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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 25, 1998
COMMISSION FILE NUMBER 000-25372
U.S. OFFICE PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
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DELAWARE 52-1906050
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.
1025 THOMAS JEFFERSON AVENUE, NW, SUITE 600E 20007
WASHINGTON, D.C. (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (202) 339-6700
Securities registered pursuant to Section 12(b) of the Act:
NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. __
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of July 13, 1998 was $613,894,298.
As of July 13, 1998, 36,514,159 shares of the Registrant's common stock, $.001
par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for 1998 annual meeting of
U.S. Office Products Company (to be filed).
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PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL" AND "EXPECT" AND SIMILAR
EXPRESSIONS AS THEY RELATE TO U.S. OFFICE PRODUCTS COMPANY ("U.S. OFFICE
PRODUCTS" OR THE "COMPANY") OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED
BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS AFFECTING THE
COMPANY'S BUSINESS." THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.
ITEM 1. BUSINESS
COMPANY OVERVIEW
The Company 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"), the Company provides office supplies,
office furniture and office coffee, beverage and vending services primarily to
middle-market companies (25 to 500 employees). Based on current revenues, NAOPG
is one of the largest contract stationers in the United States. Outside North
America, the Company's Blue Star Group Limited ("Blue Star") is a leading
supplier of office products and services in New Zealand and Australia, and the
Company 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"), the Company expanded into the
high-growth small office and home office ("SOHO") 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, the Company has grown primarily through
an aggressive acquisition program, which has included the purchase of more than
230 businesses in the United States and internationally. The Company 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.
In June 1998, the Company completed a comprehensive restructuring plan (the
"Strategic Restructuring Plan") which consisted of a number of elements,
including a self-tender offer (the "Equity Tender") by the Company for its
common stock, $.001 par value per share (the "Common Stock"), including Common
Stock underlying vested and unvested stock options, distributions (the
"Distributions") by the Company to its stockholders of shares of common stock of
four separate companies (the "Spin-Off Companies") created to conduct the
Company's former technology solutions, print management, educational supplies
and corporate travel services businesses, and an equity investment in the
Company (the "Equity Investment") by an affiliate (the "Investor") of an
investment fund managed by Clayton, Dubilier & Rice, Inc ("CD&R"). For further
details about the elements of the Strategic Restructuring Plan, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction."
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. To execute this new strategy the Company is
implementing new product, sales and marketing programs to leverage its extensive
sales force and existing distribution channels. In addition, the Company is
centralizing a number of common business functions, such as purchasing,
distribution, inventory management and information systems. Furthermore, the
Company 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, the
Company believes it can achieve greater regional efficiencies and economies of
scale in purchasing, distribution and asset utilization. At the same time, the
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Company continues to encourage entrepreneurial innovation and management of
customer relationships at the local level. The Company believes that its
organizational structure combines the best elements of both centralized and
decentralized management for its business.
MARKET OVERVIEW
UNITED STATES
The office products and business services market in the United States
includes office supplies, office furniture, and office coffee, beverage and
vending services. Business customers can be generally divided into three
segments: (i) large corporate (more than 500 employees), (ii) middle-market (25
to 500 employees) and (iii) SOHO (fewer than 25 employees). Set forth below is
an overview of the major business products supplied by the Company and the
customer segments for which it competes.
OFFICE SUPPLIES. According to independent research reports, the office
supplies market in the United States generates over $60.0 billion in annual
revenues. Office supplies include a broad array of products including desktop
accessories, writing instruments, paper products, computer consumables and
business machines. Historically, office supplies have been sold through three
distribution channels: (i) traditional retailers (which now include discount
superstores); (ii) mail order (or direct mail) marketers; and (iii)
direct-to-business suppliers ("contract stationers" such as the Company's
NAOPG). Independent estimates indicate that retailers generate approximately
$30.0 billion in annual revenues, and contract stationers generate approximately
$30.0 billion in annual revenues.
In recent years, as industry participants have sought to take advantage of
economies of scale, the retail and contract stationer distribution channels have
undergone significant consolidation with several large companies emerging in
each channel. Additionally, while most office supply businesses traditionally
operated in just one of the three distribution channels, more recently the
Company and many of its large competitors have sought to enter more than one of
these channels as a way of expanding their revenues and customer bases. Despite
recent consolidation and "cross channel" activity, the office supplies market
remains highly fragmented, with more than 4,300 independent suppliers
representing a significant portion of the U.S. market. With pro forma revenues
of $1.1 billion in office supplies for the fiscal year ended April 25, 1998, the
Company believes it has approximately 4% of the approximately $30.0 billion U.S.
contract stationer market.
OFFICE FURNITURE. The U.S. office furniture market generates approximately
$12.0 billion in annual revenues and can be divided into three segments:
catalog, middle-market and contract furniture. Catalog furniture items include
such office commodities as low-priced chairs, file cabinets and computer stands.
Such furniture is sold by direct marketers, retailers and contract stationers
through catalog mailings. Middle-market furniture is of higher quality and
functionality than commodity furniture items and is available through retailers
and contract stationers. Contract furniture is high quality, includes customized
office configurations, often involves a service component and is usually
purchased on a project basis when offices are opened or remodeled. Contract
furniture is typically sold through dealers affiliated with furniture
manufacturers. The Company believes that several thousand companies sell office
furniture to the corporate market. With pro forma revenues of approximately
$600.0 million in office furniture for the fiscal year ended April 25, 1998, the
Company believes it has approximately a 5% share of the U.S. market.
Office Coffee, Beverage and Vending Services. The Company believes that the
office coffee services industry in the United States generates approximately
$3.0 billion in annual revenues and is highly fragmented. The Company had pro
forma revenues in this segment for the fiscal year ended April 25, 1998 of
approximately $110.0 million (including approximately $30.0 million in vending
services revenues), giving it approximately a 4% share of this market.
BUSINESS RELATED SERVICES. Superstores and a variety of specialty companies
provide business-related services such as copying, graphic arts, printing,
packaging, delivery, fax and computer services. The
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business services market, targeted mainly at middle-market and SOHO customers,
is highly fragmented and includes many medium to small sized independent
outlets.
BUSINESS CUSTOMERS. Customers for office supplies, office furniture and
office coffee can be divided into three segments: middle market corporate, large
corporate and SOHO.
The middle-market corporate segment has been the primary focus of NAOPG's
sales efforts because the Company believes that it offers greater growth
potential and higher margins than the large corporate segment. The Company
believes that, as compared to large corporate customers, middle-market companies
place a relatively higher value on the quality of service, including order fill
rates and dependable delivery.
Historically, contract stationers have been the primary providers of office
supplies to middle-market customers, with mail order marketers and traditional
retail dealers playing secondary roles. Superstore chains and mail order
marketers have attempted to gain market share in this segment by providing
delivery services and allowing credit card purchases. However, the Company
believes that superstores and mail order marketers have achieved only limited
penetration because they do not provide the level of service often requested by
customers in this segment.
Businesses in the large corporate segment often negotiate contract pricing
on many of the office products they routinely purchase, and the Company believes
that this segment places a relatively higher value on low product pricing. As a
result, the large corporate segment tends to generate lower gross profit margins
for suppliers. The large corporate segment has historically been served by
contract stationers, and the Company believes that this segment is currently the
primary focus of several of its largest competitors.
