the terms and subject to the
conditions set forth in Exhibit 2 (the "Warrants"), and
(b) the Company and Purchaser wish to enter into a registration rights
agreement (the "Registration Rights Agreement"), the principal terms of
which are attached hereto as Exhibit 3;
WHEREAS Purchaser and the Company are entering into this Agreement to
provide for such purchase and sale and to establish various rights and
obligations in connection therewith;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein set forth, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES, SPECIAL WARRANTS AND WARRANTS
SECTION 1.01 PURCHASE AND SALE OF SHARES, SPECIAL WARRANTS AND
WARRANTS. Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell to Purchaser and Purchaser agrees to purchase from the
Company for an aggregate purchase price of $270 million (the "Purchase Price")
(a) shares of Common Stock representing 24.9% of the outstanding shares of
Common Stock as of the Closing Date after giving effect to the issuance of such
shares (the "Shares"), (b) Special Warrants representing the right to acquire a
number of shares of Common Stock equal to the difference between (i) 24.9% of
the sum of (A) the outstanding shares of Common Stock as of the Closing Date
after giving effect to the issuance of the Shares and the exercise of the
Special Warrants, and assuming the conversion
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into Common Stock of all the 2001 Notes outstanding on the Closing Date at the
conversion price resulting from adjustments made as a result of the Tender Offer
and the Distributions and (B) the number of any shares of Contingent Stock that
are issued, and (ii) 24.9% of the outstanding shares of Common Stock as of the
Closing Date after giving effect to the issuance of the Shares and (c) Warrants
to purchase one share of Common Stock for each Share so purchased and for each
share into which the Special Warrants become exercisable.
SECTION 1.02 TIME AND PLACE OF THE CLOSING. The closing (the "Closing")
shall take place at the offices of Debevoise & Plimpton, 875 Third Avenue, New
York, New York, 10022, at 10:00 A.M., New York time, on the third Business Day
following the first date on which the conditions to Closing set forth in Article
IX have first been satisfied or waived, or at such other place, time and date as
the parties may agree. The Company shall give Purchaser ten Business Days prior
written notice of the date the Closing is scheduled to occur. The "Closing Date"
shall be the date the Closing occurs.
SECTION 1.03 TRANSACTIONS AT THE CLOSING. At the Closing, subject to the
terms and conditions of this Agreement, (a) the Company shall issue and sell to
Purchaser and Purchaser shall purchase the Shares, the Special Warrants and the
Warrants; (b) the Company shall deliver to Purchaser a certificate representing
the Shares and certificates representing the Special Warrants and the Warrants,
in each case registered in the name of Purchaser against payment of the Purchase
Price with respect thereto by wire transfer of immediately available funds to an
account or accounts previously designated by the Company; and (c) the Company
and Purchaser shall enter into the Registration Rights Agreement.
ARTICLE II
COVENANTS
SECTION 2.01 COVENANTS OF THE COMPANY.
(a) FINANCIAL STATEMENTS AND OTHER REPORTS. The Company covenants that it
will deliver to Purchaser so long as Purchaser's Percentage Interest exceeds
10%:
(i) as soon as practicable and in any event within 45 days after the end of
each quarterly period (other than the last quarterly period) in each fiscal
year, a consolidated statement of income and a consolidated statement of cash
flow of the Retained Companies for the period from the beginning of the then
current fiscal year to the end of such quarterly period, and a consolidated
balance sheet of the Retained Companies as of the end of such quarterly period,
setting forth in each case in comparative form figures for the corresponding
period or date in the preceding fiscal year, all in reasonable detail and
certified by the principal financial officer of the Company as presenting
fairly, in accordance with GAAP applied (except as specifically set forth
therein) on a basis consistent with such prior fiscal period, the information
contained therein, subject to changes resulting from year-end closing and audit
adjustments; provided, however, that delivery pursuant to clause (iii) below of
a copy of the Quarterly Report on Form 10-Q of the Company for such quarterly
period filed with the SEC shall be deemed to satisfy the requirements of this
clause (i);
(ii) as soon as practicable and in any event within 90 days after the end of
each fiscal year, a consolidated statement of income, a consolidated statement
of cash flow and a consolidated statement of stockholders equity of the Retained
Companies for such year, and a consolidated balance sheet of the Retained
Companies as of the end of such year, setting forth in each case in comparative
form the corresponding figures from the preceding fiscal year, all in reasonable
detail and examined and reported on by independent public accountants of
recognized national standing selected by the Company, which report shall state
that such consolidated financial statements present fairly the financial
position of the Retained Companies as at the dates indicated and the results of
their operations and changes in their financial position for the periods
indicated in conformity with GAAP applied on a basis consistent with
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prior years (except as otherwise specified in such report) and that the audit by
such accountants in connection with such consolidated financial statements has
been made in accordance with generally accepted auditing standards; provided,
however, that delivery pursuant to clause (iii) below of a copy of the Annual
Report on Form 10-K of the Company for such fiscal year filed with the SEC shall
be deemed to satisfy the requirements of this clause (ii);
(iii) promptly upon transmission thereof, copies of all such financial
statements, proxy statements, notices and reports as it shall send to its
stockholders and copies of all such registration statements (without exhibits),
and all such regular and periodic reports as it shall file with the SEC;
(iv) promptly upon receipt thereof, copies of all reports submitted to the
Retained Companies by independent public accountants in connection with each
annual, interim or special audit of the books of the Retained Companies made by
such accountants, including the comment letter submitted by such accountants to
management in connection with their annual audit; and
(v) with reasonable promptness, such other financial data of the Retained
Companies as Purchaser may reasonably request.
(b) INSPECTION OF PROPERTY. The Company covenants that so long as
Purchaser's Percentage Interest exceeds 10%, it will permit representatives of
Purchaser to visit and inspect, at Purchaser's expense, any of the properties of
the Retained Companies, to examine the corporate books and make copies or
extracts therefrom and to discuss the affairs, finances and accounts of the
Retained Companies with the officers and employees of the Retained Companies and
independent public accountants (and by this provision the Company authorizes
such accountants to discuss with such representatives the affairs, finances and
accounts of the Retained Companies), all at such reasonable times and as often
as Purchaser may reasonably request. Purchaser agrees not to disclose to any
Person any information or data obtained by it pursuant to this Section 2.01(b)
or Section 2.01(a)(iv) or (a)(v) until such information or data otherwise
becomes publicly available or except pursuant to a valid subpoena, judicial
process or its equivalent or in connection with a claim against the Company;
provided that Purchaser shall have used its reasonable best efforts to give the
Company advance notice of such subpoena or judicial process so that the Company
may seek an appropriate protective order. Purchaser acknowledges that
information obtained pursuant to the rights granted hereby may constitute
material non-public information and agrees that it will comply with all
applicable laws relating to the purchase or sale of securities of the Company
while in possession of such information.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to Purchaser as follows:
(a) CORPORATE ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Each Retained Subsidiary having assets or annual revenues of $500,000 or more or
which is otherwise material to the Retained Business (each a "Material
Subsidiary") is duly organized and validly existing and, if applicable, except
as set forth in Schedule 3.01(a), is in good standing, under the laws of the
jurisdiction of its incorporation or organization.
Each of the Retained Companies is duly qualified or licensed and, if
applicable, is in good standing as a foreign corporation, in each jurisdiction
in which the properties owned, leased or operated, or the business conducted, by
it require such qualification or licensing, except for any such failure so to
qualify or be in good standing which, individually or in the aggregate, would
not have a Material Adverse Effect on the Retained Companies, taken as a whole.
Each of the Material Subsidiaries has the requisite power and authority to carry
on its businesses as they are now being or will be (immediately after the
Distributions)
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conducted. The Company has heretofore made available to Purchaser complete and
correct copies of the Certificate of Incorporation of the Company (the "Company
Charter") and the By-laws of the Company (the "Company By-laws") and the
certificate of incorporation and by-laws, or the comparable organizational
documents, of each of the Material Subsidiaries, each as amended to date and
currently in full force and effect.
(b) CORPORATE AUTHORITY. Each of the Company, School, Travel, Technology
and Print has (or will have at the time of such act) the requisite corporate
power and authority to execute, deliver and perform each Transaction Agreement
to which it is or will be a party and to consummate the transactions
contemplated thereby other than, with respect to the Distributions, formal
declaration of the Distributions by the Company's Board of Directors (provided
that, with respect to the issuance and sale by the Company of the Shares, the
Special Warrants and the Warrants, the Company shall obtain pursuant to Nasdaq
Stock Market rules the approval of such issuance and sale by the affirmative
vote of the holders of a majority of the shares of Common Stock represented at
the Company Meeting and entitled to vote thereon (the "Company Stockholder
Approval")). The execution, delivery and performance of each Transaction
Agreement by the Company and the consummation by the Company of the
Pre-Distribution Transactions, the Distributions, the Proposed Financings, the
Tender Offer and the issuance and sale by the Company of the Shares, Special
Warrants and Warrants and of the other transactions contemplated by the
Transaction Agreements have been duly authorized (or will have been duly
authorized at the time of such act) by the Company's Board of Directors, and no
other corporate proceedings on the part of the Company are necessary to
authorize any Transaction Agreement or for the Company to consummate the
Transactions so contemplated (other than, with respect to the issuance and sale
by the Company of the Shares, the Special Warrants and the Warrants, the Company
Stockholder Approval and, with respect to the Distributions, formal declaration
of the Distributions by the Company's Board of Directors). The execution,
delivery and performance by each of School, Travel, Technology and Print of each
Transaction Agreement to which it will be party and the consummation by it of
the Transactions contemplated thereby will be duly authorized at the time of
such act by the Board of Directors and the stockholders of each, if required,
and no other corporate proceedings on the part of School, Travel, Technology or
Print will be necessary to authorize the execution, delivery and performance of
any Transaction Agreement to which they will be a party or for them to
consummate the Transactions so contemplated. Each Transaction Agreement to which
the Company, School, Travel, Technology or Print is or will be a party is, or
when executed and delivered will be, a valid and binding agreement of such
party, enforceable against such party in accordance with the terms thereof,
assuming (in the case of this Agreement and the Registration Rights Agreement)
that each Transaction Agreement to which Purchaser is a party is a valid and
binding agreement of Purchaser.
(c) NO VIOLATIONS; CONSENTS AND APPROVALS. (i) None of the execution,
delivery or performance by the Company, School, Travel, Technology or Print of
each Transaction Agreement to which any of them is or will be a party or the
consummation by the Company or School, Travel, Technology or Print of the
transactions contemplated thereby (A) will result in a violation or breach of
the Company Charter or the Company By-laws, the articles of incorporation or
by-laws of School, Travel, Technology or Print or the organizational documents
of any of the Retained Subsidiaries or (B) will result in a violation or breach
of (or give rise to any right of termination, revocation, cancellation or
acceleration under or increased payments under), or constitute a default (with
or without due notice or lapse of time or both) under, or result in the creation
of any lien, charge, encumbrance or security interest of any kind (a "Lien")
upon any of the properties or assets of the Retained Companies under, (1)
subject to the governmental filings and other matters referred to in clause (ii)
below, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, contract, agreement, obligation, instrument, offer, commitment,
understanding or other arrangement (each a "Contract") or of any license,
waiver, exemption, order, franchise, permit or concession (each a "Permit") to
which any of the Retained Companies is a party or by which any of their
properties or assets may be bound (except for the Company's credit facility with
Bankers Trust Company in effect on the date hereof), or (2) subject to the
governmental filings and other matters referred to in clause (ii) below, any
judgment, order, decree, statute, law, regulation or rule applicable to the
Retained
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Companies, except, in the case of clause (B), for violations, breaches,
defaults, rights of cancellation, termination, revocation or acceleration or
Liens that would not, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole.
(ii) Except for consents, approvals, orders, authorizations, registrations,
declarations or filings as may be required under, and other applicable
requirements of, the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), filings under state securities or "blue sky" laws and filings or consents
referred to in Schedule 3.01(c)(ii), no consent, approval, order or
authorization of, or registration, declaration or filing with, any government or
any court, administrative agency or commission or other governmental authority
or agency, federal, state or local or foreign (a "Governmental Entity"), is
required with respect to the Company, School, Travel, Technology or Print or any
of their respective Subsidiaries, in connection with the execution, delivery or
performance by each of the Company, School, Travel, Technology and Print of each
Transaction Agreement to which any of them is or will be a party or the
consummation by the Company and School, Travel, Technology and Print of the
Transactions contemplated thereby (except where the failure to obtain such
consents, approvals, orders or authorizations, or to make such registrations,
declarations, filings or agreements would not, individually or in the aggregate,
have a Material Adverse Effect on the Retained Companies, taken as a whole).
(d) CAPITAL STOCK. As of the date hereof, the authorized capital stock of
the Company consists of (i) 500,000,000 shares of Common Stock, of which an
aggregate of 132,958,606 shares of Common Stock were issued and outstanding as
of the close of business on January 9, 1998, and (ii) 500,000 shares of
preferred stock, $.001 par value per share, of which none were issued and
outstanding as of the close of business on January 9, 1998. As of the close of
business on January 9, 1998, there were outstanding under the Company's 1994
Long-Term Incentive Plan, the 1994 Amended and Restated Long-Term Incentive
Plan, the 1996 Non-Employee Directors' Stock Plan, the 1997A Stock Option Plan
for Employees of Mail Boxes Etc., the 1997B Stock Option Plan for Employees of
Mail Boxes Etc. and the 1997 Stock Option Plan for former Non-Employee Directors
of Mail Boxes Etc. (collectively, the "Company Stock Plans") options to acquire
an aggregate of 21,236,778 shares of Common Stock (subject to adjustment on the
terms set forth therein) of which 706,778 are subject to allocation pursuant to
option pools, as set forth on Schedule 3.01(d)(ii). As of the close of business
on January 9, 1998, there were outstanding under the Company Stock Plans no
shares of restricted stock and 3,220 deferred shares had been reserved for
issuance pursuant to the 1996 Non-Employee Directors Stock Plan. As of the close
of business on January 9, 1998, the Company had no shares of Common Stock
reserved for issuance of restricted stock. All of the outstanding shares of
Common Stock have been duly authorized and validly issued, and are fully paid
and nonassessable. As of the date hereof the Company has outstanding
$230,000,000 in 5 1/2% Convertible Subordinated Notes Due 2003 issued pursuant
to an Indenture, dated as of May 22, 1996, between the Company and The Chase
Manhattan Bank, N.A. (the "2003 Notes") and $143,750,000 in 2001 Notes,
convertible into shares of Common Stock at any time prior to maturity at a
conversion price of $31.60 and $19.00 per share, respectively. Except as set
forth on Schedule 3.01(d), there are no preemptive or similar rights on the part
of any holders of any class of securities of the Company or of any of the
Retained Subsidiaries. Except for the Common Stock, the 2003 Notes and the 2001
Notes, as set forth above, the Company has outstanding no bonds, debentures,
notes or other obligations or securities the holders of which have the right to
vote (or are convertible or exchangeable into or exercisable for securities
having the right to vote) with the stockholders of the Company on any matter.
Except as set forth above or on Schedule 3.01(d), as of the date of this
Agreement, there are no securities convertible into or exchangeable for, or
options, warrants, calls, subscriptions, rights, contracts, commitments,
arrangements or understandings of any kind to which the Company or any of its
Subsidiaries is a party or by which any of them is bound obligating the Company
or any of its Subsidiaries contingently or otherwise to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock or
other voting securities of the Company or of any of the Retained Subsidiaries.
Except (y) with respect to the withholding of
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exercise price or withholding taxes under any Company Stock Plan or (z) pursuant
to the Tender Offer, there are no outstanding Contracts of the Company or any of
its Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of the Company or of any of the Retained Subsidiaries.
(e) SUBSIDIARIES. (i) Schedule 3.01(e) contains a complete and correct
description of the shares of stock or other equity interests that are
authorized, or issued and outstanding, of each of the Retained Companies (other
than the Company). Except for Subsidiaries that will not be Subsidiaries of the
Company after the Distributions, the Company has no equity interests with a
value of $500,000 or more in any Person other than the Retained Companies, and
there are no commitments on the part of the Company or any Material Subsidiary
to contribute additional capital in respect of any equity interest in any
Person. Each of the outstanding shares of capital stock of each of the Retained
Subsidiaries has been duly authorized and validly issued, and is fully paid and
nonassessable. Except as set forth on Schedule 3.01(e)(i), all of the
outstanding shares of capital stock of each Retained Subsidiary are owned,
either directly or indirectly, by the Company free and clear of all Liens.
(ii) Schedule 3.01(e)(ii) contains a complete and correct list of all
Material Subsidiaries of the Company.
(iii) Schedule 3.01(e)(iii) contains a complete and correct list setting
forth the respective Material Subsidiaries of each of the Company, School,
Travel, Technology and Print immediately following the Distributions.
(f) SEC FILINGS. The Company has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the
SEC under the Securities Act and the Exchange Act since June 30, 1995 (the
"Company SEC Documents"). As of its filing date, each Company SEC Document
filed, as amended or supplemented, if applicable, (i) complied in all
material respects with the applicable requirements of the Securities Act or
the Exchange Act, as applicable, and the rules and regulations thereunder
and (ii) did not, at the time it was filed, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(g) RETAINED BUSINESS FINANCIAL STATEMENTS. (i) Attached hereto as
Annex A(i) are a consolidated balance sheet as of April 26, 1997 (the
"Balance Sheet") and a consolidated balance sheet as of April 30, 1996 and
consolidated statements of income, consolidated statements of cash flow and
consolidated statements of stockholders' equity for the years ended April
30, 1995 and 1996 and April 26, 1997, in each case for the Company (such
financial statements, including the notes thereto, the "Company Business
Financial Statements"), together with the report of the Company's
independent accountants thereon. Each of the Balance Sheet and the
consolidated balance sheet as of April 30, 1996 (including any related notes
and schedules) presents fairly in all material respects the consolidated
financial position of the Company as of their respective dates, and each of
the consolidated statements of income, consolidated statements of cash flow
and consolidated statements of stockholders' equity included in the Company
Business Financial Statements (including any related notes and schedules)
fairly presents in all material respects the income, cash flows and
stockholders equity, as the case may be, of the Company for the periods set
forth therein, in each case in accordance with GAAP applied on a consistent
basis throughout the periods presented therein except as indicated in the
notes thereto, prior to the announcement of the Transactions. Upon
announcement of the Transactions, the Company Business Financial Statements
will require adjustment to reflect (i) the change in the accounting
treatment of certain acquisitions from the pooling-of-interests method to
the purchase method; (ii) the treatment of certain of the Distributions as
discontinued operations, and (iii) certain footnote disclosure regarding the
Transactions.