The SOHO segment consists of home offices, telecommuters and small
businesses. The SOHO market has grown from 25 million people in 1993 to
approximately 47 million people in 1997. According to the U.S. Bureau of Labor
Statistics, the SOHO market for office supplies and related business services is
currently a $54.0 billion market, and is expected to continue to grow. In
addition to office supplies, SOHO customers purchase a variety of business
services such as printing, packaging, fax and computer services. This market is
highly fragmented with products and services offered by superstores, mail order
marketers, medium to small independent outlets, and specialty service providers
such as copy centers and quick print centers. MBE specifically targets this
high-growth customer segment.
INTERNATIONAL
The Company has operations in New Zealand and Australia and a 49% ownership
interest in Dudley in the United Kingdom. The business products market is more
consolidated in New Zealand and Australia than in the United States.
Additionally, given the relatively small size of these economies, suppliers of
business products often offer a broader range of complementary products and
services than in the United States. Blue Star is the largest office products
supplier in New Zealand and the second largest in Australia. With pro forma
revenues of approximately $940.0 million for the fiscal year ended April 25,
1998, Blue Star has a significant share of the office products market in New
Zealand and Australia. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of the impact of recent
declines in the value of the New Zealand and Australian dollars on the reported
results and financial condition of the Company. In the United Kingdom, contract
stationers offer a similar product offering to that of their counterparts in the
United States. Office products superstores in the United Kingdom have a
relatively smaller share of the office products market than do office products
superstores in the United States. As a result of several recent acquisitions,
Dudley currently has annualized revenues of over $200.0 million, and the Company
believes that Dudley is the second largest contract stationer in the United
Kingdom.
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BUSINESS STRATEGIES
The Company's goal is to be the leading provider of office products and
business services in the United States and select international markets, with an
emphasis on serving middle-market businesses and expanding its role in serving
the high-growth SOHO market. Key elements of the Company's strategies in pursuit
of this goal include the following:
IMPROVE PROFIT MARGINS AND ASSET UTILIZATION. To achieve greater operating
efficiencies, profit margins and asset utilization, the Company intends to:
- Consolidate and eliminate redundant facilities, operating systems and
business functions by developing DFCs to service defined geographic
territories; rationalize overlapping operations; and combine general and
administrative corporate functions.
- Develop and implement strategic pricing plans and improve inventory
selection and turnover, control and distribution systems to reduce
handling, storage and overhead costs.
- Integrate operating, distribution and information systems among business
entities through continued implementation of the Company's proprietary
Trinity 2.0 software and other information technology improvements.
- Continue to seek additional volume discounts and rebates from third-party
vendors through increased sales.
- Dispose of or sublease surplus real estate and fixed assets.
FOCUS ON ORGANIC GROWTH. The Company intends to pursue aggressively the
following initiatives to increase revenues through organic growth:
- Expand the Company's product lines and services in certain markets through
broadened catalog offerings and development of "greenfield" (start-up)
operations.
- Develop customized catalogs, target product offerings and expand catalog
distribution to promote overall revenue growth and the sale of higher
margin products.
- Pursue cross-selling opportunities both within and across business groups
through customer referrals and marketing programs.
- Promote wide-spread use of the Company's trade name, both exclusively and
in conjunction with its subsidiaries' local and regional trade names, to
realize the full benefits of a national identity and reputation.
- Pursue additional strategic alliances with third-party vendors as a way of
enhancing the Company's product offerings and fostering additional
cross-selling opportunities.
PURSUE TARGETED ACQUISITIONS AND EXPAND MBE NETWORK. The Company intends to
continue to:
- Grow NAOPG by selectively acquiring additional businesses, focusing
primarily on smaller companies that provide competitive benefits.
- Evaluate and pursue select international acquisition opportunities to
increase its international presence.
- Grant additional MBE master licenses in foreign countries and expand the
MBE network in the United States.
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NORTH AMERICAN OFFICE PRODUCTS GROUP
NAOPG is a leading supplier of office supplies, office furniture, and office
coffee, beverage, and vending services to corporate customers in the United
States. NAOPG's pro forma revenues for the fiscal year ended April 25, 1998 were
approximately $1.8 billion, accounting for the largest portion of the Company's
revenues among its business groups. NAOPG has focused primarily on middle-market
businesses which it believes tend to place relatively greater value on the
quality of service than large corporate businesses.
During fiscal 1998, NAOPG was reorganized into 31 districts divided among
four geographic regions. A district president oversees each district and reports
to a regional vice president who manages each region. NAOPG has continued to
centralize common business functions and has accelerated its efforts to
implement a hybrid organizational structure that uses centralized and
decentralized management. Management believes that this structure allows the
Company to achieve certain economies of scale associated with a large
organization while maintaining the kind of flexible and responsive level of
service to its customers that is characteristic of a smaller organization.
Through the Company's centralized management (located at corporate headquarters,
larger operating subsidiaries or within the DFCs), the Company can leverage its
size and scale in the areas of purchasing, inventory management and
distribution, accounting, human resources and management information systems.
Customer-oriented functions, including sales, marketing, customer service,
credit and collections, are decentralized and managed locally.
PRODUCTS AND SERVICES
NAOPG offers the following categories of products:
OFFICE SUPPLIES. In the contract stationer market, NAOPG offers over 33,000
different items such as desktop accessories, writing instruments, paper
products, computer consumables and business machines. The Company believes that
it offers a broader assortment of office supplies than any of its contract
stationer competitors. NAOPG also operates approximately 30 retail outlets,
primarily in Northern California under the McWhorter's name, that sell office
supplies, gifts and related products, primarily to consumers and to the SOHO
market.
The Company generally provides next-day delivery of ordered items and, on
request, same-day delivery. This "just in time" service enables customers to
reduce overhead cost by reducing inventory and associated personnel and space
requirements. The Company obtains office products from many sources, including
manufacturers and wholesalers, and maintains and warehouses certain frequently
ordered items.
OFFICE FURNITURE. NAOPG sells catalog, middle-market, contract and
remanufactured furniture and provides other related furniture services. Both
contract stationer businesses and specialized dealers principally serve the
office furniture market. NAOPG focuses on products and services that
traditionally have higher profit margins, such as middle-market furniture,
refurbished and remanufactured furniture, moving and storage services, furniture
installation services, furniture rentals and asset management. During fiscal
1998, NAOPG initiated an office furniture rental program which offers customers
a limited catalog selection of lower to medium-priced furniture for rental. This
program is currently being implemented in test markets and is expected to be
expanded nationwide within approximately twelve months.
OFFICE COFFEE, BEVERAGE AND VENDING SERVICES. NAOPG provides and installs
coffee brewing equipment in a customer's office at no charge but requires
customers to purchase, on an ongoing basis, a minimum volume of coffee and
related items. NAOPG generally also offers a wide assortment of both coffee and
related products, including creamers, sugar, stirrers, teas, sodas, juices and
bottled waters, as well as snack items and all other items that are likely to be
found in an employee "breakroom" or lunch room, including plastic flatware,
napkins, paper cups, straws and similar items. NAOPG also installs, stocks and
maintains a variety of food and beverage vending machines for business
customers.
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In September 1996, the Company signed an agreement with Starbucks to act as
a major distributor of Starbucks-Registered Trademark- coffee in the North
American office coffee and beverage services market for five years subject to,
among other things, satisfaction of certain minimum purchase requirements. The
Company has developed promotional materials (including materials for its office
products catalogs), and its employees have received training from Starbucks in
connection with this strategic alliance. The Company believes that this
strategic alliance strengthens its position in the office coffee and beverage
services market and will enhance its ability to cross-sell products and services
to its clients.
SALES AND MARKETING
NAOPG sells primarily through direct contact with customers through its
approximately 2,200 sales associates. The Company generally establishes and
maintains its relationships with customers by assigning a sales associate to
each customer. Many of the Company's representatives conduct targeted, business
segment-specific marketing in their respective sales areas. The Company intends
to leverage the skills and relationships of its sales representatives by
encouraging them to cross-sell multiple product lines to customers.
The Company's catalog is a primary marketing tool used by the Company's
sales representatives. The Company distributed approximately 900,000 catalogs in
fiscal 1998. Sales materials, including certain catalogs, are tailored to
address customer and market requirements and to take advantage of pricing and
marketing programs intended to maximize gross margins by product type. The
Company does not conduct significant mass-market advertising.
Customer orders are received by the Company's sales personnel primarily by
telephone or facsimile. In addition, the Company uses an electronic data
interchange ("EDI") system between the Company and certain of its customers. The
Company also has developed USOPNET,-TM- which includes data order capabilities
through a web site on the Internet. Using such systems, customers are able to
place orders directly into the Company's computer systems, manage their own
inventory and generate customized usage reports and invoices. Orders to be
filled are routed electronically to either the Company's local warehouse or, if
the ordered item is not stocked by the Company at its local warehouse, to a
wholesaler.
OPERATING AND GROWTH STRATEGIES
NAOPG's operating and growth strategies include: (i) integrating and
consolidating business operations through establishment of DFCs; (ii) installing
operating and technology systems designed to improve its operations; (iii)
implementing cross-selling programs to leverage its 2,200 person national sales
force; (iv) continuing to pursue targeted acquisitions; and (v) developing
"greenfield" (or start-up) operations.
DFCS. DFCs are large centralized warehouses that service entire geographic
territories previously served by multiple smaller business operations. The
Company believes that the establishment of DFCs will improve profit margins and
asset utilization. The Company's first DFC, opened in Orlando, Florida in late
1997, supports ten NAOPG operating businesses. In fiscal 1999, the Company plans
to open and/or reconfigure at least six new DFCs to support multiple operating
units. Ultimately, the Company expects to establish approximately 24 DFCs. DFCs
are expected to enhance the Company's ongoing efforts to rationalize redundant
facilities and functions, thereby improving profit margins. Additionally,
through proprietary information systems which are being introduced throughout
its operations, the Company will be able to identify high-turnover items and
optimize inventory management on a regional basis at DFCs. By using DFCs and
relying on wholesalers to stock and supply slower moving items, the Company
believes it can continue to offer the broadest merchandise assortment in the
industry while also reducing inventories of low turnover products and increasing
profit margins on high turnover products.
TECHNOLOGY. The Systems House, Inc. subsidiary of the Company has developed
proprietary operating and technology systems including computerized inventory
management and order processing systems, computerized quotation and job costing
systems and computerized logistics and distribution systems. The
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Company is currently installing Trinity 2.0, an operating system developed by
The Systems House, and management expects that by the end of fiscal 1999 more
than half of the 31 NAOPG districts will be connected to this common operating
system. NAOPG is also incorporating industry-standard technology platforms,
including frame relay networks, bar coding and radio frequency technologies, at
its DFCs. Trinity 2.0 and other technologies will allow the Company to process
orders and track inventory and order fulfillment on a real-time basis, forecast
demand by specific inventory item or stock keeping unit and generate customized
usage and billing reports for its customers. Management believes that
implementation of these systems throughout the Company's operations will
significantly increase the speed and accuracy of order processing and
fulfillment, thereby improving customer satisfaction, while also increasing
inventory turns.
CROSS-SELLING. The Company expects that its "cross-selling" program will
generate internal growth by increasing sales to existing NAOPG customers.
"Cross-selling" is the practice of having different businesses sell their
products and services to each other's customers. For example, office supply
companies within NAOPG encourage their customers to buy office furniture and
office coffee, beverage and vending services from other NAOPG companies and
vice-versa. Within NAOPG, management is implementing programs to encourage
customers to buy a full range of products and services from NAOPG companies.
NAOPG programs include customer referrals, joint marketing efforts, and other
efforts designed to demonstrate to customers the advantages of purchasing
multiple lines of products and services from NAOPG companies. At the end of
1997, the Company introduced an expanded catalog that promotes cross-selling and
is part of an overall marketing strategy to offer customers a broader selection
of products. NAOPG's cross-selling efforts also include providing sales
representatives with training and selling tools to help them introduce customers
to the broad line of products that is available through the Company.
ACQUISITIONS. The Company has historically grown through acquisitions.
Management believes that the vast majority of companies now available to be
acquired are relatively small, with annual revenues of $20.0 million or less.
While the Company intends to continue to expand NAOPG by acquiring additional
businesses, in the United States it expects to target primarily smaller
companies that are profitable and desirable because of their geographic
location, their customer base, or their management or sales personnel.
Substantially all of NAOPG's operations are in the United States with the
exception of three vending operations in Canada. The Company does not expect to
acquire significant additional businesses in Canada in the near future.
GREENFIELD OPERATIONS. The Company also expects to continue to develop
"greenfield" operations where management believes an attractive acquisition
target does not exist to enter a strategic geographic market or where management
believes it can expand revenues in an existing market by adding a new line of
business (such as opening a coffee and beverage operation in a market where the
Company already has a successful office supply company). Management believes
that this second approach is consistent with, and will be supported by, the
Company's cross-selling efforts. The Company expects to continue to focus its
greenfield efforts in the office coffee and beverage operations and the new
furniture rental program. As of April 25, 1998, the Company had opened
approximately 20 office coffee and beverage greenfield operations serving
approximately 25 markets in the United States and Canada.
OPERATIONS OUTSIDE OF NORTH AMERICA
The Company sells office products and business services and certain other
products and services in New Zealand and Australia through Blue Star and its
subsidiaries. The Company acquired 51% of Blue Star in February 1996 and the
remaining 49% in June 1996. Since its acquisition by the Company, Blue Star has
completed 37 acquisitions to become the largest office products company in New
Zealand and the second largest in Australia. In addition to Blue Star, the
Company acquired its interest in Dudley in November 1996.
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PRODUCTS AND SERVICES--BLUE STAR
OFFICE SUPPLIES AND FURNITURE. Blue Star sells office supplies, office
furniture, stationery, packaging supplies and similar products to corporate,
commercial and SOHO customers in New Zealand and Australia. In addition to its
corporate contract stationery business, Blue Star operates more than 250 retail
book and stationery stores throughout New Zealand and Australia (approximately
90 of which are franchises). These stores operate primarily under the Whitcoulls
and Angus & Robertson brand names.
BUSINESS MACHINES AND PERSONAL COMPUTERS. Blue Star's Business Solutions
Group offers a range of office automation products, such as personal computers
and servers, telephone systems, fax machines and photocopiers, as well as
office-related services such as systems integration, project management and
consulting. The Company believes that Blue Star is one of New Zealand's leading
direct sellers of personal computers, with Blue Star's consumer market
accounting for the largest portion of revenues. Blue Star expects to rationalize
its product offerings in this part of its business and to focus on services and
solutions-based products that respond to customers' particular needs.