(ii) Attached hereto as Annex A (ii) are the unaudited consolidated
balance sheet for the Company as of October 25, 1997 and the unaudited
consolidated statement of income of the Company for the six months then
ended (such financial statements, including the notes thereto, the
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"Unaudited Company Business Financial Statements"). The Unaudited Company
Business Financial Statements have been prepared in all material respects in
accordance with GAAP consistently applied and on that basis fairly present
the consolidated financial condition and results of operations of the
Company as of the date thereof and for the period indicated, except that the
Company Business Financial Statements omit footnote disclosures required by
GAAP and are subject to normal, recurring year-end closing and audit
adjustments, prior to the announcement of the Transactions. Upon
announcement of the Transactions, the Unaudited Company Business Financial
Statements will require adjustment to reflect (i) the change in the
accounting treatment of certain acquisitions from the pooling-of-interests
method to the purchase method; (ii) the treatment of certain of the
Distributions as discontinued operations, and (iii) certain footnote
disclosure regarding the Transactions.
(iii) Attached hereto as Annex A(iii) are the unaudited pro forma
combined balance sheet for the Retained Business as of October 25, 1997 (the
"Pro Forma Balance Sheet"), the unaudited pro forma combined statement of
income for the Retained Business for the fiscal year ended April 26, 1997
and the six month period ended October 25, 1997 (the "Pro Forma Income
Statements"), and the notes to such unaudited pro forma financial statements
(the "Notes to Pro Forma Financial Statements", and, together with the Pro
Forma Balance Sheet and the Pro Forma Income Statements, the "Pro Forma
Retained Business Financial Statements"). The Pro Forma Retained Business
Financial Statements have been prepared in accordance with Article 11 of
Regulation S-X; reflect the adjustments necessary to change accounting
treatment for certain past acquisitions from the pooling of interests method
to the purchase method; and give effect to the Proposed Financings, the
Tender Offer, the Distributions and the purchase of the Shares, Special
Shares and Warrants by Purchaser. The Pro Forma Income Statements have been
prepared as if all such Transactions had occurred at the beginning of fiscal
1997 and the Pro Forma Balance Sheet has been prepared as if all such
transactions had occurred as of October 25, 1997.
(iv) Attached hereto as Annex A(iv) are a consolidated balance sheet for
the Retained Business as of April 26, 1997 (the "Audited Balance Sheet") and
the consolidated statements of income of the Retained Business for the
fiscal year then ended (such financial statements, including the notes
thereto, the "Audited Retained Business Financial Statements"), together
with the report of the Company's independent accountants thereon. The
Audited Retained Business Financial Statements (including any related notes
and schedules) will fairly present in all material respects the consolidated
financial position of the Retained Business as of the date thereof, and
fairly present in all material respects the income of the Retained Business
for the period set forth therein, in accordance with GAAP applied on a
consistent basis throughout the periods presented therein except as
indicated in the notes thereto.
(v) The balance sheets included in the Pro Forma Retained Business
Financial Statements do not include any material assets or liabilities not
intended to constitute a part of the Retained Business after giving effect
to the Transactions. The statements of income, statements of stockholders
equity and statements of cash flows included in the Pro Forma Retained
Business Financial Statements do not reflect the operations of any entity or
business not intended to constitute a part of the Retained Business after
giving effect to all such Transactions. The statements of income included in
the Pro Forma Retained Business Financial Statements reflect all of the
material costs and expenses incurred in connection with the Retained
Business, including those incurred in generating the revenues reflected in
the Pro Forma Retained Business Financial Statements, in each case, for the
periods covered thereby, that would be required to be so reflected under
GAAP in consolidated financial statements of the Retained Business prepared
on a pro forma basis after giving effect to all such transactions.
(h) UNDISCLOSED LIABILITIES. Except (i) for the items listed in Schedule
3.01(h) hereto, (ii) as and to the extent disclosed or reserved against on the
Balance Sheet, the Pro Forma Balance Sheet and the Audited Balance Sheet or in
the footnotes thereto and (iii) as incurred after the date of the Pro Forma
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Balance Sheet in the ordinary course of the Retained Business consistent with
prior practice and not prohibited by this Agreement, the Retained Companies do
not have any liabilities or obligations of any nature, whether known or unknown,
absolute, accrued, contingent or otherwise and whether due or to become due,
that, individually or in the aggregate, are or would be material to the Retained
Companies, taken as a whole.
(i) ABSENCE OF CERTAIN EVENTS AND CHANGES. Except as disclosed in the
Company SEC Documents filed with the SEC and publicly available prior to the
date hereof and any amendments filed with respect thereto prior to the date
hereof (the "Filed Company SEC Documents") or as otherwise contemplated or
permitted by this Agreement or the other Transaction Agreements, and except for
any items referred to in Schedule 3.01(i), since October 25, 1997, the Company
and its Subsidiaries have conducted the Retained Business in the ordinary course
consistent with past practice and there has not been any event, change or
development which, individually or in the aggregate, would have a Material
Adverse Effect on the Retained Companies, taken as a whole.
(j) COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed in the Filed
Company SEC Documents, each of the Retained Companies is in compliance with all
statutes, laws, regulations, rules, judgments, orders and decrees of all
Governmental Entities applicable to it that relate to the Retained Business, and
neither the Company nor any of the Retained Companies has received any notice
alleging noncompliance except, with reference to all the foregoing, where the
failure to be in compliance would not, individually or in the aggregate, have a
Material Adverse Effect on the Retained Companies, taken as a whole. This
Section 3.01(j) does not relate to employee benefits matters (for which Section
3.01(o) is applicable), environmental matters (for which Section 3.01(p) is
applicable) or tax matters (for which Section 3.01(n) is applicable). Each of
the Retained Companies has all Permits that are required in order to permit it
to carry on its business as it is presently conducted, except where the failure
to have such Permits or rights would not, individually or in the aggregate, have
a Material Adverse Effect on the Retained Companies, taken as a whole. All such
Permits are in full force and effect and the Retained Companies are in
compliance with the terms of such Permits, except where the failure to be in
full force and effect or in compliance would not, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies, taken as a
whole.
(k) TITLE TO ASSETS. (i) Except as set forth in Schedule 3.01(k)(i), each
of the Retained Companies owns and has good and valid title to, or a valid
leasehold interest in, or otherwise has sufficient and legally enforceable
rights to use, all of the properties and assets (real, personal or mixed,
tangible or intangible), used by the Retained Business or held for use by the
Retained Business in connection with the conduct of, or otherwise material to,
the Retained Business (the "Assets"), including Assets reflected on the Balance
Sheet or acquired since the date thereof, except for Assets disposed of in the
ordinary course of business consistent with past practice and in accordance with
this Agreement and except for such defects in title which, individually or in
the aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole, in each case free and clear of any Liens except for
Permitted Liens. This Section 3.01(k) does not relate to intellectual property
(for which Section 3.01(s) is applicable). A list of all owned real property and
leased real property having an annual base rental of more than $20,000 or having
square footage in excess of 5,000 square feet relating to the Retained Business
is set forth on Schedule 3.01(k) and such owned and leased real property
constitutes all the fee and leasehold interests meeting such description held by
the Retained Companies, except for any such fee or leasehold interests acquired
or disposed of in the ordinary course of business consistent with past practice
after the date hereof and in accordance with this Agreement, and constitutes all
the fee and leasehold interests meeting such description used by the Retained
Business or held for use by the Retained Business in connection with the conduct
of the Retained Business.
(ii) Except as referred to in Schedule 3.01(k)(ii), each Retained
Company has (A) good and insurable title to its owned real properties and
(B) valid and subsisting leasehold interests in its leased real properties,
in each case, free and clear of any Liens, except for (1) Permitted Liens
and (2) easements,
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covenants, rights-of-way, other matters of record and other matters subject
to which the leases of the Retained Companies' real properties are granted.
(l) LITIGATION. Except as disclosed in the Filed Company SEC Documents or
referred to on Schedule 3.01(l), as of the date hereof there are no civil,
criminal or administrative actions, suits or proceedings pending or, to the
knowledge of the Company, threatened, against any of the Retained Companies
that, individually or in the aggregate, are likely to have a Material Adverse
Effect on the Retained Companies, taken as a whole. Except as disclosed in the
Company SEC Documents, there are no outstanding judgments, orders, decrees, or
injunctions of any Governmental Entity against any of the Retained Companies
that, insofar as can reasonably be foreseen, individually or in the aggregate,
in the future would have a Material Adverse Effect on the Retained Companies,
taken as a whole.
(m) CONTRACTS. (i) Schedule 3.01(m) contains a complete and correct list,
as of the date hereof, of all Contracts that are of the types listed in clauses
(A) through (G) below to which any of the Retained Companies is a party (the
"Material Contracts"):
(A) employment, consulting, severance, and other material Contracts
relating to or for the benefit of current, future or former employees,
officers or directors (excluding sales persons) of the Retained Business
requiring annual base payments going forward in excess of $250,000;
(B) Contracts relating to the borrowing of money or obtaining of or
extension of credit (other than in the ordinary course of business),
including letters of credit, guarantees and material security agreements;
(C) joint venture, partnership and similar Contracts (excluding joint
purchasing arrangements with no minimum purchase requirements), involving a
sharing of profits or expenses, that are material or involve any obligation
on the part of the Company to commit capital (excluding commitments not
exceeding $100,000 in the aggregate);
(D) Contracts prohibiting or materially restricting the ability of any
Retained Company to conduct its business, to engage in any business or
operate in any geographical area or to compete with any Person;
(E) Contracts that are material to the business, operations, results of
operations, condition (financial or otherwise), assets or properties of the
Retained Companies taken as a whole;
(F) any employment agreement (and any other agreement involving annual
payments in excess of $150,000) with change of control or "event risk"
provisions relating to the Company; and
(G) any employment agreement or other agreement requiring the Company to
compensate any employee for any tax imposed as a result of any excess
parachute payment under Section 280G of the Code.
(ii) All Material Contracts are legal, valid, binding, in full force and
effect and enforceable against each party thereto, except to the extent that
any failure to be enforceable, individually and in the aggregate, would not
reasonably be expected to have or result in a Material Adverse Effect on the
Retained Companies, taken as a whole, provided that no representation is
made as to the enforceability of any non-competition provision in any
employment agreements. Except as set forth in Schedule 3.01(n), there does
not exist under any Material Contract any violation, breach or event of
default, or event or condition that, after notice or lapse of time or both,
would constitute a violation, breach or event of default thereunder, on the
part of any of the Retained Companies or, to the knowledge of the Company,
any other Person, other than such violations, breaches or events of default
as would not, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole. Except as set forth in
Schedule 3.01(m), the enforceability of all Material Contracts will not be
adversely affected in any manner by the execution, delivery or performance
of this Agreement or the consummation of the Transactions, and no Material
Contract contains any change in control or other terms or conditions that
will become applicable or inapplicable as a result of the consummation of
the Transactions.
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(n) TAXES. (i) Except as set forth on Schedule 3.01(n), (A) all Tax
Returns required to be filed by or on behalf of each of the Company and the
Retained Subsidiaries have been filed except to the extent that a failure to
file, individually or in the aggregate, would not have a Material Adverse Effect
on the Retained Companies, taken as a whole; (B) all such Tax Returns filed are
complete and accurate in all respects, other than any incompleteness or any
inaccuracy that would not, individually or in the aggregate, have a Material
Adverse Effect on the Retained Companies taken as a whole, and all Taxes shown
to be due on such Tax Returns have been paid; (C) no written claim (other than a
claim that has been finally settled) has been made by a taxing authority that
any of the Company or the Retained Subsidiaries is subject to an obligation to
file Tax Returns or to pay or collect Taxes imposed by any jurisdiction in which
such Retained Company does not file Tax Returns or pay or collect Taxes, other
than any such claim that would not have a Material Adverse Effect on such
Retained Company or for which adequate reserves have been provided on the
balance sheet contained in the Unaudited Company Business Financial Statements
and the Pro Forma Balance Sheet; (D) there is no deficiency with respect to any
Taxes which would, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole, other than any such
deficiency for which adequate reserves have been provided on the balance sheet
contained in the Unaudited Company Business Financial Statements and the Pro
Forma Balance Sheet; and (E) all material assessments for Taxes due with respect
to completed and settled examinations or concluded litigation have been paid
which, individually or in the aggregate (with respect to any Retained Company),
exceed $100,000. As used in this Agreement, "Taxes" shall include all federal,
state, local and foreign income, franchise, property, sales, excise and other
taxes, tariffs or governmental charges of any nature whatsoever, including
interest and penalties, and additions thereto; and "Tax Returns" shall mean all
federal, state, local and foreign tax returns, declarations, statements,
reports, schedules, forms and information returns relating to Taxes.
(ii) Except as set forth in Schedule 3.01(n), each of the Company and
the Retained Subsidiaries has duly and timely withheld all Taxes required to
be withheld in connection with its business and assets, and such withheld
Taxes have been either duly and timely paid to the proper governmental
authorities or properly set aside in accounts for such purpose, except to
the extent that any failure to do so would not have a Material Adverse
Effect on the Retained Companies, taken as a whole.
(iii) Except as set forth in Schedule 3.01(n), (A) none of the Company
and the Retained Subsidiaries is a party to or bound by or has any
obligation under any Tax allocation, sharing, indemnification or similar
agreement or arrangement (other than any agreement for the acquisition of
one or more of the Retained Subsidiaries) with any Person other than any of
the Retained Companies, which might result in a Material Adverse Effect to
the Retained Company which entered into such agreement or arrangement; and
(B) none of the Company and the Retained Subsidiaries is or has been at any
time a member of any group of companies filing a consolidated, combined or
unitary income tax return other than any such group (1) the common parent of
which is the Company or any Retained Subsidiary or (2) the common parent of
which has not held any asset other than shares of one or more of the
Retained Subsidiaries.
(iv) Except as set forth in Section 3.01(n) of the Disclosure Schedule,
(A) all taxable periods of each of the Company and the Retained Subsidiaries
ending before December 31, 1993 are closed or no longer subject to audit;
(B) none of the Company and the Retained Subsidiaries is currently under any
audit by any taxing authority as to which such taxing authority has asserted
in writing any claim which, if adversely determined, could have a Material
Adverse Effect on such Retained Company; and (C) no waiver of the statute of
limitations is in effect with respect to any taxable year of the Company or
any of the Retained Subsidiaries.
(o) EMPLOYEE BENEFIT PLANS AND RELATED MATTERS; ERISA. (i) Employee
Benefit Plans. Each Employee Benefit Plan that provides for equity-based
compensation or that has associated costs that are expected to be material to
the Company or the Retained Companies in the aggregate and that is expected to
provide for contributions to be made by any of the Retained Companies or their
Employees after the date hereof or to permit the accrual of additional benefits
by any Employee of the Retained Companies after the date hereof is either listed
on Schedule 3.01(o) or has been filed with the SEC as a material contract
(collectively, the
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"Retained Plans"). Except as set forth on Schedule 3.01(o), neither the Company
nor any of its Subsidiaries has communicated to any Employee any intention or
commitment to modify any Retained Plan or to establish or implement any other
employee or retiree benefit or compensation plan or arrangement which would, if
it existed on the date hereof, be a Retained Plan.
(ii) QUALIFICATION. Except to the extent that failure to meet the
requirements of section 401(a) of the Code would not result in any material
liability as to which adequate reserves have not been established, each Employee
Benefit Plan intended to be qualified under section 401(a) of the Code, and the
trust (if any) forming a part thereof, (A) has received a favorable
determination letter from the IRS as to its qualification under the Code and to
the effect that each such trust is exempt from taxation under section 501(a) of
the Code, and nothing has occurred since the date of such determination letter
that could adversely affect such qualification or tax-exempt status or (B) a
timely application for such a favorable determination letter was filed and the
Company has no reason to believe that such a favorable determination letter will
not be granted.
(iii) COMPLIANCE; LIABILITY. (A) No liability has been or is reasonably
expected to be incurred under or pursuant to Title I or IV of ERISA or the
penalty, excise Tax or joint and several liability provisions of the Code
relating to employee benefit plans that is or would be material to the Company
or, following the Closing, to the Retained Companies in the aggregate.
(B) Each of the Employee Benefit Plans has been operated and
administered in all respects in compliance with its terms, all applicable
laws and all applicable collective bargaining agreements, except for any
failure so to comply that, individually and in the aggregate, could not
reasonably be expected to result in a material liability or obligation on
the part of the Retained Companies in the aggregate. There are no pending or
threatened claims by or on behalf of any of the Employee Benefit Plans, by
any Employee or otherwise involving any such Employee Benefit Plan or the
assets of any Employee Benefit Plan (other than routine claims for benefits,
all of which have been fully reserved for on the regularly prepared balance
sheets of the Company) which would reasonably be expected to result in any
material liability to the Retained Companies in the aggregate.
(C) Except to the extent that it would not give rise to a material
liability or obligation on the part of the Company or the Retained
Companies, no Employee is or will become entitled to post-employment
benefits of any kind by reason of employment with the Company or its
Subsidiaries, including, without limitation, death or medical benefits
(whether or not insured), other than (x) coverage mandated by section 4980B
of the Code, (y) retirement benefits payable under any Plan qualified under
section 401(a) of the Code or (z) accrued deferred compensation. The
consummation of the Transactions will not result in an increase in the
amount of compensation or benefits or the acceleration of the vesting or
timing of payment of any compensation or benefits payable to or in respect
of any Employee by any of the Retained Companies.
(iv) Employees, Labor Matters, etc. Except as set forth on Schedule 3.01(o),
neither the Company nor any of its Subsidiaries is a party to or bound by any
collective bargaining agreement, and there are no labor unions or other
organizations representing, purporting to represent or attempting to represent
any employees employed by the Company or any of its Subsidiaries.
Since April 26, 1997, there has not occurred or been threatened any strike,
slowdown, picketing, work stoppage, concerted refusal to work overtime or other
similar labor activity with respect to any employees of the Company or any of
its Subsidiaries. Except as set forth on Schedule 3.01(o), there are no labor
disputes currently subject to any grievance procedure, arbitration or litigation
and there is no petition pending or threatened with respect to any employee of
any the Company or its Subsidiaries. The Company and its Subsidiaries has
complied with all applicable Laws pertaining to the employment or termination of
employment of their respective employees, including, without limitation, all
such laws relating to labor relations, equal employment opportunities, fair
employment practices, prohibited discrimination or distinction and other similar
employment activities, except for any failure so to comply that, individually
and in the aggregate, could not result in any material liability to the Retained
Companies in the aggregate.