COMMERCIAL PRINTING. Blue Star's Print Group has a large commercial print
company in New Zealand. It offers a range of printed products and related
services, including commercial sheet-fed and offset printing, label
manufacturing, and digital and reprographic printing. The group also provides
specialized products and services for certain large customers, such as printing
all of New Zealand's telephone directories and handling the pre-press printing
and distribution of bills, acts and other legislative materials for the New
Zealand Parliament.
PRODUCTS AND SERVICES--DUDLEY
OFFICE SUPPLIES. Dudley sells office products and related business services
throughout the United Kingdom. With annualized revenues of over $200.0 million,
Dudley is the second largest contract stationer in the United Kingdom. Dudley
serves as stationer to Her Majesty the Queen and the Prince of Wales.
SALES AND MARKETING
Blue Star currently employs approximately 2,100 sales associates in New
Zealand and Australia. Blue Star promotes sales primarily through direct
marketing by its sales associates. Blue Star is actively pursuing cross-selling
initiatives to increase product sales across business groups.
OPERATING AND GROWTH STRATEGIES
Blue Star intends to leverage its sales force to cross-sell products to its
corporate and consumer customer base. To service its large corporate customers,
Blue Star is establishing a unit to fulfill the single-point procurement
requirements of such customers. Blue Star also will evaluate business
opportunities with governments and additional large corporate accounts. Blue
Star also expects to expand its retail store business through a variety of
strategies, including opening new stores in selected locations, re-branding
certain businesses, refurbishing certain outlets, expanding product offerings,
and introducing coffee shops in selected store locations. Blue Star management
expects that in the near term it will focus primarily on integrating the
operations of several recent acquisitions, expanding product offerings, and
developing joint marketing plans across business units.
The Company expects to continue to consider strategic acquisitions in New
Zealand and Australia. The Company believes that Blue Star's most significant
growth opportunities are in Australia. The Company also expects to continue to
evaluate opportunities to enter other foreign markets. During fiscal 1998,
Dudley expanded significantly through acquisitions in the United Kingdom, using
the funds invested by the Company.
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MAIL BOXES ETC.
MBE is the world's largest franchisor of local postal, packaging, business
and communication retail service centers ("MBE Centers"). With approximately
3,600 MBE Centers in 25 countries, MBE's network is approximately ten times
larger than the network of its next largest competitor. MBE's primary sources of
revenues are (i) royalty and marketing fees paid by existing franchisees, (ii)
fees paid by buyers of new franchises, and (iii) sales of supplies and equipment
to MBE Centers.
There are approximately 3,000 MBE Centers operating throughout the United
States and approximately 600 MBE Centers serving customers outside the United
States. MBE has granted master licenses in more than 61 countries abroad which
allow the licensee to control the development of MBE franchises in designated
territories in those countries. MBE's global network of MBE Centers sold a total
of approximately $1.4 billion of products and services during fiscal 1998, a
substantial amount of which was generated by SOHO customers. While MBE's
revenues include only a small percentage of this amount (in the form of royalty
and marketing fees paid to MBE on the sale of products and services), the
Company believes that the volume of business which MBE transacts and its
extensive distribution network make it an important supplier to the SOHO market.
FRANCHISE ARRANGEMENTS
MBE offers both individual franchises and area franchises in the United
States and master licenses in foreign countries. U.S. area franchisees are
granted the exclusive right to sell individual MBE franchises in their
respective areas and also provide start-up assistance and continuing support for
such individual franchisees. Master licenses in foreign countries provide the
licensee with the exclusive right to develop and operate MBE Centers in
designated territories in those countries and the right to sell individual MBE
franchises to others. MBE provides its franchisees and licensees valuable
services including, among other things, instruction at MBE University,
operational guidance, assistance in site selection, marketing, and advertising
programs.
PRODUCTS AND SERVICES
A typical MBE Center offers mail and parcel receiving, packaging, and
shipping services through a number of carriers and provides small businesses
with a wide range of products and services. These products and services
generally include telephone message service, word processing, copying and
printing, office supplies and communication services. Communications services
typically include fax, voice mail, pagers, and wire transfers of funds. In
addition, MBE Centers usually offer convenience items such as stamps, packaging
supplies, stationery supplies, notary, passport photos, and money orders. Large
corporations that need a national distribution system use MBE as communication
centers for their field-based employees.
SALES AND MARKETING
MBE conducts national advertising campaigns that are designed to market the
MBE brand, including televised ad campaigns during three consecutive Super Bowls
(1996-1998). MBE's marketing strategies are based upon extensive market research
and include campaigns directed at both the consumer and business-to-business
markets. MBE is also developing programs to encourage existing MBE franchisees
to acquire additional MBE franchises. The Company is also developing a program
to offer MBE Center customers the convenience of on-site ordering of office
supplies from NAOPG catalogs.
OPERATING AND GROWTH STRATEGIES
MBE's operating and growth strategies include: (i) broadening its product
and services offerings; (ii) growing organically through additional
strategically located express service centers; and (iii) increasing its
franchise base both domestically and internationally.
10
<PAGE>
PRODUCTS AND SERVICES. MBE is pursuing several new programs to increase
same-store revenues in MBE Centers. First, MBE has developed with NAOPG, in
partnership with S.P. Richards Co.,-TM- a special office products catalog
program for use by MBE Centers and their customers. Customers are able to use
the catalog to order office products for delivery to their local MBE Center, to
their offices, or to their homes. Second, MBE is developing a series of new
products related to computer and Internet technology. MBE expects that these
products will have applications both within MBE Centers and in customers' homes
and offices and that they can be developed without material expense. Third, MBE
is pursuing a program that will allow franchise owners to purchase office
supplies, copy paper and other consumables more efficiently. Management believes
this program will allow MBE franchisees to offer their customers a broader range
of competitively priced office products. Fourth, MBE has entered into strategic
alliances with United Parcel Service, Spiegel, Microsoft and Bank/One to offer
MBE Center customers a broader range of products and services. MBE receives fees
directly from strategic partners or from franchisees (in the form of a royalty
on sales of products and services offered as a result of the strategic
alliances).
EXPRESS SERVICE CENTERS. MBE has recently introduced MBE Business
Express-TM- sites, which are 24-hour self-serve, credit card-activated business
centers designed to serve customers in hotels and hospitality centers, airports,
convention centers, military retail outlets, and academic settings. The MBE
Business Express sites include computer (including Internet access), copying,
printing, and facsimile services. The sites also will allow users to connect
with MBE Centers via direct-dial telephone to order or arrange for additional
services such as package receipt or delivery or document reproduction.
FRANCHISE BASE. The global network of MBE Centers has grown dramatically,
with the number of MBE Centers in the United States increasing by 250 to 300
each year since 1991. MBE has implemented several new programs to market its
franchises. These programs include the Conversion Store Program, which targets
potential independent operators in the industry to convert to a MBE franchise;
the Host Store concept, which locates MBE Centers within another retail
environment; the Corporate Tour Program, in which potential franchise owners are
invited to attend a tour of MBE's headquarters in San Diego and receive formal
presentations by key departments; and a multiple center ownership program which
is designed to encourage existing successful MBE franchisees to purchase
additional centers.
INTERNATIONAL EXPANSION. MBE plans to continue to expand the number of
master licensees outside of the United States, and to continue to explore
opportunities for new relationships in other countries. MBE expects that
international growth will account for an increasingly significant proportion of
the total growth of MBE Centers. Approximately 600 MBE Centers are currently
open outside the United States, with another 40 MBE Centers under contract as
new foreign outlets.
COMPETITION
NAOPG
NAOPG operates in a highly competitive market. The Company estimates that
its NAOPG contract stationer operations have attained approximately a 4% share
of the approximately $30.0 billion of annual revenues of all contract stationers
in the United States. The Company believes that it has five major competitors
and that the combined market share of all five of these competitors is less than
35%. The Company's five major competitors include: Boise Cascade Office Products
Corporation; Corporate Express, Inc.; Office Depot; BT Office Products
International, Inc.; and Staples, Inc. Two of these five competitors are
divisions of discount superstore chains and two others are primarily owned by
large manufacturers of office products. As the office products industry has
undergone rapid consolidation, many smaller office supply companies have been
acquired by larger companies or have closed. Nevertheless, the market remains
highly fragmented, with more than 4,300 independent suppliers representing more
than 50% of the U.S. market.
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<PAGE>
In the contract stationery market, as well as the other markets that it
serves or may in the future seek to serve, the Company believes that customers
not only are concerned with the overall reduction of their office products
costs, but also place an emphasis on dependability, superior levels of service
and flexible delivery capabilities. The Company believes that it competes
favorably with its five largest competitors in the contract stationery market on
the basis of service and price. However, some of these companies have greater
financial resources than the Company.
INTERNATIONAL
The markets in which Blue Star operates are extremely competitive. In New
Zealand, the Company believes that its three main competitors are Corporate
Express, Warehouse and Office Products Depots, which together with Blue Star
serve the vast majority of the market. Independent operators and retail
bookstore chains are the primary outlets serving the remaining market.
In Australia, Corporate Express, Boise Cascade and Viking Office Products,
Inc. are Blue Star's major competitors. However, the market remains highly
fragmented with a large number of independent operators.
MAIL BOXES ETC.
The market for ancillary services and products served by MBE, including
office supplies, telecopy and copying services, is highly fragmented with
products and services being provided by national chains, medium to small
independent outlets, and specialty service providers such as copy centers, quick
print centers and office supply companies. In the United States, the U.S. Postal
Service is the primary competitor in the SOHO market for mailing and packaging,
particularly its postal service centers located in shopping centers and other
locations. A growing segment of other domestic business is also being captured
by discount outlets such as Staples and Office Depot. In addition, approximately
10,000 other independent or franchised postal and business service centers
operate in the United States and compete with MBE.
EMPLOYEES
The Company currently has approximately 15,382 full-time employees, a small
number of whom are members of labor unions. In general, the Company considers
its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
The Company operates more than 800 facilities in various states and in New
Zealand, Australia and Canada, including one facility located in Washington,
D.C. for its corporate headquarters. Of these facilities, more than 90% are
leased and the rest are owned. The facilities are used for retail, warehouse and
office purposes, or a combination of these functions. The aggregate square
footage for all facilities is approximately 9.4 million square feet, consisting
of approximately 2.1 million square feet for retail use, approximately 5.5
million square feet for warehouse use and approximately 1.8 million square feet
for office use.
The terms on the Company's leases are from one month to 20 years, with the
majority of the terms ranging from five to ten years. The Company generally pays
market rates for its leases. The Company leases approximately 7.9 million square
feet and owns approximately 1.5 million square feet.
Approximately 280 leases, representing approximately 29% of the Company's
total leased space, will expire in the next twelve months. Many of these leases
contain renewal options. Where necessary, the Company intends to seek to renew
or extend such expiring leases, and the Company believes that it will be able to
do so on terms that are acceptable to it. When no renewal option exists or the
property is no longer a desirable location for operational purposes, the Company
will evaluate the local real estate market and
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<PAGE>
seek to identify alternative space in sufficient time to negotiate an acceptable
lease agreement prior to the expiration of the existing lease. The Company has
generally been able to renew or extend its expiring leases, and enter into new
leases where necessary, on acceptable terms.
The Company believes that its facilities are and will be suitable for their
respective purposes, and have adequate productive capacity for the Company's
present and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to legal proceedings arising in
the normal course of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
On April 14, 1998, a stockholder purporting to represent a class composed of
all the Company's stockholders filed an action in the Delaware Chancery Court.
The action names the Company and its directors as defendants, and claims that
the directors breached their fiduciary duty to stockholders of the Company by
changing the terms of the Equity Tender to include employee stock options. The
complaint seeks injunctive relief, damages and attorneys' fees. The directors
have filed an answer denying the claims against them, and the Company has moved
to dismiss all claims against it. The Company believes that this lawsuit is
without merit and intends to vigorously contest it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders for consideration
during the quarter ended April 25, 1998.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) Price Range of Common Stock.
The following table sets forth for the periods indicated the high ask and
low bid prices for the Common Stock, as reported on the Nasdaq National Market
for each fiscal quarter during the last two fiscal years. On November 6, 1997,
the Company effected a three-for-two split of the common stock, and on June 10,
1998, the Company effected a one-for-four reverse stock split of the common
stock. The prices given below are adjusted retroactively to reflect these
actions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED APRIL 26, 1997
First fiscal quarter....................................................................... $ 121.33 $ 65.33
Second fiscal quarter...................................................................... $ 101.33 $ 66.00
Third fiscal quarter....................................................................... $ 99.33 $ 70.00
Fourth fiscal quarter...................................................................... $ 92.67 $ 53.33
FISCAL YEAR ENDED APRIL 25, 1998
First fiscal quarter....................................................................... $ 82.33 $ 58.68
Second fiscal quarter...................................................................... $ 103.67 $ 68.84
Third fiscal quarter....................................................................... $ 99.32 $ 58.75
Fourth fiscal quarter...................................................................... $ 79.25 $ 67.00
</TABLE>
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS. The number of record holders
of the Company's common stock as of July 13, 1998 was 1028. The Company believes
that a substantially larger number of beneficial owners hold such shares of
common stock in depository or nominee form.
DIVIDENDS. The Company has not declared or paid any cash dividends on the
Company's common stock to date and does not anticipate paying any cash dividends
on its shares of common stock in the foreseeable future because it intends to
retain its earnings, if any, to finance the expansion of its business and for
general corporate purposes. Any payment of future dividends will be at the
discretion of the Board of Directors and will depend upon, among other things,
the Company's earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to the payment of dividends
and other factors that the Company's Board of Directors deems relevant. Further,
the Company's credit facility restricts the Company's ability to pay dividends,
permitting the payment of dividends only (i) in the form of Common Stock (or
rights to purchase Common Stock) or (ii) in the event the Company makes a public
offering of its Common Stock, up to 6% of the aggregate gross proceeds from such
public offering.