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(p) ENVIRONMENTAL MATTERS. Except as disclosed in the Filed Company SEC
Documents or as set forth on Schedule 3.01(p) and except for such matters that,
individually or in the aggregate, would not have a Material Adverse Effect on
the Retained Companies, taken as a whole, (i) the Retained Companies are in
compliance with all applicable Environmental Laws (as defined below), (ii) the
Retained Companies have all Permits required under Environmental Laws for the
operation of the Retained Business as presently conducted ("Environmental
Permits"), (iii) none of the Retained Companies has received notice from any
Governmental Entity asserting that any of the Retained Companies may be in
violation of, or liable under, any Environmental Law, and (iv) there are no
actions, proceedings or claims pending (or, to the knowledge of the Retained
Companies, threatened) seeking to impose any liability on the Retained Companies
in respect of any Environmental Laws, Environmental Permits or Hazardous
Substances.
For purposes of this Agreement, "Environmental Law" means any federal,
state, local or foreign law, statute, regulation or decree relating to (x) the
protection of the environment or (y) the use, storage, treatment, generation,
transportation, processing, handling, release or disposal of Hazardous
Substances, in each case as in effect on the date hereof. "Hazardous Substance"
means any waste, substance, material, pollutant or contaminant listed, defined,
designated or classified as hazardous, toxic or radioactive, or otherwise
regulated, under any Environmental Law.
(q) DELAWARE LAW. The Company has taken all action necessary to ensure
that the provisions of Section 203 of the Delaware General Corporation Law (the
"DGCL") will not be applicable to Purchaser or its Affiliates as a result of the
transactions contemplated by this Agreement.
(r) STATUS OF SHARES. The Shares being issued at the Closing have been
duly authorized by all necessary corporate action on the part of the Company,
and at Closing such Shares will have been validly issued and, assuming payment
therefor has been made, will be fully paid and nonassessable, and the issuance
of such Shares will not be subject to preemptive rights of any other stockholder
of the Company. The Warrant Shares and the Special Warrant Shares have been duly
authorized by all necessary corporate action on the part of the Company, and
such shares of Common Stock have been validly reserved for issuance, and,
assuming payment therefor has been made, upon issuance and exercise of the
Warrants or the Special Warrants, as the case may be, will be validly issued and
outstanding, fully paid and nonassessable. Assuming the Company Stockholder
Approval has been obtained, the Shares, Warrants and Special Warrants will be
eligible for listing on the Nasdaq Stock Market.
(s) INTELLECTUAL PROPERTY. The Intellectual Property that is owned by the
Retained Companies constitutes all of the Intellectual Property that is material
to the Retained Companies as a whole, except for Intellectual Property subject
to written or oral licenses, agreements or arrangements pursuant to which the
use of Intellectual Property by any Retained Company is permitted by any Person
(the "Company Intellectual Property"). The Company Intellectual Property that is
owned by the Retained Companies is owned free from any Liens (other than
Permitted Liens). Except as set forth in Schedule 3.01(s), all material
Intellectual Property Licenses are in full force and effect in accordance with
their terms, and are free and clear of any Liens (other than Permitted Liens).
Except as set forth in Schedule 3.01(s), immediately after the Closing, the
Retained Companies will own or have the right to use all the Company
Intellectual Property, in each case free from Liens (except for Permitted Liens
incurred in the ordinary course of business) and on the same terms and
conditions as in effect prior to the Closing. Except as set forth in Schedule
3.01(s), the conduct of the Retained Business does not infringe or conflict with
the rights of any third party in respect of any Intellectual Property, except
where such conduct would not materially affect the ability of the Retained
Companies to conduct their business as presently conducted. Except as set forth
in Schedule 3.01(s), to the knowledge of the Company, none of the Company
Intellectual Property is being infringed by any third party except where such
infringement would not have a Material Adverse Effect on the Retained Companies
taken as a whole. Except as set forth in Schedule 3.01(s), there is no claim or
demand of any Person pertaining to, or any proceeding which is pending or, to
the knowledge of the Company, threatened, that challenges the rights of any of
the Retained Companies in respect of any Company Intellectual Property, or that
claims that any default exists under any Intellectual
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Property License, except where such claim, demand or proceeding would not
materially affect the ability of the Retained Companies to conduct their
business as presently conducted. Except as set forth in Schedule 3.01(s), none
of the Company Intellectual Property is subject to any outstanding order,
ruling, decree, judgment or stipulation by or with any court, tribunal,
arbitrator, or other Governmental Entity materially adverse to the Company.
Except as set forth in Schedule 3.01(s), the Intellectual Property owned by the
Retained Companies and material to the Retained Companies taken as a whole has
been duly registered with, filed in or issued by, as the case may be, the
appropriate filing offices, domestic or foreign, to the extent necessary or
desirable to ensure usual and customary protection for the Company Intellectual
Property in the relevant jurisdiction under any applicable law, and the same
remain in full force and effect. The Retained Companies have taken all necessary
actions to ensure usual and customary protection for the Company Intellectual
Property in the relevant jurisdiction of the Company Intellectual Property
(including maintaining the secrecy of all confidential Intellectual Property)
under any applicable law.
(t) Guarantees. Except as set forth on Schedule 3.01(t), none of the
obligations or liabilities of any of the Distributed Companies will be
guaranteed by or subject to a contingent obligation of any of the Retained
Companies following the Distributions (excluding lease guarantees involving
obligations in an aggregate amount not to exceed $100,000).
(u) Brokers or Finders. Except as set forth on Schedule 3.01(u), no agent,
broker, investment banker or other firm is or will be entitled to any broker's
or finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement.
(v) Acquisitions. Schedule 3.01(v) sets forth a true and correct list of the
25 largest acquisitions (in terms of aggregate consideration) of businesses made
by the Company since its inception. The Company has provided Purchaser with
copies of the acquisition agreements and all schedules thereto for each
acquisition listed on Schedule 3.01(v).
(w) Disclosure. No representation or warranty by the Company contained in
this Agreement or in any certificate to be furnished by or on behalf of the
Company pursuant hereto contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein, in light of the circumstances under
which they were made, not misleading with respect to the Retained Business as a
whole or the transactions contemplated by this Agreement.
(x) Fairness Opinion. The Board of Directors of the Company has received a
fairness opinion, customary in form and substance, from Morgan, Stanley & Co.,
Incorporated.
SECTION 3.02 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
represents and warrants as of the date hereof as follows:
(a) ORGANIZATION. Purchaser is a limited liability company duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, with all requisite power and authority to
own, lease and operate its properties and to conduct its business as now
being conducted.
(b) AUTHORITY. Purchaser has the requisite limited liability company
power and authority to execute, deliver and perform each Transaction
Agreement to which it is a party and to consummate the Transactions. All
necessary action required to have been taken by or on behalf of Purchaser by
applicable law, its limited liability company agreement or otherwise to
authorize the approval, execution, delivery and performance by Purchaser of
this Agreement and the consummation by it of the Transactions have been duly
authorized, and no other proceedings on its part are or will be necessary to
authorize this Agreement or for it to consummate the Transactions. This
Agreement is a valid and binding agreement of Purchaser, enforceable against
Purchaser in accordance with the terms hereof, assuming that this Agreement
is a valid and binding agreement of the Company.
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(c) CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the execution
and delivery of this Agreement nor the performance by Purchaser of its
obligations hereunder will conflict with, result in a breach of the terms,
conditions or provisions of, constitute a default under, result in the
creation of any mortgage, security interest, encumbrance, lien or charge of
any kind upon any of the properties or assets of Purchaser pursuant to, or
require any consent, approval or other action by or any notice to or filing
with any court or administrative or governmental body pursuant to, the
organizational documents or agreements of Purchaser or any agreement,
instrument, order, judgment, decree, statute, law, rule or regulation by
which Purchaser is bound (assuming that the Company shall have made or
obtained all consents, approvals, orders, authorizations, registrations,
declarations or filings referred to in Section 3.01(c)(ii)), except for
filings after the Closing under Section 13(d) of the Exchange Act and
filings under the HSR Act.
(d) ACQUISITION FOR INVESTMENT. Purchaser is acquiring the Shares,
Warrants and Special Warrants being purchased by it for its own account for
the purpose of investment and not with a view to or for sale in connection
with any distribution thereof, and Purchaser has no present intention or
plan to effect any distribution of Shares, Warrants, Special Warrants,
Warrant Shares or Special Warrant Shares; provided that the disposition of
such Purchaser's property shall at all times be and remain within its
control and subject to the provisions of this Agreement and the Registration
Rights Agreement. Purchaser has delivered to the Company a complete and
correct copy of a commitment letter from the Fund for $270 million of common
equity financing. The Fund constitutes a "venture capital operating company"
within the meaning of Section 2510.3-101(d) of the regulations promulgated
under ERISA and the transactions contemplated by this Agreement shall not
adversely affect such status.
(e) OWNERSHIP OF SECURITIES. At the date hereof Purchaser does not
Beneficially Own, directly or, to the knowledge of Purchaser, indirectly (or
have any option or other right to acquire), any securities of the Company
other than the Shares, Warrants and Special Warrants being purchased by it
hereunder.
(f) BROKERS OR FINDERS. Except as set forth in Schedule 3.02(f), no
agent, broker, investment banker or other firm is or will be entitled to any
broker's or finder's fee or any other commission or similar fee from
Purchaser in connection with any of the transactions contemplated by this
Agreement.
(g) FUTURE ACQUISITIONS. Purchaser has no present plan or intention to
acquire, directly or indirectly, shares of capital stock comprising 50% or
more of the Total Voting Power or 50% or more of the total fair market value
of all shares of outstanding capital stock of the Company.
ARTICLE IV
CORPORATE GOVERNANCE
SECTION 4.01 COMPOSITION OF THE BOARD OF DIRECTORS.
(a) At and after the Closing, the Board of Directors of the Company shall
consist of nine directors (subject to the right to increase the Board of
Directors pursuant to Section 4.01(b)(iii)). Three members of the Board of
Directors shall initially be designated by the Purchaser (the "Investor
Directors"). Six members of the Board (the "Non-Investor Directors") shall
initially be designated by the Company, subject to the conditions set forth in
Section 9.03(l), and shall include the chief executive officer of the Company.
So long as Purchaser shall have the right to nominate at least two directors
pursuant to clause (i) below, Purchaser shall be entitled to designate the
Chairman of the Board of Directors, provided that the Chairman of the Board, if
designated by Purchaser, shall be an Investor Director.
(b) Purchaser shall be entitled to nominate three directors for election,
provided:
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(i) if the total number of shares of Common Stock represented by the Shares,
the Special Warrants and the Warrants ("Purchaser's Total Securities") declines
by more than 33 1/3% but less than 66 2/3% from Purchaser's Total Securities at
Closing by reason of sales or other dispositions of Common Stock, Warrants or
Special Warrants by Purchaser, Purchaser shall have the right to nominate two
directors;
(ii) if Purchaser's Total Securities declines by 66 2/3% or more from
Purchaser's Total Securities at Closing, but Purchaser's Percentage Interest
remains at least 5% of the outstanding Voting Securities, by reason of sales or
other dispositions of Common Stock, Warrants or Special Warrants by Purchaser,
Purchaser shall have the right to nominate one director;
(iii) in the event that the size of the Board of Directors shall be
increased, Purchaser shall have the right to at least proportionate
representation on the Board following such increase based on the composition of
the Board as between Investor Directors and Non-Investor Directors immediately
prior to such increase; provided that in no event shall the Board consist of
more than 12 directors; and
(iv) if the chief executive officer of the Company is not then a member of
the Board of Directors or a nominee for membership thereon, the Purchaser shall
be entitled to approve an additional nominee to the Board of Directors.
(c) The Company shall not, and shall not permit its Affiliates to, solicit
proxies (as such terms are used in the proxy rules of the SEC) of the
stockholders of the Company to vote against any of the nominees selected by the
Purchaser or for the approval of any stockholder or other proposals that are
inconsistent with the rights afforded the Purchaser pursuant to this Agreement
and the other Transaction Agreements.
SECTION 4.02 SUPERMAJORITY VOTING PROVISIONS. So long as Purchaser has the
right to designate at least two nominees to the Board of Directors of the
Company pursuant to Section 4.01(b):
(a) neither the Company nor the Board of Directors shall cause or permit to
occur any of the following events without the affirmative vote of not less than
three-fourths of the members of the Board of Directors of the Company:
(i) any issuance of Equity Securities other than (A) issuances pursuant to
employee stock option or incentive compensation plans of Equity Securities
(other than in respect of options outstanding as of the date hereof) in an
aggregate amount not to exceed 5% of the Common Stock outstanding immediately
following the Closing on a fully diluted basis ("Permitted Options"), or (B)
issuances pursuant to acquisitions or in public offerings, such issuances not to
exceed 5% of the Common Stock outstanding immediately following the Closing on a
fully diluted basis in any one issuance or 20% in the aggregate, provided,
however, that no such issuance shall be permitted if as a result thereof any
Person would own 10% of the Common Stock outstanding immediately following such
issuance on a fully diluted basis;
(ii) (A) any merger, consolidation or other business combination to which
the Company is a party or any decision whether to approve a tender offer
involving the Company's Equity Securities, in any case other than a Cash
Transaction (as defined in Section 4.02(b)(i) below) or a Permitted Securities
Transaction (as defined in Section 4.02(b)(ii)) below, or (B) any amendment of
any shareholder rights plan (or "poison pill") maintained by the Company and any
redemption of the rights issued thereunder, except to permit a Cash Transaction
or a Permitted Securities Transaction;
(iii) any sale, lease, transfer or other disposition in one transaction or a
series of related transactions of all or substantially all the assets of the
Company, in any case other than a Cash Transaction or Permitted Securities
Transaction; or
(iv) any major recapitalization or similar transaction or series of
transactions involving the Company;
(v) any dissolution or complete or partial liquidation of the Company; or
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(vi) any amendment or modification of the Company Charter or the Company
By-laws that is inconsistent with the provisions of this Agreement and the
rights afforded to Purchaser hereunder.
(b) For purposes of this Agreement:
(i) "Cash Transaction" means any merger, consolidation or other business
combination or sale of all or substantially all the assets of the Company to
which the Company is a party or any decision whether to approve a tender offer
for all of the Company's Equity Securities, in any case if the consideration
involved in such transaction is all cash;
(ii) "Permitted Securities Transaction" means any merger, consolidation or
other business combination to which the Company is a party or any decision
whether to approve a tender or exchange offer for all of the Company's Equity
Securities, in any case if all consideration involved in such transaction is
cash and/ or shares of a registered, freely tradeable, listed common equity
security for which there was an aggregate public market capitalization equal to
at least the greater of $5 billion or the market capitalization of the Company's
Equity Securities, in each case determined immediately prior to the approval of
such transaction by the Board of Directors of the Company.
SECTION 4.03 COMMITTEES. Subject to any law or stock exchange rule
prohibiting committee membership by Affiliates of the Company, Purchaser shall
be entitled to at least proportionate representation by Investor Directors on
any committee of the Board of Directors, based on the composition of the Board
as between Investor Directors and Non-Investor Directors.
SECTION 4.04 BY-LAWS. The Company and Purchaser shall take or cause to be
taken all lawful action necessary to ensure at all times as of and following the
Closing Date that the Company By-laws are not inconsistent with the provisions
of this Agreement or the transactions contemplated hereby.
SECTION 4.05 TERMINATION OF ARTICLE IV. This Article IV shall terminate and
be of no further force or effect on the earlier to occur of (a) the fifth
anniversary of the Closing and (b) the date on which the percentage of the Total
Voting Power represented by the aggregate voting power of all Voting Securities
then owned by Purchaser (other than any Voting Securities acquired in violation
of this Agreement) is greater than 50%.
ARTICLE V
EQUITY PURCHASES FROM THE COMPANY
SECTION 5.01 SUBSCRIPTION RIGHTS. So long as Purchaser has the right to
nominate an Investor Director pursuant to Section 4.01, if the Company's Board
of Directors shall authorize the issuance of New Securities for cash (other than
any New Securities issued (i) to officers, employees or directors of the Company
or any of its Subsidiaries pursuant to any employee stock offering, plan or
arrangement (x) in effect on the date hereof, (y) which constitutes Permitted
Options or (z) approved by any Investor Director, (ii) in connection with any
acquisition transaction, (iii) in any public offering registered under the
Securities Act or in any financing transaction in which sales or resales are
effected through Rule 144A or Regulation S under the Securities Act or any
successor or comparable provisions thereto and (iv) to Purchaser or its
Affiliates (other than the Company and its Subsidiaries)), then, prior to each
such issuance of New Securities, the Company shall offer to Purchaser a Pro Rata
Share of such New Securities. Any offer of New Securities made to Purchaser
under this Section 5.01 shall be made by notice in writing (the "Subscription
Notice") at least 10 Business Days prior to the date on which the meeting of the
Company's Board of Directors is held to authorize the issuance of such New
Securities. The Subscription Notice shall set forth (i) the number of New
Securities proposed to be issued to Persons other than Purchaser and the terms
of such New Securities, (ii) the consideration (or manner of determining the
consideration), if any, for which such New Securities are proposed to be issued
and the terms of payment, (iii) the number of
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New Securities offered to Purchaser in compliance with the provisions of this
Section 5.01 and (iv) the proposed date of issuance of such New Securities. Not
later than 20 Business Days after its receipt of a Subscription Notice,
Purchaser shall notify the Company in writing whether it elects to purchase all
or any portion of the New Securities offered to Purchaser pursuant to the
Subscription Notice. If Purchaser shall elect to purchase any such New
Securities, the New Securities which it shall have elected to purchase shall be
issued and sold to Purchaser by the Company at the same time and on the same
terms and conditions as the New Securities are issued and sold to third parties.
If, for any reason, the issuance of New Securities to third parties is not
consummated, Purchaser's right to its Pro Rata Share of such issuance shall
lapse, subject to Purchaser's ongoing subscription right with respect to
issuances of New Securities at later dates or times.