(b) Not Applicable.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
the five years ended April 25, 1998. The selected statement of income data and
selected statement of cash flows data for the fiscal years ended April 25, 1998,
April 26, 1997, and April 30, 1996 and the selected balance sheet data as of
April 25, 1998 and April 26, 1997 have been derived from the Company's
consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP and that appear elsewhere in this Annual Report. The
PricewaterhouseCoopers LLP report on the financial statements is based in part
on the reports of other independent accountants, which appear elsewhere in this
Annual Report. The selected statement of income data and selected statement of
cash flows data for the fiscal year ended April 30, 1995 and the selected
balance sheet data as of April 30, 1996 have been derived from the Company's
consolidated
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<PAGE>
financial statements that have been audited by PricewaterhouseCoopers LLP not
included elsewhere in this Annual Report. The selected statement of income data
for the fiscal year ended April 30, 1994 and the selected balance sheet data as
of April 30, 1995 and 1994 have been derived from unaudited combined financial
statements of the Company not included elsewhere in this Annual Report.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
APRIL 25, APRIL 26, APRIL 30, APRIL 30, APRIL 30,
1998 1997 1996 1995 1994
------------ ------------ ------------ ---------- ----------
STATEMENT OF INCOME DATA:
Revenues....................................... $ 2,611,740 $ 2,115,954 $ 1,061,528 $ 658,494 $ 523,755
Cost of revenues............................... 1,884,892 1,518,287 789,436 485,955 377,494
------------ ------------ ------------ ---------- ----------
Gross profit................................. 726,848 597,667 272,092 172,539 146,261
Selling, general, and administrative
expenses..................................... 591,463 488,215 231,569 152,176 132,320
Amortization expense........................... 19,938 12,416 2,711 801 733
Non-recurring acquisition costs................ 8,001 8,057
Restructuring costs............................ 6,187 4,201 682
------------ ------------ ------------ ---------- ----------
Operating income............................. 109,260 84,834 29,073 19,562 13,208
Interest expense............................... 37,837 36,047 8,132 3,401 2,519
Interest income................................ (1,853) (6,857) (3,506) (675) (411)
Other income................................... (7,146) (4,233) (684) (1,456) (1,315)
------------ ------------ ------------ ---------- ----------
Income from continuing operations before
provision for income taxes and extraordinary
items........................................ 80,422 59,877 25,131 18,292 12,415
Provision for income taxes..................... 36,946 27,939 6,032 2,800 1,727
------------ ------------ ------------ ---------- ----------
Income from continuing operations before
extraordinary items.......................... 43,476 31,938 19,099 15,492 10,688
Income from discontinued operations, net of
income taxes (2)............................. 23,712 26,800 15,778 15,675 10,953
------------ ------------ ------------ ---------- ----------
Income before extraordinary items.............. 67,188 58,738 34,877 31,167 21,641
Extraordinary items--losses on early
terminations of credit facilities, net of
income taxes................................. 1,450 701
------------ ------------ ------------ ---------- ----------
Net income..................................... $ 67,188 $ 57,288 $ 34,176 $ 31,167 $ 21,641
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------
APRIL 25, APRIL 26, APRIL 30, APRIL 30, APRIL 30,
1998 1997 1996 1995 1994
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Per share amounts(3):
Basic:
Income from continuing operations before
extraordinary items...................... $ 1.45 $ 1.42 $ 1.13 $ 1.36 $ 0.97
Income from discontinued operations........ 0.80 1.19 0.93 1.38 0.99
Extraordinary items........................ (0.06) (0.04)
------------ ------------ ------------ ---------- ----------
Net income................................. $ 2.25 $ 2.55 $ 2.02 $ 2.74 $ 1.96
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
Diluted:
Income from continuing operations before
extraordinary items...................... $ 1.43 $ 1.39 $ 1.12 $ 1.36 $ 0.97
Income from discontinued operations........ 0.77 1.17 0.92 1.37 0.99
Extraordinary items............................ (0.06) (0.04)
------------ ------------ ------------ ---------- ----------
Net income..................................... $ 2.20 $ 2.50 $ 2.00 $ 2.73 $ 1.96
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
APRIL 25, APRIL 26, APRIL 30, APRIL 30, APRIL 30,
1998 1997 1996 1995 1994 (4)
----------- ----------- ----------- ---------- -----------
STATEMENT OF CASH FLOWS DATA:
EBITDA (5)........................................ $ 172,614 $ 133,138 $ 48,811 $ 26,083
Net cash provided by operating activities......... 83,562 15,812 19,246 7,741
Net cash used in investing activities............. (150,389) (423,955) (120,061) (26,175)
Net cash provided by financing activities......... 76,418 277,420 257,766 22,255
Net increase (decrease) in cash and cash
equivalents..................................... 7,995 (139,457) 158,537 7,190
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
APRIL 25, APRIL 26, APRIL 30, APRIL 30, APRIL 30,
1998 1997 1996 1995 1994
------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................. $ 53,000 $ 233,986 $ 274,124 $ 70,153 $ 51,344
Total assets..................................... 2,541,427 1,711,873 805,978 259,904 172,656
Long-term debt, less current portion............. 382,174 380,209 176,230 18,841 15,112
Stockholders' equity............................. 1,486,131 921,148 394,746 128,512 77,735
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
</TABLE>
- ------------------------
(1) As a result of the completion of the Strategic Restructuring Plan in June
1998, the Company expects that future results will differ significantly from
historical results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction."
(2) The results of the Spin-Off Companies are reflected as discontinued
operations for all periods presented in the Company's consolidated statement
of income.
(3) The per share amounts give effect to the one-for-four reverse stock split
completed by the Company in June 1998 in conjunction with the Strategic
Restructuring Plan.
(4) No statement of cash flows data has been provided for the fiscal year ended
April 30, 1994.
(5) EBITDA represents earnings before interest, income taxes, depreciation,
amortization, non-recurring acquisition costs, restructuring costs and
extraordinary items. EBITDA is provided because it is a measure commonly
used by analysts and investors to determine a company's ability to incur and
service its debt. EBITDA is not a measurement of performance under GAAP and
should not be considered an alternative to net income as a measure of
performance or to cash flow as a measure of liquidity. EBITDA is not
necessarily comparable with similarly titled measures for other companies.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements, including the related notes thereto,
appearing elsewhere in this Annual Report. The Company's audited consolidated
financial statements have been restated to reflect (i) the results of the
businesses that were spun off to stockholders in June 1998 as part of the
Company's comprehensive restructuring plan (the "Strategic Restructuring Plan")
as discontinued operations; and (ii) as a result of the adoption of the
Strategic Restructuring Plan, the change in accounting treatment of 22 business
combinations completed during fiscal 1998, from the pooling-of-interests method
to the purchase method, which resulted in the recording of approximately $422.8
million of additional goodwill (including $293.7 million related to continuing
operations). In addition, except as otherwise noted, the following discussion
gives effect to the one-for-four reverse stock split (the "Reverse Stock Split")
completed by the Company in June 1998 in conjunction with the completion of the
Strategic Restructuring Plan.
In June 1998, the Company completed the Strategic Restructuring Plan. The
principal elements of the Strategic Restructuring Plan were:
- EQUITY TENDER OFFER. Pursuant to a self-tender offer (the "Equity
Tender"), the Company repurchased 9,259,261 shares (37,037,042 shares
prior to the Reverse Stock Split) of its common stock, including 1,140,186
shares (4,560,743 shares prior to the Reverse Stock Split) that were
issued on exercise of vested and unvested options for common stock at
$108.00 per share ($27.00 per share prior to the Reverse Stock Split) (or
in the case of stock options, at $108.00 per share ($27.00 per share prior
to the Reverse Stock Split) minus the exercise price of the options). The
Company repurchased the shares for $934.6 million in cash. In fiscal 1999,
the Company will record a non-cash compensation expense of approximately
$60.0 million, before the related benefit from income taxes, related to
the participation of stock options in the Equity Tender.
- SPIN-OFF DISTRIBUTIONS. After acceptance of the shares in the Equity
Tender, the Company distributed to U.S. Office Products' stockholders the
shares of four separate companies (collectively, the "Spin-Off
Companies"): Aztec Technology Partners, Inc. (one share for every 1.25
shares (5.0 shares prior to the Reverse Stock Split) of U.S. Office
Products common stock held), Workflow Management, Inc. (one share for
every 1.875 shares (7.5 shares prior to the Reverse Stock Split) of U.S.
Office Products common stock held), School Specialty, Inc. (one share for
every 2.25 shares (9.0 shares prior to the Reverse Stock Split) of U.S.
Office Products common stock held) and Navigant International, Inc. (one
share for every 2.5 shares (10.0 shares prior to the Reverse Stock Split)
of U.S. Office Products common stock held). The distributions of the
shares of the Spin-Off Companies are referred to as the "Distributions."
The Spin-Off Companies operate U.S. Office Products' former technology
solutions, print management, educational supplies and corporate travel
services businesses, respectively.
- EQUITY INVESTMENT. After the Distributions, an affiliate ("Investor") of
an investment fund managed by Clayton, Dubilier & Rice, Inc., a private
investment firm, acquired the following equity securities of the Company
for $270.0 million: (i) approximately 9,092,106 shares (24.9%) of the
Company's common stock, (ii) special warrants (the "Special Warrants")
entitling Investor to purchase additional common stock in certain
circumstances intended to permit Investor to maintain its 24.9% equity
ownership position, and (iii) warrants (the "Warrants") entitling Investor
to purchase additional shares of common stock for $405 million equal to
the number of shares of common stock it purchased outright plus the number
of shares it acquires or is entitled to acquire pursuant to the Special
Warrants. The Warrants are exercisable at any time after June 10, 2000
until June 10, 2010. Investor did not acquire any interests in the
Spin-Off Companies.
17
<PAGE>
In conjunction with the Strategic Restructuring Plan, U.S. Office Products
completed the following financing transactions (the "Financing Transactions") in
June 1998:
- Pursuant to a tender offer, the Company repurchased $222.2 million of its
5 1/2% convertible subordinated notes due 2003 (the "2003 Notes") for a
purchase price of 94.5% of the principal amount and accrued interest on
the 2003 Notes. In fiscal 1999, the Company will record an extraordinary
gain of $12.2 million, before provision for income taxes, on the early
extinguishment of the 2003 Notes. In addition, in fiscal 1999, the Company
will record a non-cash expense of approximately $5.3 million, before
benefit from income taxes, related to the write-off of debt issue costs
capitalized in connection with the issuance of the 2003 Notes.
- Pursuant to an exchange offer, the Company exchanged $131.0 million of its
5 1/2% convertible subordinated notes due 2001 (the "2001 Notes") for
2,025,185 shares of common stock at an exchange rate of 15.461 shares of
U.S. Office Products common stock for each $1,000 principal amount of the
2001 Notes, which effectively reduced the conversion price of the 2001
Notes from $76.00 to $64.68 ($19.00 and $16.17 prior to the Reverse Stock
Split) while the exchange offer was open. In fiscal 1999, the Company will
record a non-cash expense of $20.4 million as a result of the reduction in
the conversion price of the 2001 Notes. In addition, in fiscal 1999, the
Company will record a non-cash expense of approximately $3.0 million,
before benefit from income taxes, related to the write-off of debt issue
costs capitalized in connection with the issuance of the 2001 Notes.
- The Company entered into a new $1,225.0 million senior secured bank credit
facility (the "Credit Facility") that consists of the following (i) a
$200.0 million seven-year multi-draw loan facility; (ii) a $250.0 million
seven-year revolving credit facility; (iii) a $100.0 million seven-year
term loan facility; and (iv) a $675.0 million eight-year term loan
facility. As a result of the Company entering into the Credit Facility,
the Company terminated its former credit facility which will result in the
Company recording a non-cash expense of approximately $4.8 million, before
benefit from income taxes, in fiscal 1999, related to the write-off of
debt issue costs capitalized in connection with the former credit
facility.
- The Company issued and sold $400.0 million in 9 3/4% senior subordinated
notes due 2008 (the "2008 Notes") in a private placement at 99.583% of the
principal amount.
As a result of the Strategic Restructuring Plan, the Company's consolidated
financial statements reflect the results of those companies owned by the
Spin-Off Companies (and thus included in the Distributions) as discontinued
operations. The Company's continuing operations consist of its North American
Office Products Group (which includes office supply, office furniture, and
office coffee, beverage, and vending service businesses) ("NAOPG"), Mail Boxes
Etc. ("MBE") which the Company acquired in November 1997, the Company's
operations in New Zealand and Australia, and the Company's 49% interest in
Dudley Stationery Limited, a U.K. contract stationer. The NAOPG operates
primarily in the United States; it also includes three coffee and beverage
businesses located in Canada.
The Company's continuing operations derive revenues primarily from the sale
of a wide variety of office supplies, office furniture, and other office
products, including office 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 inventory when such inventory is sold. Selling, general and
administrative expenses represent product marketing and selling costs, customer
service and product design costs, warehouse costs, and other administrative
expenses.
Following completion of the Strategic Restructuring Plan, the Company
expects to focus more on expanding existing operations and improving their
profitability and less on growth through acquisitions. The Company believes that
the majority of its future acquisitions will be of smaller businesses and that,
as a result, acquisitions will account for a much smaller percentage of the
Company's overall revenue growth
18
<PAGE>
than in the past. See "Item 1. Business." The Company also expects that in the
future it will report net income and net income per share amounts that are
significantly less than the amounts that have been reported historically.
Management believes that this will be the result primarily of three factors: (i)
substantially higher amortization expenses as compared to prior periods (as a
result of reclassifying 12 business combinations as purchase acquisitions
(including the acquisition of MBE), rather than under the pooling-of-interests
method, as the Company had originally intended); (ii) substantially higher
interest expense, as a result of increased borrowing that the Company incurred
to help finance the cost of the Equity Tender and the Financing Transactions;
and (iii) higher effective income tax rates, due to increased non-deductible
goodwill expense and lower income before provision for income taxes. Rather than
net income and net income per share, management believes that a more meaningful
indication of the Company's performance will be cash flows from operations and
earnings before interest expense, provision for income taxes, depreciation
expense and amortization expense ("EBITDA"). The Company expects to focus
substantial attention on operating strategies intended to increase EBITDA both
in absolute terms and as a percentage of revenues. As the Company derives
approximately one-third of its revenues from operations in New Zealand and
Australia, the Company's results of operations, cash flows and financial
position will continue to be affected by fluctuations in foreign currency
exchange rates, which have deteriorated significantly in New Zealand and
Australia since the beginning of fiscal 1998. See "-- Liquidity and Capital
Resources" and "--Factors Affecting the Company's Business."
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 will involve the incurrence by the Company of certain
restructuring costs. The Company is currently developing formal plans to
implement such a restructuring. 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
by the Company's senior management. The Company has announced that it expects
such a plan will be committed to in the first quarter of fiscal 1999 and
estimates that the costs of such a plan may range from $80 million to $105
million, slightly more than half of which will be cash charges paid out over
approximately a three year period as the Company consolidates existing
facilities. The Company estimates that this charge, together with the
approximately $110 million of costs associated with the Strategic Restructuring
Plan (approximately $80 million of which are non-cash charges), will result in
total restructuring charges of approximately $190 to $215 million. The Company
expects to record all of these one-time charges in the first quarter of fiscal
1999. No authorization for any of these costs occurred during fiscal 1998.
Except where specifically noted, the discussion of financial condition and
results of operations that appears below covers only the Company's continuing
operations. For additional information about the results of discontinued
operations, see note 3 to the Company's audited consolidated financial
statements.