SECTION 5.02 ISSUANCE AND DELIVERY OF NEW SECURITIES AND VOTING STOCK. The
Company represents and covenants to Purchaser that (i) upon issuance, all the
shares of New Securities sold to Purchaser pursuant to this Article V shall be
duly authorized, validly issued, fully paid and nonassessable and will be
approved (if outstanding securities of the Company of the same type are at the
time already approved) for listing on the Nasdaq Stock Market or for quotation
or listing on the principal trading market for the securities of the Company at
the time of issuance, (ii) upon delivery of such shares, they shall be free and
clear of all claims, Liens, encumbrances, security interests and charges of any
nature and shall not be subject to any preemptive right of any stockholder of
the Company and (iii) in connection with any such issuance, the Company shall
take such actions as are specified in Section 3.01(q) with respect to such
shares. Each share issued or delivered by the Company hereunder shall bear the
legend set forth in Section 13.11.
ARTICLE VI
LIMITATIONS ON PURCHASES OF ADDITIONAL EQUITY SECURITIES
SECTION 6.01 PURCHASES OF EQUITY SECURITIES. (a) Except as permitted by
Section 6.01(b) or 6.01(c), neither Purchaser nor its Affiliates will directly
or indirectly acquire any securities (including by exercise of the Warrants or
Special Warrants) or take any other action that would cause the percentage of
the Total Voting Power represented by the aggregate voting power of all Voting
Securities then held by Purchaser to equal or exceed 25%.
(b) Nothing herein shall prevent Purchaser from purchasing any Securities
pursuant to the terms of this Agreement (including through exercise of the
Warrants and the Special Warrants in accordance with their respective terms) and
the Purchaser shall not be treated as having breached any covenant in this
Agreement solely as a result of such purchase.
(c) This Section 6.01 shall terminate and be of no further force or effect
on the earlier to occur of (i) the fifth anniversary of the Closing and (ii) the
date on which the percentage of the Total Voting Power represented by the
aggregate voting power of all Voting Securities then owned by Purchaser (other
than any Voting Securities acquired in violation of this Agreement) is greater
than 50%.
SECTION 6.02 ADDITIONAL LIMITATIONS. Other than in connection with a Buyout
Transaction that is not solicited or proposed by Purchaser or its Affiliates or
as specifically approved by a majority of the Non-Investor Directors, during the
five-year period beginning on the date of this Agreement, Purchaser shall not,
and shall not permit its Affiliates to:
(i) contrary to the recommendation of the Company's Board of Directors, in
any "solicitation" of "proxies" (as such terms are used in the proxy rules of
the SEC), vote any shares of capital stock of the Company, initiate, propose or
otherwise solicit stockholders of the Company for the approval of one or more
stockholder proposals or induce or attempt to induce any other individual, firm,
corporation, partnership or other entity to initiate any stockholder proposal,
provided, however, that this clause shall be
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inapplicable to any solicitation of proxies, or inducement or attempt to induce
any other entity to initiate any stockholder proposal, in respect of any Cash
Transaction or Permitted Securities Transaction approved by the Board of
Directors of the Company without the approval of at least one Investor Director;
(ii) deposit any Voting Securities into a voting trust or subject any Voting
Securities to any arrangement or agreement with respect to the voting of such
securities or form, join a partnership, limited partnership, syndicate or other
group, or otherwise act in concert with any other Person, for the purpose of
acquiring, holding, voting or disposing of Voting Securities, or otherwise
become a "person" within the meaning of Section 13(d)(3) of the Exchange Act; or
(iii) make a public request to the Company (or its directors, officers,
stockholders, employees or agents) to amend or waive any provisions of this
Section 6.02.
ARTICLE VII
TRANSFER OF COMMON STOCK
SECTION 7.01 TRANSFER OF COMMON STOCK. (a) Other than as specifically
approved by a majority of the Non-Investor Directors, prior to the second
anniversary of the Closing, Purchaser will not, directly or indirectly, sell,
transfer or otherwise dispose of any Shares, Special Warrants or Warrants
(except to any Affiliate of Purchaser).
(b) Other than as specifically approved by a majority of the Non-Investor
Directors, prior to the fifth anniversary of the Closing, Purchaser will not,
directly or indirectly, sell, transfer or otherwise dispose of any Shares except
(i) pursuant to a registered underwritten public offering intended to achieve a
broad distribution in accordance with the Registration Rights Agreement, (ii) in
accordance with the volume and manner-of-sale limitations of Rule 144
promulgated under the Securities Act (regardless of whether such limitations are
applicable), (iii) in a transaction exempt from the registration requirements of
the Securities Act to any Person or group (within the meaning of Section
13(d)(3) of the Exchange Act) of Persons, if, prior to and after giving effect
to such sale, such Person or group of Persons (A) does not or would not to
Purchaser's knowledge after due inquiry, Beneficially Own (provided that for
purposes of this Section 7.01(a) a Person shall be deemed to Beneficially Own
all shares that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time) 5% or more of the
then outstanding shares of Common Stock or (B) is an investment company
registered under the Investment Company Act of 1940, as amended, or (iv) in
connection with a Buyout Transaction. Purported transfers of shares of Common
Stock that are not in compliance with this Article VII shall be of no force or
effect.
(c) The provisions of clauses (a) and (b) of this Article VII shall
terminate and be of no further force or effect on the earlier to occur of (i)
the fifth anniversary of the Closing and (ii) the date on which the percentage
of the Total Voting Power represented by the aggregate voting power of all
Voting Securities then owned by Purchaser (other than any Voting Securities
acquired in violation of this Agreement) is greater than 50%.
(d) Prior to the seventh anniversary of the Closing, the Purchasers will
not, directly or otherwise dispose of Shares representing 15% or more of the
then outstanding Common Stock to any Person or group (within the meaning of
Section 13(d)(3) of the Exchange Act) without first offering the Company the
right to make an offer to purchase the Shares proposed to be so sold,
transferred or otherwise disposed of. The provisions of the previous sentence
shall terminate and be of no effect on the date on which the percentage of the
Total Voting Power represented by the aggregate voting power of all Voting
Securities then owned by Purchaser (other than any Voting Securities acquired in
violation of this Agreement) is greater than 50%.
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ARTICLE VIII
COVENANTS AND ADDITIONAL AGREEMENTS
SECTION 8.01 COVENANTS OF THE COMPANY. During the period from the date of
this Agreement and continuing until the Closing, the Company agrees as to itself
and the Retained Subsidiaries that, except as set forth in the Distribution
Agreements or in Schedule 8.01, or to the extent that Purchaser otherwise
consents in writing:
(a) ORDINARY COURSE. The Retained Business will be conducted in the
ordinary course in substantially the same manner as presently conducted and the
Company will use commercially reasonable efforts to keep available the services
of the current officers and employees engaged primarily in the Retained Business
and to preserve the relationships with customers, suppliers and others having
business dealings with the Retained Business.
(b) NO ACQUISITIONS. The Company will not, nor will it permit any of the
Retained Subsidiaries to, acquire or agree to acquire (excluding any non-binding
letters of intent) by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets (other
than inventory) involving aggregate consideration having a value in excess of
$25 million in any case or $150 million in the aggregate (in either case whether
payable in cash, stock or a combination thereof); provided that (i) no such
consideration shall be payable in Common Stock or stock of any Retained
Subsidiary and (ii) any such consideration payable in stock of a Distributed
Company shall not be payable prior to completion of the Distributions; and
provided, further, that this paragraph (b) shall not limit the ability of the
Company or the Retained Subsidiaries to make acquisitions in respect of
businesses which will constitute part of a Distributed Company if all
acquisition debt associated therewith is allocated to such Distributed Company.
(c) NO DISPOSITIONS. The Company will not, nor will it permit any of the
Retained Subsidiaries to, sell, lease, license, encumber or otherwise dispose
of, or agree to sell, lease, license, encumber or otherwise dispose of, any of
the Assets of the Retained Business other than at fair market value in the
ordinary course of business consistent with past practice.
(d) OTHER TRANSACTIONS. The Company will not, nor will it permit any of
the Retained Subsidiaries to, do any of the following (except as otherwise
expressly provided herein or in any other Transaction Agreement):
(i) Amend its Certificate of Incorporation (except to the extent necessary
to implement a shareholder rights plan pursuant to clause (ii) below), By-laws
or other organizational documents (except for immaterial amendments to the
Certificate of Incorporation or By-laws of any Subsidiaries, provided such
amendments in no way adversely affect Purchaser or the rights granted to
Purchaser hereunder);
(ii) declare or pay any non-cash dividend or make any non-cash distribution
with respect to the Assets; provided, however, that the Company shall be
permitted to issue rights under a customary shareholder rights plan or "poison
pill" that (A) expires at Closing and (B) expressly exempts Purchaser and its
Affiliates from its operation;
(iii) redeem or otherwise acquire any shares of its capital stock or issue
any capital stock (except upon exercise of options issued prior to the date
hereof under a Company Stock Plan), or any option, or warrant or right relating
thereto (other than grants under the Company's 1994 Amended and Restated Long
Term Incentive Plan of options to acquire not more than 685,778 shares of Common
Stock in the aggregate from the separate "pools" of options that the Company has
heretofore allocated in connection with certain acquisitions that the Company
has made for award to employees of such acquired companies; provided that each
such option shall (A) have a per share exercise price that is not less than the
fair market value
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per share of Common Stock at the date of grant, (B) vest and become exercisable
no more rapidly than 25% on each of the first four anniversaries of the date of
grant, and (C) shall not vest or become earlier exercisable as a result of the
consummation of the Transactions);
(iv) incur any liabilities, obligations or indebtedness for borrowed money
or guarantee any such liabilities, obligations or indebtedness, other than in
the ordinary course of business consistent with past practice (except as
otherwise provided herein with respect to the Proposed Financings or as incurred
in connection with acquisitions to the extent permitted hereby) and in an
aggregate amount that would not be material to the Company;
(v) permit, allow or suffer any assets of the Retained Business to be
subject to any Lien other than Permitted Liens;
(vi) guarantee or otherwise become contingently liable for any obligation of
any of the Distributed Companies;
(vii) cancel any material indebtedness (individually or in the aggregate)
relating to the Retained Business or waive any claims or rights of substantial
value relating to the Retained Business;
(viii) pay, loan or advance any amount to, or sell, transfer or lease any of
its assets relating to the Retained Business, or enter into any agreement or
arrangement relating to the Retained Business with, any of the Distributed
Companies or any of their respective Affiliates other than in the ordinary
course of business consistent with past practice;
(ix) make any change in any method of accounting or accounting practice or
policy, except as may be required by GAAP;
(x) modify, amend, terminate or permit the lapse of any lease of real
property used in connection with, and which is material to, the Retained
Business (except modifications or amendments associated with renewals of such
leases in the ordinary course of business consistent with past practice of the
Retained Companies with respect to which Purchaser shall have the right to
participate and to approve);
(xi) enter into, terminate, renew or modify any Contract to which the
Company or any Retained Subsidiary is a party or by which any of their assets
are bound and which is material to the Company;
(xii) enter into any agreement or take any action in violation of the terms
of this Agreement or any of the other Transaction Agreements;
(xiii) settle any material tax audit, make or change any tax election or amend
any Tax Returns; or
(xiv) agree, whether in writing or otherwise, to do any of the foregoing.
(e) EMPLOYEE BENEFITS. Except (w) as set forth in Schedule 8.01(e), (x) in
connection with acquisitions to the extent permitted by this Agreement or (y) in
the ordinary course of business and as consistent with past practice (which
shall include normal periodic performance reviews and related benefit increases)
or (z) pursuant to the existing terms of any collective bargaining agreement,
the Company will not, nor will it permit any of the Retained Subsidiaries to (i)
increase in any manner the compensation of any of the officers or other
employees of the Retained Companies; (ii) pay or agree to pay any pension,
retirement allowance or other employee benefit not required by any existing
plan, agreement or arrangement to any such officer or employee, whether past or
present; (iii) enter into, or negotiate, any collective bargaining agreement
with respect to employees of the Retained Companies except as required by law,
in which case the Company or such Retained Subsidiary shall first notify
Purchaser; or (iv) commit itself to any additional pension, profit-sharing,
bonus, incentive, deferred compensation, stock purchase, stock option, equity
purchase (or other equity based plan), stock appreciation right, group
insurance, severance pay, retirement or other employee benefit plan, policy,
program, understanding, agreement or arrangement, or to any employment agreement
or consulting agreement (arising out of prior employment), regardless of the
applicable funding arrangements, with or for the benefit of any officer or
employee of the Retained
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Companies, or amend, renew or extend any of such plan or any of such agreements
in existence on the date hereof in any manner which would, in the case of
clauses (i), (ii), (iii) and (iv) above, result in liabilities that are material
to the Retained Companies taken as a whole.
SECTION 8.02 TRANSACTION PROPOSALS. (a) Subject to Section 8.02(d), the
Company shall not, nor shall it permit any of its Subsidiaries to, nor shall it
authorize or permit any officer, director or employee of, or any investment
banker, attorney, accountant or other advisor, agent or representative of, the
Company or any of its Subsidiaries to, (i) solicit or initiate, or encourage
(including by furnishing non-public information) the submission of, any
Transaction Proposal (as defined below) or (ii) participate in any discussions
or negotiations regarding, or furnish to any Person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Transaction Proposal; provided, however, that prior to the Company Meeting, in
response to an unsolicited written bona fide Transaction Proposal that in the
good faith opinion of the Board of Directors of the Company could reasonably be
expected to result in a Superior Proposal (as defined below), if the Board of
Directors of the Company determines in good faith, after consultation with
outside counsel, that failure to do so could reasonably be expected to result in
a breach of its fiduciary duties to stockholders under applicable law, the
Company may, subject to compliance with Section 8.02(c), (A) furnish information
with respect to the Company to such Person making such proposal pursuant to a
customary confidentiality and standstill agreement with such Person and (B)
participate in negotiations regarding such Transaction Proposal. For purposes of
this Agreement, "Transaction Proposal" means any inquiry, proposal or offer from
any Person relating to (x) any purchase or other acquisition from the Company of
assets representing 25% or more of the net revenues, net income or profits of
the Company and its Subsidiaries, taken as a whole, (y) any purchase or other
acquisition of 10% or more of any class of Equity Securities of the Company, or
(z) any merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving the Company (or any
Subsidiary whose business constitutes 25% or more of the net revenues, net
income or assets of the Company and its Subsidiaries, taken as a whole), in each
case other than the transactions contemplated by this Agreement. Immediately
after the execution and delivery of this Agreement, the Company will, and will
cause its Subsidiaries and Affiliates, and their respective officers, directors,
employees, investment bankers, attorneys, accountants and other agents to, cease
and terminate any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any possible Transaction Proposal.
(b) Nothing contained in this Section 8.02 shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act; provided that except as set forth
in this Section 8.02(b) or as permitted by Section 8.02(d), neither the Board of
Directors of the Company nor any committee thereof shall (A) withdraw or modify,
or propose to withdraw or modify, in a manner adverse to Purchaser, the approval
or recommendation by such Board of Directors or any such committee of this
Agreement or the Transactions, (B) approve or recommend, or propose to approve
or recommend, any Transaction Proposal (C) cause or permit the Company or any of
its Subsidiaries to enter into any agreement with respect to any Transaction
Proposal or (D) terminate this Agreement in response to a Transaction Proposal.
Notwithstanding the foregoing, if prior to the Company Meeting the Company has
received a Transaction Proposal that the Board determines in good faith is a
Superior Proposal, then the Board of Directors of the Company, if it determines
in good faith, after consultation with outside counsel, that failure to do so
could reasonably be expected to result in a breach of its fiduciary duties to
stockholders under applicable law, may (subject to the terms of this sentence
and compliance with the following sentence) (i) withdraw or modify its
recommendation of this Agreement, or the transactions contemplated hereby, (ii)
approve or recommend such Superior Proposal, (iii) cause the Company to enter
into an agreement with respect to a Superior Proposal and (iv) terminate this
Agreement, in each case (as contemplated by this Section 8.02(b)) no earlier
than five Business Days following Purchaser's receipt of a written notice from
the Company advising Purchaser that the Board of Directors of the Company has
received a Superior Proposal, specifying the terms and conditions of such
Superior Proposal and identifying the person making such Superior Proposal;
provided, however, that neither the Company nor its Board of Directors shall
take any of the actions specified in such clauses (i),
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(ii), (iii) or (iv) unless the Company shall have furnished Purchaser with
written notice on a date prior to the date any such actions are proposed to be
taken specifying such actions to be taken. In addition, if the Company or the
Board of Directors of the Company proposes to take any of the actions permitted
by the preceding sentence with respect to any Transaction Proposal, then the
Company shall, prior to the taking of any such action, pay, or cause to be paid,
to Purchaser, Purchaser's Expenses and the Termination Fee (each as defined in
Section 12.09). The term "Superior Proposal" shall mean any bona fide written
Transaction Proposal that has the following characteristics: (1) it is a
proposal to acquire, directly or indirectly, for consideration consisting of
cash and/or readily marketable securities, (x) shares of Common Stock
representing at least 20% of the Total Voting Power, or (y) at least 25% of the
assets of the Retained Subsidiaries and (2) the terms of such proposal in the
good faith judgment of the Board of Directors of the Company, based on advice
from the Company's financial adviser, provide consideration to the Company or
the Company's stockholders that is superior to the consideration provided
pursuant to this Agreement (after taking into account any modifications to this
Agreement proposed by Purchaser).
(c) The Company shall immediately advise Purchaser orally and in writing of
(i) any request for information which may relate to a Transaction Proposal, (ii)
any Transaction Proposal, (iii) any inquiry with respect to or that could lead
to any Transaction Proposal or (iv) any action taken in accordance with Section
8.02(a)(A) or (B), and in each case the material terms and conditions of such
request, Transaction Proposal, inquiry or action and the identity of the Person
making any such request, Transaction Proposal or inquiry with respect to which
such action is taken. The Company will keep Purchaser reasonably informed of
material developments concerning the status and details (including amendments or
proposed amendments) of any such request, Transaction Proposal, inquiry or
action.
SECTION 8.03 MODIFICATION OF TRANSACTION AGREEMENTS; ABANDONMENT OF
DISTRIBUTIONS. Notwithstanding anything to the contrary in this Agreement, the
Company may in its sole discretion modify each of the Transaction Agreements
relating to the Distributions and, if the Board of Directors of the Company
determines in good faith that it is in the best interest of the Company to do
so, abandon the Distributions.
SECTION 8.04 TRANSACTION AGREEMENTS AND SCHEDULES. The Company shall use
reasonable best efforts to cause (i) each of the Transaction Agreements to be
entered into by the Company, School, Travel, Technology or Print, as the case
may be, in connection with the Distributions, and each of the Annexes called for
in this Agreement that have not been provided to Purchaser prior to the
execution of this Agreement, to be delivered to Purchaser and its counsel by
7:00 p.m., New York Time, February 13, 1998 (the "Agreement Delivery Cut-Off
Time"); and (ii) each of the Schedules called for in this Agreement that have
not been provided to Purchaser prior to execution of this Agreement (and prior
to the Schedule Review Cut-Off Time (as defined below) may supplement Schedules
that have previously been supplied or may unilaterally amend this Agreement to
add additional Schedules) to be delivered to Purchaser and its counsel by 7:00
p.m., New York time, January 20, 1998 (the "Schedule Delivery Cut-off Time").
Purchaser shall review such Transaction Agreements, Schedules and Annexes in
good faith. Prior to the applicable Review Cut-off Time (as defined below) the
Company shall make available to Purchaser and its counsel at their request all
documentation related to any item set forth on any Schedule or Annex. Purchaser
shall complete its review of the Transaction Agreements, and the Annexes and
notify the Company that such review is complete by 7:00 p.m., New York time, on
February 27, 1998 (the "Agreement Review Cut-off Time") and shall complete its
review of the Schedules and notify the Company that such review is complete by
7:00 p.m., New York time, on February 3, 1998 (the "Schedule Review Cut-Off
Time"); provided, however, that if any Transaction Agreement, Schedule or Annex
is delivered after the applicable Delivery Cut-off Time, the applicable Review
Cut-off Time for all Transaction Agreements and Annexes and for the Schedules,
as the case may be shall be extended by the number of days elapsed (which, in
any case, shall not be less than one) between the date of such Delivery Cut-off
Time and the date of receipt by Purchaser and its counsel of such Transaction
Agreement or Annex or such Schedule, as the case may be; and provided further,
however, that if (A) the Transaction Agreements are not satisfactory to
Purchaser in its good faith reasonable judgment, (B) the Audited Retained
Business Financial Statements reflect
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financial information materially different from that presented in the Pro Forma
Retained Business Financial Statements, or (C) any new Schedule or change or
addition to the Schedules made after the date hereof is not satisfactory to
Purchaser in its good faith reasonable judgment, Purchaser may terminate this
Agreement upon written notice to the Company without further liability on the
part of Purchaser or the Company other than pursuant to Sections 10.02 and
13.09.
SECTION 8.05 COMPANY STOCKHOLDER APPROVAL; PROXY STATEMENT. (a) The Company
shall call a meeting of its stockholders (the "Company Meeting") for the
purpose, among others, of voting upon the issuance (the "Issuance") of the
Shares, the Special Warrants and the Warrants to Purchaser (the "Company Meeting
Proposal").
(b) The Company will prepare and file with the SEC a proxy statement
relating to the Company Meeting (as amended or supplemented and including
documents incorporated by reference therein, the "Proxy Statement") and shall
use its reasonable best efforts to respond to any comments of the SEC or its
staff and to cause the Proxy Statement to be cleared by the SEC. The Company
shall notify Purchaser of the receipt of any comments from the SEC or its staff
and of any request by the SEC or its staff for amendments or supplements to the
Proxy Statement or for additional information and shall supply Purchaser and its
counsel with copies of all correspondence between the Company or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Proxy Statement. The Company shall give Purchaser and its
counsel the opportunity to review the Proxy Statement prior to its being filed
with the SEC and shall give Purchaser and its counsel the opportunity to review
all amendments and supplements to the Proxy Statement and all responses to
requests for additional information and replies to comments prior to their being
filed with, or sent to, the SEC. Each of the Company and Purchaser agrees to use
its reasonable best efforts, after consultation with the other party hereto, to
respond promptly to all such comments of and requests by the SEC. After the
Proxy Statement has been cleared by the SEC, the Company shall mail the Proxy
Statement to the stockholders of the Company. If at any time prior to the
Company Meeting there shall occur any event that should be set forth in an
amendment or supplement to the Proxy Statement, the Company will prepare and
mail to its stockholders such an amendment or supplement.
(c) The Proxy Statement will not, at the date mailed to the Company's
stockholders and at the date of the Company Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading, except that no
representation is made by the Company with respect to statements made therein
based on information concerning Purchaser or its Affiliates supplied in writing
by Purchaser or any of its Affiliates specifically for inclusion in the Proxy
Statement. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder.
(d) Subject to Section 8.02(b), the Board of Directors of the Company shall
recommend that the Company's stockholders approve the Company Meeting Proposal
and the Company shall use its best efforts to obtain the necessary approvals by
its stockholders of the Company Meeting Proposal.
SECTION 8.06 RETAINED COMPANIES FINANCING. In connection with the Proposed
Financings, the Company and Purchaser shall jointly select all sources of the
Proposed Financings, including determining the respective roles of such sources;
provided, however, that Bankers Trust Company shall have the opportunity to be a
lead in the bank financing with economics at least as favorable as any other
lead in the bank financing if Bankers Trust Company's pricing is competitive. In
addition, (i) Purchaser and its counsel shall have the right to participate in
any discussions or negotiations between the Company and any of its
representatives, on the one hand, and its prospective lenders and their counsel,
on the other, and to comment on draft loan and other documentation in respect of
any such Proposed Financings and (ii) the Company shall provide Purchaser and
its counsel copies of all correspondence between the Company and its lenders
relating thereto. If, prior to the execution of any definitive documentation
with respect to the Proposed Financings, based on its review of such definitive
documentation, Purchaser determines in the
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good faith exercise of its reasonable judgment not to proceed with the
transactions contemplated by this Agreement, Purchaser may terminate this
Agreement upon written notice to the Company.
SECTION 8.07 TENDER OFFER. (a) The Company shall cause the commencement (as
such term is defined in Rule 13e-4(a)(4) under the Exchange Act) of the Tender
Offer to purchase 37,037,037 shares of Common Stock, at a price per share equal
to $27, net to the seller in cash, no later than the date specified in Schedule
8.07. Unless Purchaser shall otherwise agree, the Company's obligation to
complete the Tender Offer shall be subject only to the conditions (the "Offer
Conditions") set forth in Schedule 8.07. Subject to the provisions hereof, the
Tender Offer shall expire on the date set forth in Schedule 8.07; provided that
the Tender Offer shall be extended from time to time if the Offer Conditions
shall not have been satisfied, so long as this Agreement shall remain in effect.
(b) On the date of commencement of the Tender Offer, the Company shall file
with the SEC an Issuer Tender Offer Statement on Schedule 13E-4 with respect to
the Tender Offer (the "Tender Offer Statement"), which shall contain an offer to
purchase and a related letter of transmittal (such Tender Offer Statement and
the documents therein pursuant to which the Tender Offer will be made, together
with any supplements or amendments thereto, are referred to hereinafter as the
"Offer Documents"). After the Offer Documents are filed with the SEC, the
Company shall disseminate the Offer Documents to the stockholders of the
Company. If at any time prior to the expiration of the Tender Offer there shall
occur any event that should be set forth in an amendment or supplement to the
Offer Documents, the Company will prepare and file with the SEC and disseminate
to its stockholders such an amendment or supplement.
(c) The Company shall give Purchaser and its counsel the opportunity to
review the Offer Documents prior to their being filed with the SEC and shall
give Purchaser and its counsel the opportunity to review all amendments and
supplements to the Offer Documents and all responses to requests for additional
information and replies to comments prior to their being filed with, or sent to,
the SEC. The Company shall notify Purchaser of the receipt of any comments from
the SEC or its staff and of any request by the SEC or its staff for amendments
or supplements to the Offer Documents or for additional information and shall
supply Purchaser and its counsel with copies of all correspondence between the
Company or any of its representatives, on the one hand, and the SEC or its
staff, on the other hand, with respect to the Offer Documents.
(d) The Offer Documents will not, on the date filed with the SEC and as of
the date first published, sent or given to the Company's stockholders, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not misleading
except that no representation is made by the Company with respect to statements
made therein based on information concerning Purchaser or its Affiliates
supplied in writing by Purchaser or any of its Affiliates specifically for
inclusion in the Offer Documents. The Offer Documents will comply as to form in
all material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
SECTION 8.08 INFORMATION STATEMENTS. (a) The Company shall give Purchaser
and its counsel the opportunity to review the information statements to be
disseminated to stockholders of the Company in connection with the Distributions
(the "Information Statements") prior to its being filed with the SEC and shall
give Purchaser and its counsel the opportunity to review all amendments and
supplements to the Information Statements and all responses to requests for
additional information and replies to comments prior to their being filed with,
or sent to, the SEC. The Company shall notify Purchaser of the receipt of any
comments from the SEC or its staff and of any request by the SEC or its staff
for amendments or supplements to the Information Statements or for additional
information and shall supply Purchaser and its counsel with copies of all
correspondence between the Company or any of its representatives, on the one
hand, and the SEC or its staff, on the other hand, with respect to the
Information Statements. If at any time prior to completion of the Distributions
there shall occur any event that should be set forth in an amendment or
supplement to the Information Statement, the Company will prepare and file with
the SEC and disseminate to its stockholders such an amendment or supplement.
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(b) The Information Statements will not, on the date filed with the SEC and
as of the date first disseminated to the Company's stockholders, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading except that
no representation is made by the Company with respect to statements made therein
based on information concerning Purchaser or its Affiliates supplied in writing
by Purchaser or any of its Affiliates specifically for inclusion in the
Information Statements. The Information Statements will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
SECTION 8.09 [INTENTIONALLY OMITTED.]
SECTION 8.10 TAX STANDSTILL. Except as permitted by Section 6.01(b) or
6.01(c), during the period ending two years after the date of the Distributions,
(i) Purchaser shall not acquire any Securities or take any other action that
would cause Purchaser's Percentage Interest to equal or exceed 50%, (ii) none of
Purchaser, the Fund or CD&R shall act in concert with any other Person to
acquire any Securities if aggregating such acquisition with the Purchaser's
holdings would cause the Purchaser's Percentage Interest to equal or exceed 50%,
and (iii) none of Purchaser, the Fund or CD&R shall solicit the acquisition of
any Securities, provided that the provision by the Fund to its limited partners
of customary reports and information, and customary communication with such
limited partners on behalf of the Fund, with respect to the Fund's investment in
the Company that, in either case, do not recommend any such acquisition, shall
not be treated as a solicitation by the Purchaser within the meaning of this
clause (iii).
SECTION 8.11 ACCESS AND INFORMATION. (a) So long as this Agreement remains
in effect, prior to the Closing, the Company will (and will cause each of the
Retained Companies, and each of their respective accountants, counsel,
consultants, officers, directors, employees, agents and representatives of or to
any of the Retained Companies, to) give Purchaser and its Representatives, full
access during reasonable business hours to all of their respective properties,
assets, books, contracts, commitments, reports and records relating to the
Retained Companies, and furnish to them all such documents, records and
information with respect to the properties, assets and business of the Retained
Companies and copies of any work papers relating thereto as Purchaser shall from
time to time reasonably request. The Company will keep Purchaser generally
informed as to the affairs of the Retained Business.
(b) In addition, the Company shall deliver to Purchaser, not later than the
35th day following the end of each fiscal month prior to the Closing, updated
Pro Forma Retained Business Financial Statements as of the end of such fiscal
month.
SECTION 8.12 FURTHER ACTIONS. (a) The Company shall, and shall cause each
of the Retained Companies to, use reasonable best efforts to take or cause to be
taken all actions, and to do or cause to be done all other things, necessary,
proper or advisable in order for each of the Retained Companies to fulfill and
perform its obligations in respect of this Agreement and the Transaction
Agreements to which it is a party, or otherwise to consummate and make effective
the transactions contemplated hereby and thereby.
(b) The Company shall (and shall cause each of the Retained Companies to),
as promptly as practicable, (i) make, or cause to be made, all filings and
submissions (including but not limited to under the HSR Act and foreign
antitrust filings) required under any law applicable to any of the Retained
Companies, and give such reasonable undertakings as may be required in
connection therewith, and (ii) use all reasonable efforts to obtain or make, or
cause to be obtained or made, all Permits necessary to be obtained or made by
any of the Retained Companies, in each case in connection with this Agreement or
the Transaction Agreements, the sale and transfer of the Shares, the Special
Warrants and the Warrants pursuant hereto, or the consummation of the other
transactions contemplated hereby or thereby.
(c) The Company shall, and shall cause each of the Retained Companies to,
coordinate and cooperate with Purchaser in exchanging such information and
supplying such reasonable assistance as may
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be reasonably requested by Purchaser in connection with the filings and other
actions contemplated by this Agreement.
(d) At all times prior to the Closing Date, the Company shall promptly
notify Purchaser in writing of any fact, condition, event or occurrence that
could reasonably be expected to result in the failure of any of the conditions
contained in Article IX to be satisfied, promptly upon becoming aware of the
same.
SECTION 8.13 FURTHER ASSURANCES. Following the Closing Date, the Company
shall, and shall cause each of the Retained Companies to, from time to time,
execute and deliver such additional instruments, documents, conveyances or
assurances and take such other actions as shall be necessary, or otherwise
reasonably be requested by Purchaser, to confirm and assure the rights and
obligations provided for in this Agreement and the Transaction Agreements and
render effective the consummation of the transactions contemplated hereby and
thereby, or otherwise to carry out the intent and purposes of this Agreement.
ARTICLE IX
CONDITIONS PRECEDENT
SECTION 9.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The obligations of the
Company and Purchaser to consummate the transactions contemplated to occur at
the Closing shall be subject to the satisfaction prior to the Closing of each of
the following conditions, each of which may be waived only if it is legally
permissible to do so:
(a) HSR AND OTHER APPROVALS. Any applicable waiting period under the HSR
Act relating to the transactions contemplated hereby shall have expired or been
terminated, and all other material authorizations, consents, orders or approvals
of, or regulations, declarations or filings with, or expirations of applicable
waiting periods imposed by, any Governmental Entity (including, without
limitation, any foreign antitrust filing) necessary for the consummation of the
transactions contemplated hereby, shall have been obtained or filed or shall
have occurred.
(b) NO LITIGATION, INJUNCTIONS, OR RESTRAINTS. No statute, rule,
regulation, executive order, decree, temporary restraining order, preliminary or
permanent injunction or other order enacted, entered, promulgated, enforced or
issued by any Governmental Entity or other legal restraint or prohibition
preventing the consummation of the transactions contemplated by this Agreement
or any of the Transaction Agreements shall be in effect.
(c) STOCKHOLDERS VOTE. The Company Stockholder Approval shall have been
obtained.
(d) NASDAQ LISTING. The Shares shall have been approved for listing on the
Nasdaq Stock Market, subject only to official notice of issuance.
(e) CONSUMMATION OF DISTRIBUTIONS. The distribution of the businesses of
School, Travel, Technology, Print and their respective Subsidiaries shall have
occurred pursuant to the Distribution Agreements, which shall contain
provisions:
(i) effecting the Pre-Distribution Transactions;
(ii) allocating assets and liabilities among the Distributed Companies and
the Retained Companies;
(iii) allocating among the Distributed Companies an aggregate of $130 million
of corporate debt, in addition to acquisition debt incurred in respect of
acquisitions effected after the date hereof;
(iv) allocating among the Distributed Companies and the Company on a pro
rata basis all liabilities of the Distributed Companies not properly allocable
to any specific Distributed Company or to the Company;
(v) with respect to current and planned cross-selling opportunities between
the Distributed Companies and the Retained Companies; and
(vi) allocating on a pro rata basis the transaction costs associated with
the Transactions.
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(f) Tax Allocation Agreement. The Tax Allocation Agreement shall have been
executed and shall contain the following provisions:
(i) a joint and several indemnity from the Distributed Companies in favor of
the Company and the Retained Subsidiaries from and against any Losses with
respect to Taxes resulting from any Adverse Tax Act of any of the Distributed
Companies or their Subsidiaries;
(ii) an indemnity from each of the Distributed Companies in favor of the
Company from and against any Losses with respect to Taxes resulting from the
Pre-Distribution Transactions or the Distributions, as a result of the failure
of the Pre-Distribution Transactions or the Distributions to qualify under
sections 355 or 368 of the Code or otherwise, including, without limitation, by
reason of any stock or securities of any Distributed Company failing to qualify
as "qualified property" within the meaning of section 355(c)(2) of the Code,
except to the extent such Losses result from any Adverse Tax Act by any of the
Company, the Retained Subsidiaries, the Distributed Companies or any of their
Subsidiaries, provided that each Distributed Company shall be only liable for
the portion of such Losses that bears the same ratio to the aggregate amount of
such Losses as the Market Capitalization of such Distributed Company bears to
the aggregate Market Capitalization of the Company and the Distributed Companies
and provided, further, that each Distributed Company shall be liable for 100% of
any such Losses attributable to any "deferred intercompany transaction" to the
extent such Loss is attributable to any "intercompany item" that such
Distributed Company or any of its Subsidiaries is required to take into account
immediately prior to the Distributions pursuant to Treasury Regulations section
1.1502-13;
(iii) customary provisions providing for control and participation rights
with respect to any administrative and judicial proceedings with respect to
Taxes, including the right of the Person primarily responsible for the relevant
indemnification obligation thereunder to control any such proceeding.
Notwithstanding anything to the contrary in the preceding sentence, no
Distributed Company shall be entitled to assume control of any portion of any
administrative or judicial proceeding with respect to Taxes unless such
Distributed Company shall have theretofore acknowledged in writing its liability
for such Taxes pursuant to the Tax Allocation Agreement; and
(iv) Any tax saving or other benefit attributable any compensation deduction
arising from or in connection with the exercise by any Employee of the Company
or any of its Subsidiaries of any option granted under any of the Company Stock
Plans shall be apportioned to the entity whose shares were issued upon the
exercise of such option, provided that any compensation deduction arising from
or in connection with any such exercise on or prior to the Closing Date by any
Employee of any Distributed Company or any of its Subsidiaries shall be
apportioned to such Distributed Company.
SECTION 9.02 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations
of the Company to consummate the transactions contemplated to occur at the
Closing shall be subject to the satisfaction or waiver thereof prior to the
Closing of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Purchaser that are qualified as to materiality shall be true and correct,
and those that are not so qualified shall be true and correct in all
material respects, as of the date of this Agreement and as of the time of
the Closing as though made at and as of such time, except to the extent such
representations and warranties expressly relate to an earlier date (in which
case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, on and as of such
earlier date) and the Company shall have received a certificate signed by an
authorized officer of Purchaser to such effect.
(b) OPINION OF PURCHASER'S COUNSEL. The Company shall have received an
opinion dated as of the Closing of Debevoise & Plimpton, counsel to
Purchaser, in form and substance reasonably satisfactory to the Company.
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(c) REGISTRATION RIGHTS AGREEMENT. Purchaser shall have executed and
delivered the Registration Rights Agreement.
SECTION 9.03 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligations of
Purchaser to consummate the transactions contemplated to occur at the Closing
shall be subject to the satisfaction or waiver thereof prior to the Closing of
each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company set forth in this Agreement that are qualified as to materiality
shall be true and correct, and those that are not so qualified shall be true and
correct in all material respects, as of the date of this Agreement and as of the
time of the Closing as though made at and as of such time, except to the extent
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified shall
be true and correct in all material respects, on and as of such earlier date),
and Purchaser shall have received a certificate signed by the chief executive
officer and chief financial officer of the Company to such effect.
(b) TRANSACTION AGREEMENTS. Each Transaction Agreement to which the
Company is a party shall have been executed without modification from the forms
as in existence at the Review Cut-off Time or such earlier date as Purchaser
completed its review of such agreement.
(c) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed or complied in all material respects with all obligations and
covenants required to be performed or complied with by the Company under this
Agreement, and Purchaser shall have received a certificate signed by the chief
executive officer and chief financial officer of the Company to such effect.
(d) OPINION OF THE COMPANY'S COUNSEL. Purchaser shall have received
opinions dated as of the Closing of the general counsel of the Company, and
Wilmer, Cutler & Pickering, counsel to the Company, in form and substance
reasonably satisfactory to Purchaser.
(e) REGISTRATION RIGHTS AGREEMENT. The Company shall have executed and
delivered the Registration Rights Agreement.
(f) FINANCINGS. The Company shall have entered into definitive
documentation for the Proposed Financings and such definitive documentation
shall be satisfactory in form and substance to Purchaser.
(g) TENDER OFFER. The Company shall have consummated the Tender Offer as
provided for herein.
(h) CONSULTING AGREEMENT; TRANSACTION FEE. The Company shall have (A)
entered into a consulting agreement with CD&R providing for an annual fee of
$500,000 (plus reasonable out-of-pocket expenses) in connection with consulting
and advisory services and a related indemnification agreement and (B) authorized
payment to CD&R of the Transaction Fee and the Transaction Fee shall have been
paid to CD&R. The consulting agreement shall terminate at the later of (i) the
fifth anniversary of the Closing Date and (ii) such time as Purchaser is
entitled to nominate only one Investor Director.
(i) OTHER PARTIES. (A) No Person or "group" (as defined in the Exchange
Act), other than Purchaser, shall have acquired beneficial ownership of more
than 15% of the outstanding shares of Voting Securities, and (B) no Person
(other than Purchaser or one or more of its Affiliates) shall have entered into
an agreement in principle or definitive agreement with the Company with respect
to a tender or exchange offer for any shares of Common Stock or a merger,
consolidation or other business combination with or involving the Company.
(j) CORPORATE PROCEEDINGS. All corporate proceedings of the Company in
connection with the transactions contemplated by this Agreement and the
Transaction Agreements, and all documents and instruments incident thereto,
shall be satisfactory in form and substance to Purchaser and its counsel, and
Purchaser and its counsel shall have received all such documents and
instruments, or copies thereof, certified or requested, as may be reasonably
requested.
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(k) MANAGEMENT PLAN. Purchaser shall have completed discussions with
management which satisfactorily confirm to Purchaser that the operating
prospects of the Retained Business (exclusive of acquisitions), are, taken as a
whole, not materially inconsistent with the Company's forecasts (excluding (i)
the impact on the Company's earnings for fiscal quarters ending prior to or
including the Closing caused by the inability of the Company to complete
acquisitions following announcement of the Transactions and/or to account for
acquisitions as poolings of interest and (ii) the effect on the Company of being
required as a result of the Transactions to change accounting treatment for past
acquisitions from poolings of interests to purchases); provided, however, that
this condition shall be deemed satisfied if Purchaser shall not have given
notice to the Company on or prior to February 3, 1998 that Purchaser has
concluded that this condition has not been satisfied.
(l) BOARD OF DIRECTORS. The Board of Directors of the Company shall
consist of 9 persons, including the chief executive officer of the Company,
three designees of Purchaser, three persons selected by the current Board of
Directors and two persons who shall be satisfactory to both Purchaser and the
current Board of Directors of the Company.
(m) MATERIAL ADVERSE EFFECT. No event, change or development shall exist
or have occurred since October 25, 1997 which has had or is reasonably likely to
have a Material Adverse Effect on the Retained Companies, taken as a whole.
(n) DEBT AMOUNTS. The outstanding debt of the Retained Companies shall not
exceed $1.4 billion (after giving effect to the Transactions and assuming
conversion of all issued and outstanding 2001 Notes) and the outstanding debt of
the Distributed Companies shall be at least $130 million plus the expenditures
by the entities comprising such Distributed Companies for acquisitions after the
date hereof.
(o) OPTIONS. The Company's arrangements with respect to Management options
shall be satisfactory to Purchaser in its good faith reasonable judgment.
ARTICLE X
TERMINATION
SECTION 10.01 TERMINATION. This Agreement may be terminated at any time
prior to the Closing, whether before or after the Company Stockholder Approval
has been obtained:
(a) by mutual written consent of Purchaser and the Company;
(b) by Purchaser or the Company:
(i) if the Closing shall not have occurred prior to September 30, 1998,
provided, that the right to terminate this Agreement pursuant to this clause (i)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement results in the failure of the Closing to occur;
(ii) if the Company Stockholder Approval shall not have been obtained by
reason of the failure to obtain the required vote upon a vote held at the
Company Meeting, or such meeting shall not have been held by September 30, 1998;
(iii) if there shall be any statute, law, regulation or rule that makes
consummating the transactions contemplated hereby illegal or if any court or
other Governmental Entity of competent jurisdiction shall have issued a
judgment, order, decree or ruling, or shall have taken such other action
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated hereby and such judgment, order, decree or ruling
shall have become final and non-appealable;
(c) by Purchaser:
(i) if the Company shall have failed to perform in any material respect any
of its obligations hereunder or shall have breached in any respect any
representation or warranty contained herein qualified by materiality or shall
have breached in any material respect any representation or warranty not so
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qualified, and the Company has failed to perform such obligation or cure such
breach, within 30 days of its receipt of written notice thereof from Purchaser,
and such failure to perform shall not have been waived in accordance with the
terms of this Agreement;
(ii) if the Board of Directors of the Company or any committee thereof
withdraws or modifies (or publicly announces its intention to do so, or
resolves to do so) in a manner adverse to Purchaser (as determined by
Purchaser in its reasonable judgment) its approval or recommendation of this
Agreement or the transactions contemplated hereby or approves or recommends
a Transaction Proposal;
(iii) if the Board of Directors of the Company publicly announces its
determination not to effect the Distributions;
(iv) if any of the conditions set forth in Section 9.01 or 9.03 shall
become impossible to fulfill (other than as a result of any breach by
Purchaser of the terms of this Agreement) and shall not have been waived in
accordance with the terms of this Agreement;
(v) if permitted pursuant to Section 8.04 or 8.06;
(vi) if the Company shall make any substantive amendment to any
Transaction Agreement after the Review Cut-Off Time without Purchaser's
consent;
(d) by the Company:
(i) if Purchaser shall have failed to perform in any material respect
any of its obligations hereunder or shall have breached in any respect any
representation or warranty contained herein qualified by materiality or
shall have breached in any material respect any representation or warranty
not so qualified, and Purchaser has failed to perform such obligation or
cure such breach, within 30 days of its receipt of written notice thereof
from the Company, and such failure to perform shall not have been waived in
accordance with the terms of this Agreement;
(ii) if any of the conditions set forth in Section 9.01 or 9.02 shall
become impossible to fulfill (other than as a result of any breach by the
Company of the terms of this Agreement) and shall not have been waived in
accordance with the terms of this Agreement;
(iii) if permitted pursuant to Section 8.02(b).
SECTION 10.02 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either the Company or Purchaser as provided in Section 10.01, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Purchaser or the Company, other than the provisions
of this Section 10.02, Section 13.09 and Article XI and except to the extent
that such termination results from the wilful and material breach by a party of
any of its representations, warranties, covenants or agreements set forth in
this Agreement.
ARTICLE XI
INDEMNIFICATION
SECTION 11.01 INDEMNIFICATION OF PURCHASER. The Company covenants and
agrees to defend, indemnify and hold harmless each of Purchaser, its Affiliates
(other than the Company and any Retained Companies), and their respective
officers, directors, partners, employees, agents, advisers and representatives
including, without limitation, the Fund, CD&R Investment Associates, Inc., a
Delaware corporation, and CD&R Associates V Limited Partnership, a Cayman
Islands exempted limited partnership, and CD&R (collectively, the "Purchaser
Indemnitees") from and against, and pay or reimburse the Purchaser Indemnitees
for, any and all claims, demands, liabilities, obligations, losses, costs,
expenses, fines or damages (whether absolute, accrued, conditional or otherwise
and whether or not resulting from third party claims), including interest and
penalties with respect thereto and out-of-pocket expenses and
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reasonable attorneys' and accountants' fees and expenses incurred in the
investigation or defense of any of the same or in asserting, preserving or
enforcing any of their respective rights hereunder (collectively, "Losses"),
resulting from or based on (or allegedly resulting from or based on):
(i) any actions (including by any shareholders of the Company in
connection with any derivative actions) resulting from or based on (or
allegedly resulting from or based on) any of the Transactions, provided that
the indemnity provided in this clause (i) shall not include (A) actions
brought by any limited partner of the Fund against Purchaser or any of its
Affiliates relating to the transactions contemplated by this Agreement, (B)
Losses resulting from or based on the acts or omissions of a Purchaser
Indemnitee following the Closing, (C) claims resulting from or based on (1)
a breach by Purchaser of its obligations under this Agreement, (2) any
contract, agreement, obligation, commitment, understanding or other
arrangement between the claimant and any Purchaser Indemnitee, (3) any
intentional tort by a Purchaser Indemnitee or (4) any fee, compensation or
other payment to be paid to any Purchaser Indemnitee;
(ii) subject to the limitations set forth in Section 11.03, any breach
by the Company of any representation, warranty, covenant or obligation of
the Company hereunder; and
(iii) any failure of any of the Distributed Companies to satisfy its
stated obligations and liabilities under the Distribution Agreements, the
Tax Allocation Agreement or any of the other Transaction Agreements to which
it is a party, whether by virtue of such agreement's unenforceability, the
Distributed Company's bankruptcy or otherwise.
The Losses described in clauses (i), (ii) and (iii) of this Section 11.01(a)
are herein referred to as "Purchaser Indemnifiable Losses". The Company shall
reimburse the Purchaser Indemnitees for any legal or other expenses incurred by
such Purchaser Indemnitees in connection with investigating or defending any
such Purchaser Indemnifiable Losses as such expenses are incurred.
SECTION 11.02 INDEMNIFICATION PROCEDURES. Promptly after receipt by a
Purchaser Indemnitee of notice of the commencement of any action or the written
assertion of any claim, such Purchaser Indemnitee shall, if a claim in respect
thereof is to be made against the Company, as the case may be (the "Indemnifying
Person"), notify the Indemnifying Person in writing of the commencement or the
written assertion thereof. Failure by a Purchaser Indemnitee to so notify the
Indemnifying Person shall relieve the Indemnifying Person from the obligation to
indemnify such Purchaser Indemnitee only to the extent that the Indemnifying
Person suffers actual and material prejudice as a result of such failure but in
no event shall such failure to notify the Indemnifying Person (i) constitute
prejudice suffered by the Indemnifying Person if it has otherwise received
notice of the actions giving rise to such obligation to indemnify or (ii)
relieve it from any liability or obligation that it may otherwise have to such
Purchaser Indemnitee. In case any such action or claim shall be brought or
asserted against any Purchaser Indemnitee and it shall notify the Indemnifying
Person of the commencement or assertion thereof, the Indemnifying Person shall
be entitled to participate therein but the defense of such action or claim shall
be conducted by counsel to the Purchaser Indemnitee, provided, however, that the
Indemnifying Person shall not, in connection with any one such action or
proceeding or separate but substantially similar actions or proceedings arising
out of the same general allegations, be liable for the fees and expenses of more
than one separate firm of attorneys at any time for all Purchaser Indemnitees,
except to the extent that local counsel, in addition to regular counsel, is
required in order to effectively defend against such action or proceeding and
provided further that a Purchaser Indemnitee shall not enter into any settlement
of any such claim without the prior consent of the Company, such consent not to
be unreasonably withheld or delayed.
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SECTION 11.03 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company contained in this Agreement shall
expire for all purposes on the first anniversary of the Closing Date, except for
the representations and warranties contained in Sections 3.01(n), 3.01(o) and
3.01(p), which shall expire for all purposes upon expiration of the applicable
statute of limitations.
ARTICLE XII
INTERPRETATION; DEFINITIONS
SECTION 12.01 INTERPRETATION. As used in this Agreement:
(a) any reference to the Company and its Subsidiaries means the Company and
each of its Subsidiaries;
(b) any reference to the "Retained Company" and its Subsidiaries or the
"Retained Companies" means the Company and those of its Subsidiaries included in
the Retained Business;
(c) any reference to the "Retained Subsidiaries" means the Subsidiaries of
the Company included in the Retained Business;
(d) any reference to School, Travel, Technology or Print and their
Subsidiaries means School, Travel, Technology or Print immediately after
completion of the Distributions and those entities that immediately after the
completion of the Distributions will be Subsidiaries of School, Travel,
Technology or Print.
SECTION 12.02 DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
"2001 Notes" is defined in the recitals to this Agreement.
"2003 Notes" is defined in Section 3.01(d).
"Adverse Tax Act" means, for any Person, any action of such Person, or any
omission by such Person of an action reasonably available to it, after the date
of the Distributions, that materially contributes to a Final Determination that
the Pre-Distribution Transactions or any of the Distributions results in the
recognition of gain to the Company by virtue of the Pre-Distribution
Transactions or any of the Distributions failing to qualify under sections 355
or 368 of the Code, including, without limitation, by reason of any stock or
securities of any Distributed Company failing to qualify as "qualified property"
within the meaning of section 355(c)(2) of the Code, or otherwise.
"Affiliate" shall have the meaning set forth in Rule 12b-2 under the
Exchange Act (as in effect on the date of this Agreement).
"Agreement" is defined in the recitals to this agreement.
"Assets" is defined in Section 3.01(k).
"Audited Balance Sheet" is defined in Section 3.01(g)(iv).
"Audited Retained Business Financial Statements" is defined in 3.01(g)(iv).
"Balance Sheet" is defined in Section 3.01(g)(i).
"Beneficially Own" with respect to any securities means having "beneficial
ownership" of such securities (as determined pursuant to Rule 13d-3 under the
Exchange Act), including pursuant to any agreement, arrangement or
understanding, whether or not in writing.
"Business Day" means any day on which banking institutions are open in the
City of New York.
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<PAGE>
"Buyout Transaction" means a tender offer, merger, sale of all or
substantially all the Company's assets or any similar transaction that offers
each holder of Voting Securities (other than, if applicable, the Person
proposing such transaction) the opportunity to dispose of Voting Securities
Beneficially Owned by each such holder for the same consideration or otherwise
contemplates the acquisition of Voting Securities Beneficially Owned by each
such holder for the same consideration.
"Cash Transaction" is defined in Section 4.02(b)(i).
"CD&R" means Clayton, Dubilier & Rice, Inc., a Delaware corporation.
"Closing" is defined in Section 1.02.
"Closing Date" is defined in Section 1.02.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" is defined in the recitals to this Agreement.
"Company" is defined in the recitals to this Agreement.
"Company Business Financial Statements" is defined in Section 3.01(g)(i).
"Company By-laws" is defined in Section 3.01(a).
"Company Charter" is defined in Section 3.01(a).
"Company Intellectual Property" is defined in Section 3.01(s).
"Company Meeting" is defined in Section 8.05(a).
"Company Meeting Proposal" is defined in Section 8.05(a).
"Company SEC Documents" is defined in Section 3.01(f).
"Company Stock Plans" is defined in Section 3.01(d).
"Company Stockholder Approval" is defined in Section 3.01(b).
"Contingent Stock" means Common Stock issued after the Closing Date pursuant
to (i) the Amendment to Stock Purchase Agreement, dated as of June 20, 1996, by
and between the Company and Eric Watson or (ii) any security, option, warrant,
call, subscription, right, contract, commitment, arrangement or understanding
required to be disclosed on Schedule 3.01(d) but not disclosed thereon.
"Contract" is defined in Section 3.01(c)(i).
"Delivery Cut-off Time" is defined in Section 8.04.
"DGCL" is defined in Section 3.01(q).
"Distribution Agreements" is defined in the recitals to this Agreement.
"Distributions" is defined in the recitals to this Agreement.
"Distributed Companies" is defined in the recitals to this Agreement.
"Employee" means any employee or former employee of any member of the
Company or any of its Subsidiaries or any beneficiary or dependent of any such
employee or former employee.
"Employee Benefit Plans" means all defined contribution, defined benefit,
welfare benefit, bonus, incentive compensation, stock option, stock purchase,
stock appreciation right, stock bonus, incentive, deferred compensation,
insurance, medical, dental, vision, life, death benefit, fringe benefit or other
employee benefit plans, programs, policies or arrangements, including without
limitation, any employment, consulting, offer, secondment, severance or other
termination agreement, whether or not an employee
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<PAGE>
benefit plan within the meaning of section 3(3) of ERISA, maintained by the
Company or any of its Subsidiaries.
"Environmental Law" is defined in Section 3.01(p).
"Environmental Permits" is defined in Section 3.01(p).
"Equity Security" means (i) any Common Stock or other Voting Securities,
(ii) any securities of the Company convertible into or exchangeable for Common
Stock or other Voting Securities or (iii) any options, rights or warrants (or
any similar securities) issued by the Company to acquire Common Stock or other
Voting Securities.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" is defined in Section 3.01(c)(ii).
"Filed Company SEC Documents" is defined in Section 3.01(i).
"Final Determination" means the final resolution of liability for any Tax
for any taxable period, including any related interest or penalties, by or as a
result of: (i) a final and unappealable decision, judgment, decree or other
order of a court of competent jurisdiction; (ii) a closing agreement or accepted
offer in compromise under Section 7121 or 7122 of the Code, or comparable
agreement under the laws of other jurisdictions, which resolves the entire tax
liability for any tax period; (iii) any allowance of a refund or credit in
respect of an overpayment of Tax, but only after the expiration of all periods
during which such refund may be recovered (including by way of offset) by the
applicable taxing jurisdiction; or (iv) any other final disposition, including
by reason of the expiration of the applicable statute of limitations.
"Fund" means Clayton, Dubilier & Rice Fund V Limited Partnership, a Cayman
Islands exempted limited partnership.
"GAAP" means United States generally accepted accounting principles.
"Governmental Entity" is defined in Section 3.01(c)(ii).
"Hazardous Substance" is defined in Section 3.01(p).
"HSR Act" is defined in Section 3.01(c)(ii).
"Indemnifying Person" is defined in Section 11.02.
"Information Statement" is defined in Section 8.08(a).
"Intellectual Property" means trademarks, trade names, trade dress, service
marks, copyrights, domain names, and similar rights (including registrations and
applications to register or renew the registration of any of the foregoing),
patents and patent applications, trade secrets, ideas, inventions, improvements,
practices, processes, formulas, designs, know-how, confidential business or
technical information, computer software, firmware, data and documentation,
licenses of or agreements relating to any of the foregoing, rights of privacy
and publicity, moral rights, and any other similar intellectual property rights
and tangible embodiments of any of the foregoing (in any medium including
electronic media).
"Investor Directors" is defined in Section 4.01.
"Issuance" is defined in Section 8.05(a).
"knowledge of the Company" or any like expression means to the knowledge of
the persons listed on Schedule 12.02 after due inquiry.
"Lien" is defined in Section 3.01(c)(i).
"Losses" is defined in Section 11.01(a).
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<PAGE>
"Market Capitalization" means, for any entity, the market capitalization of
such entity determined on the basis of the average closing price for the common
stock of such entity for the five-day period ending on the tenth day after the
date of the Distributions.
"Material Adverse Effect" on or with respect to an entity (or group of
entities taken as a whole) means any state of facts, event, change or effect
that has had, or would reasonably be expected to have, a material adverse effect
on the business, properties, results of operations or financial condition of
such entity (or, if with respect thereto, of such group of entities taken as a
whole), or on the ability of such entity (or group of entities) to consummate
the transactions contemplated hereby, including the Pre-Distribution
Transactions and the Distributions, or to perform its obligations under the
Transaction Agreements to which it is or will be a party; provided, however,
that a "Material Adverse Effect" shall exclude (i) the impact on the Company's
earnings for fiscal quarters ending prior to or including the Closing caused by
the inability of the Company to complete acquisitions following the announcement
of the Transactions and/or to account for acquisitions as poolings of interest
and (ii) the effect on the Company of being required as a result of the
Transactions to change accounting treatment for past acquisitions from poolings
of interests to purchases.
"Material Contracts" is defined in Section 3.01(m).
"Material Subsidiary" is defined in Section 3.01(a).
"New Security" means any Equity Security issued by the Company after the
Closing; provided that "New Security" shall not include (i) any securities
issuable upon conversion of any convertible Equity Security, (ii) any securities
issuable upon exercise of any option, warrant or other similar Equity Security
or (iii) any securities issuable in connection with any stock split, stock
dividend or recapitalization of the Company where such securities are issued to
all stockholders of the Company on a pro rata basis.
"Non-Investor Directors" is defined in Section 4.01.
"Notes to Pro Forma Financial Statements" is defined in Section
3.01(g)(iii).
"Offer Conditions" is defined in Section 8.07(a).
"Offer Documents" is defined in Section 8.07(b).
"Other Holders" means the holders of the Other Shares.
"Other Shares" means Voting Securities not Beneficially Owned by Purchaser
or its Affiliates.
"Permit" is defined in Section 3.01(c)(i).
"Permitted Liens" shall mean those Liens (A) securing debt that is reflected
on the Balance Sheet or the notes thereto or securing debt incurred as part of
the Proposed Financings, (B) referred to in Schedule 3.01(l), (C) for Taxes not
yet due or payable or being contested in good faith and for which adequate
reserves have been established in accordance with GAAP, (D) that constitute
mechanics', carriers', workmens' or like liens, liens arising under original
purchase price conditional sales contracts and equipment leases with third
parties entered into in the ordinary course, (E) Liens incurred or deposits made
in the ordinary course of business consistent with past practice in connection
with workers' compensation, unemployment insurance and social security,
retirement and other legislation and (F) easements, covenants, declarations,
rights of way, encumbrances, or similar restrictions in connection with real
property owned by certain of the Retained Subsidiaries that do not materially
impair the use of such real property by such Retained Subsidiaries, and in the
case of Liens described in clauses (B), (C), (D), (E) or (F) that, individually
or in the aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole.
"Permitted Options" is defined in Section 4.02(a)(i).
"Permitted Securities Transaction" is defined in Section 4.02(b)(ii).
B-36
<PAGE>
"Person" means any individual, partnership, joint venture, corporation,
limited liability company, trust, unincorporated organization, government or
department or agency of a government.
"Plans" is defined in Section 3.01(o)(ii).
"Pre-Distribution Transactions" means the contribution of certain assets,
the assumption of certain liabilities and other transfers contemplated by the
respective Distribution Agreements, pursuant to which the respective businesses
of School, Travel, Technology and Print will be consolidated under such
corporations prior to the Distributions.
"Print" is defined in the recitals to this Agreement.
"Print Distribution" is defined in the recitals to this Agreement.
"Print Distribution Agreement" is defined in the recitals to this Agreement.
"Pro Forma Balance Sheet" is defined in Section 3.01(g)(iii).
"Pro Forma Income Statements" is defined in Section 3.01(g)(iii).
"Pro Forma Retained Business Financial Statements" is defined in Section
3.01(g)(iii).
"Pro Rata Share" means the fraction of an entire issuance of New Securities,
the numerator of which shall be the number of shares of Common Stock owned or
receivable upon exercise of the Warrant and the Special Warrant by Purchaser and
its Affiliates (other than the Company and its Subsidiaries) immediately prior
to such issuance of such New Securities and the denominator of which shall be
the aggregate number of shares of Common Stock outstanding immediately prior to
such issuance of such New Securities and receivable upon exercise of the Warrant
and the Special Warrant.
"Proposed Charter Amendments" is defined in Section 4.05.
"Proposed Financings" is defined in the recitals to this Agreement.
"Proxy Statement" is defined in Section 8.05(b).
"Purchase Price" is defined in Section 1.01.
"Purchaser" is defined in the recitals to this Agreement.
"Purchaser Indemnifiable Losses" is defined in Section 11.01(a).
"Purchaser Indemnitees" is defined in Section 11.01(a).
"Purchaser's Expenses" is defined in Section 13.09(b).
"Purchaser's Percentage Interest" means the greater of (i) the percentage of
Total Voting Power, determined on the basis of the number of Voting Securities
actually outstanding, that is controlled directly or indirectly by Purchaser or
any Subsidiary or Affiliate of Purchaser (other than the Company and its
Subsidiaries), including by beneficial ownership and (ii) the percentage of the
total Fair Market Value of all classes of outstanding capital stock of the
Company that is owned directly or indirectly by Purchaser or any Subsidiary or
Affiliate of Purchaser (other than the Company and its Subsidiaries), including
by beneficial ownership. For purposes of determining Purchaser's Percentage
Interest, (a) any options, rights, warrants (including the Warrants and the
Special Warrants) and similar securities that entitle the holder thereof to
acquire shares of any class of capital stock of the Company, whether voting or
non-voting, shall be treated as exercised; (b) any debt security that is
convertible into shares of any class of capital stock of the Company, whether
voting or non-voting, shall be treated as converted; and (c) any equity security
that is convertible into shares of any class of capital stock of the Company,
whether voting or non-voting, shall be treated as converted, but only to the
extent that such conversion would result in Purchaser's Percentage Interest
being greater than such interest would be if such conversion had not been deemed
to occur.
"Purchaser's Total Securities" is defined in Section 4.01(b)(i).
"Registration Rights Agreement" is defined in the recitals to this
Agreement.
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<PAGE>
"Retained Business" means the business and operation of the Retained
Companies.
"Retained Companies" is defined in Section 12.01(b).
"Retained Plans" is defined in Section 3.01(O)(i).
"Retained Subsidiaries" is defined in Section 12.01(c).
"Review Cut-off Time" is defined in Section 8.04.
"School" is defined in the recitals to this Agreement.
"School Distribution" is defined in the recitals to this Agreement.
"School Distribution Agreements" is defined in the recitals to this
Agreement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" is defined in Section 3.01(c)(ii).
"Security" means at any time Equity Securities and any shares of any class
of capital stock of the Company.
"Shares" is defined in Section 1.01.
"Special Warrants" is defined in the recitals to this Agreement.
"Special Warrant Shares" means shares of Common Stock issuable upon exercise
of the Special Warrants.
"Subscription Notice" is defined in Section 5.01.
"Subsidiary" means, as to any Person, any corporation at least a majority of
the shares of stock of which having general voting power under ordinary
circumstances to elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency) is, at the time as of which the determination is being made, owned
by such Person, or one or more of its Subsidiaries or by such Person and one or
more of its Subsidiaries.
"Superior Proposal" is defined in Section 8.02(b).
"Tax Allocation Agreement" is defined in the recitals to this Agreement.
"Tax Returns" is defined in Section 3.01(n)(i).
"Taxes" is defined in Section 3.01(n)(i).
"Technology" is defined in the recitals to this Agreement.
"Technology Distribution" is defined in the recitals to this Agreement.
"Technology Distribution Agreement" is defined in the recitals to this
Agreement.
"Tender Offer" is defined in the recitals to this Agreement.
"Tender Offer Statement" is defined in Section 8.07(b).
"Termination Fee" is defined in Section 13.09(b).
"Total Voting Power" means at any time the total combined voting power in
the general election of directors of all the Voting Securities then outstanding.
"Transactions" means the execution, delivery and performance of each
Transaction Agreement by the Company and the consummation by the Company of the
Pre-Distribution Transactions, the Distributions,
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<PAGE>
the Proposed Financings, the Tender Offer, the issuance and sale by the Company
of the Shares, the Special Warrants and the Warrants, and of the other
transactions contemplated by the Transaction Agreements.
"Transaction Agreements" means, collectively, this Agreement, the Special
Warrant, the Warrant, the Registration Rights Agreement, the Distribution
Agreements, the Tax Allocation Agreement, the tax representation letters to be
delivered in connection with the Distributions and such other agreements as are
entered into to effect the Pre-Distribution Transactions, including, without
limitation, any employee benefits agreement, intellectual property agreement and
transitional services agreement.
"Transaction Fee" means an amount equal to $15 million plus out-of-pocket
expenses.
"Transaction Proposal" is defined in Section 8.02.
"Travel" is defined in the recitals to this Agreement.
"Travel Distribution" is defined in the recitals to this Agreement.
"Travel Distribution Agreement" is defined in the recitals to this
Agreement.
"Unaudited Company Business Financial Statements" is defined in Section
3.01(g)(ii).
"Voting Securities" means at any time shares of any class of capital stock
of the Company which are then entitled to vote generally in the election of
directors.
"Warrants" is defined in the recitals to this Agreement.
"Warrant Shares" means the shares of Common Stock issuable upon exercise of
the Warrants.
ARTICLE XIII
MISCELLANEOUS
SECTION 13.01 SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such which may be hereafter declared invalid, void or unenforceable.
SECTION 13.02 SPECIFIC ENFORCEMENT. Purchaser, on the one hand, and the
Company, on the other, acknowledge and agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state thereof having jurisdiction, this being in addition to any
other remedy to which they may be entitled at law or equity.
SECTION 13.03 ENTIRE AGREEMENT. This Agreement (including the documents set
forth in the Exhibits and Schedules hereto) and the other Transaction Agreements
contain the entire understanding of the parties with respect to the transactions
contemplated hereby.
SECTION 13.04 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more of the counterparts have been signed by
each party and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
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<PAGE>
SECTION 13.05 NOTICES. All notices, consents, requests, instructions,
approvals and other communications provided for herein and all legal process in
regard hereto shall be validly given, made or served, if in writing and
delivered personally, by telecopy (except for legal process) or sent by
registered mail, postage prepaid, if to:
The Company:
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attention of: Mark D. Director
Telecopy No.: (202) 339-6727
with a copy to:
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Attention of: George P. Stamas
Telecopy No.: (202) 663-6363
Purchaser:
c/o Clayton, Dubilier & Rice Fund V
Limited Partnership
1043 Foulk Road, Suite 106
Wilmington, Delaware
with a copy to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue, 18th Floor
New York, New York 10152
Attention of: Brian D. Finn
Telecopy No.: (212) 407-5200
with a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention of: Franci J. Blassberg
Telecopy No.: (212) 909-6836
or to such other address or telex number as any party may, from time to time,
designate in a written notice given in a like manner.
SECTION 13.06 AMENDMENTS. This Agreement may be amended as to Purchaser and
their successors and assigns (determined as provided in Section 13.08), and the
Company may take any action herein prohibited, or omit to perform any act
required to be performed by it, if the Company shall obtain the written consent
of Purchaser. This Agreement may not be waived, changed, modified, or discharged
orally, but only by an agreement in writing signed by the party or parties
against whom enforcement of any waiver, change, modification or discharge is
sought or by parties with the right to consent to such waiver, change,
modification or discharge on behalf of such party.
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<PAGE>
SECTION 13.07 COOPERATION. Purchaser and the Company agree to take, or
cause to be taken, all such further or other actions as shall reasonably be
necessary to make effective and consummate the transactions contemplated by this
Agreement, including, without limitation, making all required filings under the
HSR Act, if any; provided, however, that the foregoing shall not limit the
ability of the Company to abandon the Distributions pursuant to Section 8.03.
SECTION 13.08 SUCCESSORS AND ASSIGNS.
All covenants and agreements contained herein shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that neither party may assign any of its rights under this
Agreement without the written consent of the other party.
SECTION 13.09 EXPENSES AND REMEDIES.
(a) Whether or not the Closing takes place, all costs and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be borne by the party incurring such expense, except as set forth in the next
seven paragraphs.
(b) Notwithstanding Section 13.09(a), if Purchaser terminates this Agreement
pursuant to Section 10.01(c)(ii), (c)(iii) or (c)(vi) the Company shall
reimburse Purchaser for the reasonable out-of-pocket expenses (including
reasonable fees and expenses of legal counsel) incurred by Purchaser in
connection with this Agreement or the matters contemplated hereby ("Purchaser's
Expenses") and shall pay CD&R a termination fee of $25 million (the "Termination
Fee").
(c) Notwithstanding Section 13.09(a), if the Company terminates this
Agreement pursuant to Section 10.01(d)(iii), the Company shall pay Purchaser's
Expenses to Purchaser and the Termination Fee to CD&R.
(d) Notwithstanding Section 13.09(a), if Purchaser terminates this Agreement
pursuant to any provision of Section 10.01 other than those referred to in
Sections 13.09(b) or the Company terminates this Agreement pursuant to any
provision of Section 10.01 other than those referred to in Section 13.09(c) and
other than pursuant to Section 10.01(d)(i), the Company shall pay Purchaser's
Expenses to Purchaser; provided that if Purchaser terminates this Agreement
pursuant to Section 10.01(c)(iv) by reason of the failure to be satisfied of the
condition set forth in Section 9.03(k), Purchaser's Expenses shall be limited to
$2,000,000.
(e) Notwithstanding Section 13.09(a), if (i) the Company terminates this
Agreement pursuant to any provision of Section 10.01 other than those referred
to in Sections 13.09(c) or Purchaser terminates this Agreement pursuant to
Section 10.01(b)(ii), (ii) a Transaction Proposal was made prior to September
30, 1998 and (iii) during the period ending 12 months after termination the
Company enters into an agreement relating to or publicly announces, a
transaction including the sale or other disposition of Equity Securities
representing in excess of 20% of the Total Voting Power or 20% of the assets of
the Company and its Subsidiaries, taken as a whole, then upon consummation of
such transaction, the Company shall pay Purchaser's Expenses (without
duplication of any Purchaser's Expenses paid pursuant to Section 13.09(d)) and
the Termination Fee to CD&R.
(f) Notwithstanding Section 13.09(a), upon the occurrence of the Closing,
the Company shall pay Purchaser's Expenses to Purchaser.
(g) Notwithstanding Section 13.09(a), if Purchaser terminates this Agreement
pursuant to Section 10.01(c)(i) the Company shall reimburse Purchaser for
Purchaser's Expenses and shall pay CD&R a termination fee of $10 million.
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<PAGE>
SECTION 13.10 TRANSFER OF SHARES AND WARRANTS.
Purchaser understands and agrees that neither any shares of Common Stock or
any Warrants, Special Warrants, Warrant Shares or Special Warrant Shares have
been registered under the Securities Act or the securities laws of any state and
that they may be sold or otherwise disposed of only in one or more transactions
registered under the Securities Act and, where applicable, such laws or as to
which an exemption from the registration requirements of the Securities Act and,
where applicable, such laws is available. Purchaser acknowledges that except as
provided in the Registration Rights Agreement, Purchaser has no right to require
the Company to register shares of Common Stock, the Warrants, the Special
Warrants, the Warrant Shares or the Special Warrant Shares. Purchaser
understands and agrees that each certificate representing shares of Common
Stock, Warrants, Special Warrants, Warrant Shares or Special Warrant Shares
(other than, with respect to the first legend, shares of Common Stock, Warrants,
Special Warrants, Warrant Shares or Special Warrant Shares that are no longer
subject to the provisions of Article VII and other than, with respect to the
second legend, shares of Common Stock, Warrants, Special Warrants, Warrant
Shares or Special Warrant Shares which have been transferred in a transaction
registered under the Securities Act or exempt from the registration requirements
of the Securities Act pursuant to Rule 144 thereunder or any similar rule or
regulation) shall bear the following legends:
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY AN AGREEMENT ON FILE AT THE OFFICES OF THE CORPORATION."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT
BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS."
and Purchaser agrees to transfer shares of Common Stock, Warrants and Warrant
Shares only in accordance with the provisions of such legends.
SECTION 13.11 GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York, except to the extent that
Delaware law mandatorily governs.
SECTION 13.12 PUBLICITY.
The Company and Purchaser will consult and cooperate with each other before
issuing, and provide each other the opportunity to review and comment upon, any
press releases or otherwise making public statements with respect to the
transactions contemplated by this Agreement.
SECTION 13.13 NO THIRD PARTY BENEFICIARIES.
(a) Nothing contained in this Agreement is intended to confer upon any
person or entity other than the parties hereto and their respective successors
and permitted assigns, any benefit, right or remedies under or by reason of this
Agreement; provided, however, that the parties hereto hereby acknowledge and
agree that the Distributed Companies are each third party beneficiaries of
Section 6.01 of this Agreement and that the Purchaser Indemnitees (other than
Purchaser) are third party beneficiaries of Article XI of this Agreement.
(b) Purchaser shall cooperate with the Company in connection with any tax
audits or administrative or judicial proceedings with respect to the application
of Section 355(e) (as ultimately enacted), including in rebutting any
presumption arising under Section 355(e) of the Code.
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<PAGE>
SECTION 13.14 CONSENT TO JURISDICTION.
Each of the Company and Purchaser irrevocably submits to the personal
exclusive jurisdiction of the United States District Court for the Southern
District of New York for the purposes of any suit, action or other proceeding
arising out of this Agreement or any transaction contemplated hereby (and, to
the extent permitted under applicable rules of procedure, agrees not to commence
any action, suit or proceeding relating hereto except in such court). Each of
the Company and Purchaser further agrees that service of any process, summons,
notice or document hand delivered or sent by registered mail to such party's
respective address set forth in Section 13.05 will be effective service of
process for any action, suit or proceeding in New York with respect to any
matters to which it has submitted to jurisdiction as set forth in the
immediately preceding sentence. Each of the Company and Purchaser irrevocably
and unconditionally waives any objection to the laying of venue of any action,
suit or proceeding arising out of this Agreement or the transactions
contemplated hereby in the United States District Court for the Southern
District of New York, and hereby further irrevocably and unconditionally waives
and agrees not to plead or claim in such court that any such action, suit or
proceeding brought in such court has been brought in an inconvenient forum.
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<PAGE>
IN WITNESS WHEREOF, Purchaser and the Company have caused this Agreement to
be duly executed as of the day and year first above written.
<TABLE>
<S> <C> <C>
U.S. OFFICE PRODUCTS COMPANY
/S/ THOMAS I. MORGAN
-----------------------------------------
Name: Thomas I. Morgan
TITLE: PRESIDENT
CDR-PC ACQUISITION, L.L.C.
By: /s/ DONALD J. GOGEL
-----------------------------------------
Name: Donald J. Gogel
TITLE: PRESIDENT
</TABLE>
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<PAGE>
EXHIBIT 1
TO INVESTMENT AGREEMENT
TERMS OF SPECIAL WARRANTS
<TABLE>
<S> <C>
Exercise Price: $.01 per share.
Expiration Date: 12 years from date of issuance.
Exercisability: To the extent of 24.9% of sum of (A) the number of shares
of Common Stock issued upon conversion of the 2001
Notes, (B) the number of any shares of Contingent Stock
that are issued, and (C) the number of shares of Common
Stock issuable pursuant to this Special Warrant in
respect of shares described in clauses (A) and (B)
above; or after the second anniversary of the issuance
of this Special Warrant, whichever is earlier.
Shares Subject to Warrant: Equal to the number of shares of Common Stock that is the
difference between (i) 24.9% of the sum of (A) the
outstanding shares of Common Stock as of the Closing
Date after giving effect to the issuance of the Shares
and the exercise of this Special Warrant, and assuming
the conversion into Common Stock of all the 2001 Notes
outstanding on the Closing Date at the conversion price
resulting from adjustments made as a result of the
Tender Offer and the Distributions and (B) the number of
any shares of Contingent Stock that are issued, and (ii)
24.9% of the outstanding shares of Common Stock as of
the Closing after giving effect to the issuance of the
Shares.
Transferability: Transferable to the same extent as Shares.
Cashless Exercise: Permitted.
Antidilution Protection: Customary.
Registration Rights: Same as for Shares.
Listing of Warrants: Upon request of Purchaser.
Listing of Shares issuable upon
exercise of Warrants: Prior to Closing.
Listing of Special Covenants: The Company will not be permitted to repurchase Common
Stock if as a result thereof the exercisability of the
Special Warrant will be limited.
</TABLE>
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<PAGE>
EXHIBIT 2
TO INVESTMENT AGREEMENT
TERMS OF WARRANTS
<TABLE>
<S> <C>
Exercise Price: 1.5 times $270 million divided by the total number of
Shares and shares of Common Stock subject to Special
Warrants.
Expiration Date: 12 years from date of issuance.
Exercisability: Only after the second anniversary of issuance.
Shares Subject to Warrant: Equal to the number of the Shares.
Transferability: Transferable to the same extent as the Shares under
Section 7.01.
Cashless Exercise: Permitted.
Antidilution Protection: Customary.
Registration Rights: Same as for Shares.
Listing of Warrants: Upon request of Purchaser.
Listing of Shares issuable upon
exercise of Warrants: Prior to Closing.
Listing of Special Covenants: The Company will not be permitted to repurchase Common
Stock if as a result thereof the exercisability of the
Warrant will be limited.
</TABLE>
B-46
<PAGE>
EXHIBIT 3
TO INVESTMENT AGREEMENT
TERMS OF REGISTRATION RIGHTS AGREEMENT
<TABLE>
<S> <C>
Registrable Securities: Shares issued under Investment Agreement, Warrants,
Special Warrants and other Common Stock purchased by
Purchaser in compliance with the Investment Agreement.
Demand Registrations: Four.
Piggyback Registrations: Unlimited.
Registration Fees and Expenses: Payable by the Company, including counsel for selling
stockholder.
Selection of Underwriters: Purchaser selects underwriters for Demand Registrations
subject to Company's consent which shall not be
unreasonably withheld. Company selects underwriters for
Piggyback Registrations subject to Purchaser's consent
which shall not be unreasonably withheld.
Priority in Exercise of
Registration of Rights: In the event of cutbacks, securities to be registered for
the account of the Purchaser shall have priority over
other securities to be registered in connection with
Demand Registrations and over other securities to be
registered for the account other selling stockholders in
Piggyback Registrations.
Indemnification: Customary.
Registration Procedures: Customary including, without limitation, provision of
opinions of counsel and comfort letter.
</TABLE>
B-47
<PAGE>
SCHEDULE 8.07
TO INVESTMENT AGREEMENT
TENDER OFFER TIMING AND CONDITIONS
The capitalized terms used in this Schedule 8.07 have the meaning set forth
in the attached Agreement.
COMMENCEMENT DATE:
Approximately 20 business days preceding the date of the Company Meeting set
forth in the Proxy Statement
EXPIRATION DATE:
No earlier than 20 business days following the Commencement Date.
CONDITIONS:
The conditions to the Tender Offer shall be as set forth below (capitalized
terms set forth below shall have the meaning given them in the Tender
Offer):
Notwithstanding any other provisions of the Tender Offer, and in addition to
(and not in limitation of) the Company's rights to extend and amend the Tender
Offer at any time in its sole discretion (subject to the provisions of the
Investment Agreement), the Company shall not be required to accept for payment
or, subject to any applicable rules and regulations of the Commission, including
Rule 14e-1(c) under the Exchange Act (relating to the Tender Offer), pay for,
and may delay the acceptance for payment of or, subject to the restriction
referred to above, the payment for, any tendered shares of Common Stock, and may
amend the Tender Offer consistent with the terms of the Investment Agreement or
terminate the Tender Offer if (i) the Minimum Condition (as defined below) has
not been satisfied; (ii) the Financing Condition (as defined below) has not been
satisfied; (iii) the Equity Investment Condition (as defined below) has not been
satisfied; (iv) the Distribution Condition (as defined below) has not been
satisfied; or (v) any of the General Conditions (as defined below) shall not
have been satisfied.
The Minimum Condition will be satisfied if, at the Acceptance Date, a
minimum of 37,037,037 Shares (including Option Shares) have been validly
tendered pursuant to the terms of the Tender Offer and not withdrawn.
The Financing Condition will be satisfied upon (a) the availability to the
Company on terms and conditions satisfactory to the Company in its sole
discretion of funds sufficient to pay the Tender Offer Price for 37,037,037
Shares and related costs and expenses of the Tender Offer from the Subordinated
Debt Offering, through borrowings under the Credit Facility, and/or from the
Equity Investment, or any combination of the foregoing, and (b) the Company
having obtained all necessary consents from lenders for completion of the Tender
Offer and the Distributions.
The Equity Investment Condition will be satisfied when all conditions to
closing under the Investment Agreement have been satisfied or waived other than
the following conditions: the condition set forth in Section 9.01(e) of the
Investment Agreement relating to consummation of the Distributions; and the
condition set forth in Section 9.03(g) of the Investment Agreement relating to
consummation of the Tender Offer.
The Distributions Condition shall be satisfied when all conditions,
including among others (a) the registration statements relating to the
distribution of shares in the Distributions having been declared effective by
the Commission and (b) the Company having received an opinion of Wilmer, Cutler
& Pickering regarding the tax treatment of the Distributions, to the obligation
of the Company to consummate the Distributions under the Distribution Agreement
have been satisfied or waived, other than the
B-48
<PAGE>
condition set forth in Section 8.01(g) of the Distribution Agreement relating to
consummation of the Tender Offer.
For purposes of the foregoing provisions, all the General Conditions shall
be deemed to have been satisfied unless any of the following conditions shall
occur prior to the Acceptance Date:
(i) there shall have been instituted or threatened or be pending any
action or proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, that
challenges the making of or the consummation of the transactions
contemplated by the Tender Offer, the Equity Investment or the
Distributions; or that has, or is reasonably likely to have, in the sole
judgment of the Company, a material adverse effect on the business,
operations, properties, condition (financial or otherwise); assets,
liabilities or prospects of the Company and its subsidiaries taken as a
whole;
(ii) any order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been proposed, enacted, entered,
issued, promulgated, enforced or deemed applicable by any court or
governmental, regulatory or administrative agency or instrumentality that,
in the sole judgment of the Company, would or might prohibit, prevent,
restrict or delay in consummation of the Tender Offer, the Equity Investment
or the Distributions or that has, or is reasonably likely to have, in the
sole judgment of the Company, a material adverse effect on the business,
operations, properties, condition (financial or otherwise), assets,
liabilities or prospects of the Company and its subsidiaries taken as a
whole;
(iii) there shall have occurred or be likely to occur any event that, in
the sole judgment of the Company, would or might prohibit, prevent, restrict
or delay consummation of the Tender Offer, the Equity Investment or the
Distributions or that will, or is reasonably likely to, materially impair
the contemplated benefits to the Company of the Tender Offer, the Equity
Investment or the Distributions, or otherwise result in the consummation of
the Tender Offer, the Equity Investment or the Distributions not being, or
not being reasonably likely to be, in the best interests of the Company and
its subsidiaries taken as a whole;
(iv) a tender or exchange offer for some or all of the Shares (other
than the Tender Offer) or a proposal with respect to a merger, consolidation
or other business combination with or involving the Company or any
subsidiary shall have been proposed to be made or shall have been made by
another person; or
(v) (1) any entity, "group" (as that term is used in Section 13(d)(3) of
the Exchange Act) or person (other than Investor and entities, groups or
persons, if any, who have filed with the Commission, on or before
January 12, 1998, a Schedule 13G or Schedule 13D with respect to any of
the Shares) shall have acquired or proposed to acquire beneficial
ownership of more than 5% of the outstanding Shares; or
(2) such entity, group or person that has publicly disclosed any such
beneficial ownership of more than 5% of the Shares prior to such date
shall have acquired, or proposed to acquire, beneficial ownership of
additional Shares constituting more than 2% of the outstanding Shares or
shall have been granted any option or right to acquire beneficial
ownership of more than 2% of the outstanding Shares (other than the
Equity Investment); or
(3) any entity, person or group shall have filed a Notification and
Report Form under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 reflecting an intent to acquire the Company or any of its Shares; or
(vi) there shall have occurred (a) any general suspension of trading in,
or limitation on prices for, securities in the United States national
securities exchanges or over-the-counter markets, (b) any significant
adverse change in the trading prices for the Common Stock or in the
Company's other securities, or in any financial markets, (c) a material
impairment in the trading market for securities that could, in the sole
judgment of the Company, affect the Equity Investment, the Tender Offer, the
Distributions or the New Borrowings, (d) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States, (e) any limitation (whether or not mandatory) by any government or
governmental, administrative or regulatory authority or agency, domestic or
foreign, on (or other event that, in the reasonable judgment of the Company,
might affect) the extension of credit by banks or other lending institutions
in the United States, (f) a commencement of a war or armed hostilities or
other national or international calamity directly or indirectly involving
the United States, or (g) in the case of any of the foregoing existing on
the date hereof, a material acceleration or worsening thereof.
B-49
<PAGE>
EXHIBIT 8.1
WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037-1420
TELEPHONE: (202) 663-6000
FACSIMILE: (202) 663-6363
April 30, 1998
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Ladies and Gentlemen:
We have represented U.S. Office Products Company ("U.S. Office Products") in
connection with the filing of a Registration Statement on Form S-4 (the
"Registration Statement") with respect to the exchange of shares of its common
stock, par value $.001 per share (the "Common Stock"), for its outstanding
5 1/2% Convertible Subordinated Notes due 2001 (the "Notes") pursuant to the
terms set forth in the Offering Circular/Prospectus (the "Offering
Circular/Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal," which together with the Offering Circular/Prospectus, constitutes
the "Exchange Offer"). We have taken into account the Equity Self-Tender (the
tax consequences of which are described in the Tender Offer Statement) and the
Distributions (the tax consequences of which are described in the Offering
Circular/Prospectus under "U.S. Federal Income Tax Consequences of the
Distributions"). Terms not otherwise defined in this letter have the same
definition as in the Offering Circular/Prospectus.
For purposes of rendering this opinion, we have reviewed the initial
Offering Circular/Prospectus, the Indenture, and such other documents as we have
deemed relevant for purposes of this opinion. We have assumed that all parties
to agreements that we have examined have acted, and will act, in accordance with
the terms of such agreements. We have assumed the genuineness of all signatures,
the proper execution of all documents, the authenticity of all documents
submitted to us as originals, the conformity to originals of all documents
submitted to us as copies, and the authenticity of the originals of any such
copies. We have also taken into account that U.S. Office Products will not
complete the Distributions unless we deliver the Spin-Off Opinion that is
described in the Offering Circular/Prospectus under "U.S. Federal Income Tax
Consequences of the Distributions," stating our opinion that the Distributions
will qualify as tax-free spin-offs under Section 355 of the Internal Revenue
Code of 1986, as amended (the "Code"), and will not be taxable under Section
355(e) of the Code. The Spin-Off Opinion will be based on the accuracy of
certain factual representations as of the time of the Distributions made to us
by U.S. Office Products, the Spin-Off Companies, and Investor, and certain other
information, data, documentation, and other materials that we deem necessary.
U.S. Office Products has made the following representations in a letter
dated April 30, 1998:
1. The payment of cash in lieu of fractional shares of Common Stock is solely
for the purpose of avoiding the expense and inconvenience to U.S. Office
Products of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be paid
in the transaction to the Holders of Notes instead of issuing fractional
shares of Common Stock is not expected to exceed one percent of the total
consideration that will be issued in the transaction to the Holders of Notes
in exchange for their Notes. The fractional share interests of each Holder
of Notes will be aggregated, and no Holder of Notes will receive cash in an
amount greater than the value of one full share of Common Stock.
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<PAGE>
2. U.S. Office Products intended the Notes to be five year obligations, and the
selection of the maturity date was for marketing convenience.
This opinion does not address all aspects of U.S. federal income taxation
that may be relevant to particular holders of the Notes and applies only to
Holders who are U.S. persons and hold Notes as a capital asset within the
meaning of Section 1221 of the Code. A U.S. person is the beneficial owner of a
Note that is (i) for U.S. federal income tax purposes a citizen or resident of
the United States (including certain former citizens and former long-term
residents), (ii) a corporation, partnership or other entity created or organized
in or under the laws of the United States or of any political subdivision
thereof, (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source or (iv) a trust with respect to the
administration of which a court within the United States is able to exercise
primary supervision and one or more U.S. persons have the authority to control
all substantial decisions of the trust. This opinion does not address tax
considerations applicable to a Holder's particular circumstances or to a Holder
that may be subject to special tax rules (such as Holders subject to the
alternative minimum tax) or other special situations. This opinion may not apply
to certain classes of taxpayers, including, without limitation, insurance
companies, tax-exempt organizations, financial institutions, dealers in
securities, or persons who hold their Notes in a hedging transaction or as a
part of a straddle or conversion transaction.
This opinion represents our best judgment of how a court would rule if
presented with the issues addressed herein and is not binding upon either the
IRS or any court. Thus, no assurances can be given that a position taken in
reliance on our opinions will not be challenged by the IRS or rejected by a
court.
On the basis of the foregoing, and our consideration of such other matters
of fact and law as we have deemed necessary or appropriate, it is our opinion,
under presently applicable U.S. federal income tax law, that the exchange of
Notes for Common Stock pursuant to the Exchange Offer is an exchange of
securities for stock, which constitutes a tax-free recapitalization described in
Section 368(a)(1)(E) of the Code, and that the following U.S. federal income tax
consequences therefore apply:
1. A Holder will not recognize any gain or loss (except with respect to cash
received in lieu of fractional shares and in respect of unpaid interest
accrued on the Notes through the Expiration Date and not previously included
in income) by reason of the exchange of Notes for Common Stock.
2. The Common Stock received by a Holder upon the exchange of Notes will have
an aggregate basis equal to the aggregate basis of the Notes that are
exchanged for Common Stock (reduced by any basis allocable to a fractional
share).
3. A Holder's holding period in the Common Stock issued upon the exchange of
Notes will include the period during which the Holder held the Notes prior
to the exchange.
4. A Holder who receives cash in lieu of a fractional share of Common Stock
upon exchange of Notes will be taxable as if the fractional share had been
issued and then redeemed for cash. The receipt of cash for a fractional
share will result in capital gain or loss measured by the difference between
the basis of such fractional share interest and the cash received.
5. Cash received by a Holder in respect of unpaid interest accrued on the Notes
through the Expiration Date that has not previously been included in income
of the Holder will be taxed as ordinary income to the Holder.
6. A Holder that does not exchange its Notes for Common Stock will not
recognize gain or loss by reason of the Exchange Offer.
This opinion is based on relevant provisions of the Code, the Treasury
Regulations promulgated thereunder, and interpretations of the foregoing as
expressed in court decisions and administrative determinations, as currently in
effect. We undertake no obligation to update or supplement this opinion to
reflect any changes in laws that may occur.
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<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this opinion in the Registration
Statement. In giving this consent, we do not hereby admit that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
WILMER, CUTLER & PICKERING
By: /s/_WILLIAM J. WILKINS__
William J. Wilkins
A Partner
3