The Company's financial condition and results of operations have changed
dramatically from the Company's inception in October 1994 to April 25, 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
fiscal 1998, the Company completed an additional 73 business combinations (51
related to continuing operations and 22 related to discontinued operations). As
a result of the Board's adoption of the Strategic Restructuring Plan in January
1998, all 73 business combinations completed during fiscal 1998 were accounted
for under the purchase method. Prior to the adoption of the Strategic
Restructuring Plan, 22 of the fiscal 1998 business combinations had been
accounted for under the pooling-of-interests method (12 related to continuing
operations, including the acquisition of MBE, and 10 related to discontinued
operations). Following adoption of the Strategic Restructuring Plan, the Company
19
<PAGE>
restated its historical consolidated financial statements to account for these
22 business combinations under the purchase method. The Company's consolidated
financial statements give retroactive effect to the business combinations
accounted for under the pooling-of-interests method during fiscal 1997 and 1996
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, dollar
increases in the various revenue 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 noted above, the Company expects to focus more on
improving and expanding existing operations, and less on acquisitions as a means
of growth. The Company also 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.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the fiscal years ended April 25, 1998, April 26, 1997 and April 30, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
APRIL 25, APRIL 26, APRIL 30,
1998 1997 1996
----------- ----------- -----------
Revenues........................................................................... 100.0% 100.0% 100.0%
Cost of revenues................................................................... 72.2 71.8 74.4
----- ----- -----
Gross profit....................................................................... 27.8 28.2 25.6
Selling, general and administrative expenses....................................... 22.6 23.1 21.8
Amortization expense............................................................... 0.8 0.6 0.3
Non-recurring acquisition costs.................................................... 0.4 0.7
Restructuring costs................................................................ 0.2 0.1 0.1
----- ----- -----
Operating income................................................................... 4.2 4.0 2.7
Interest expense, net.............................................................. 1.4 1.4 0.4
Other income....................................................................... (0.3) (0.2) (0.1)
----- ----- -----
Income from continuing operations before provision for income taxes and
extraordinary items.............................................................. 3.1 2.8 2.4
Provision for income taxes......................................................... 1.4 1.3 0.6
----- ----- -----
Income from continuing operations before extraordinary items....................... 1.7 1.5 1.8
Income from discontinued operations, net of income taxes........................... 0.9 1.3 1.5
----- ----- -----
Income before extraordinary items.................................................. 2.6 2.8 3.3
Extraordinary items--losses on early terminations of credit facilities, net of
income taxes..................................................................... 0.1 0.1
----- ----- -----
Net income......................................................................... 2.6% 2.7% 3.2%
----- ----- -----
----- ----- -----
</TABLE>
20
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
YEAR ENDED APRIL 25, 1998 COMPARED TO THE YEAR ENDED APRIL 26, 1997
Consolidated revenues increased 23.4%, from $2,116.0 million in fiscal 1997,
to $2,611.7 million in fiscal 1998. This increase was primarily due to
acquisitions. Revenues for fiscal 1998 include revenues from 122 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 fiscal 1997 include revenues from 71 of the Fiscal 1997 and 1998
Purchased Companies for a portion of such period. The increase in revenues was
partially offset by the effect on international revenues of the devaluation of
the New Zealand and Australian dollars versus the United States dollar ("USD").
Because revenues generated in New Zealand and Australia contributed
approximately one-third of the Company's consolidated revenues in fiscal 1998,
management estimates that the currency devaluation had the effect of reducing
the Company's increase in reported consolidated revenues (in U.S. dollar terms)
by approximately 4.8%.
International revenues increased 24.7%, from $708.4 million, or 33.5% of
consolidated revenues in fiscal 1997, to $883.0 million, or 33.8% of
consolidated revenues in fiscal 1998. The increase in international revenues was
primarily due to the inclusion, in the revenues for fiscal 1998, of revenues
from 39 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 16 of such companies were included in international revenues for a portion
of fiscal 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. International revenues in New Zealand and Australia, calculated in
their local currencies, increased 40.0% in fiscal 1998, as compared to fiscal
1997. From April 25, 1998 through June 24, 1998 these exchange rates declined
further. See "--Liquidity and Capital Resources" and "--Factors Affecting the
Company's Business-Operations Outside of the United States." The following table
illustrates the declines in the average exchange rates of the New Zealand and
Australian dollars versus the USD in fiscal 1998 and 1997:
<TABLE>
<CAPTION>
AVERAGE EXCHANGE RATES
-------------------------------------
<S> <C> <C> <C>
FISCAL FISCAL
1998 1997 DECLINE
----------- ----------- -----------
New Zealand dollar....................................................................... $ .62 $ .70 $ (.08)
Australian dollar........................................................................ .71 .79 (.08)
</TABLE>
Gross profit increased 21.6%, from $597.7 million in fiscal 1997, to $726.8
million in fiscal 1998. Gross profit as a percentage of revenues decreased from
28.2% in fiscal 1997 to 27.8% in fiscal 1998. The 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. In addition, the Company experienced a slight decline in gross
profit as a percentage of revenues in the fourth quarter of fiscal 1998. The
Company believes that a number of factors have contributed to this slight
decline and is currently working to isolate and address such factors. This
decrease was 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 21.1%, from $488.2
million in fiscal 1997, to $591.5 million in fiscal 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 23.1% in fiscal 1997 to 22.6% in fiscal 1998. The decrease in
selling, general and administrative expenses as a percentage of revenues was due
to several factors, including (i) a shift in revenue mix,
21
<PAGE>
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 level 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.
The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interest in the
Company, which the Company believes has the effect of more closely aligning
their interests with the interests of stockholders of the Company. As a result
of this use of stock options, if the Company had recorded compensation expense
based upon the fair market value of such stock options on the dates of grant
under the methodology prescribed by Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company's
income from continuing operations for fiscal 1998 would have been reduced by
approximately $19.1 million or 44.0%. In addition, as a result of the
Distributions, and consistent with and the anti-dilution provisions of the
Company's stock option plan and generally accepted accounting principles
("GAAP"), the Company adjusted the number of employee stock options and the
exercise prices of such options to keep option holders in the same economic
position immediately before and after the Distributions. The net impact of this
adjustment and the additional adjustment made under the stock option plan to
reflect the Reverse Stock Split was to reduce the number of options outstanding
by slightly more than one-half and to slightly less than double the exercise
prices of such options. Because the Reverse Stock Split reduced the number of
shares outstanding by 75%, these option adjustments had the effect of increasing
the number of stock options outstanding, as a percentage of total shares
outstanding. As a result of these adjustments as of July 13, 1998, the Company
was not able to grant additional stock options to employees, as the Company's
stock option plan prohibits additional grants to be made if such additional
grants would cause the total number of stock options outstanding to exceed 20%
of total shares outstanding. The Company is currently reviewing its cash and
non-cash compensation programs to ensure that they remain competitive and to
assess what approach it should take to future long-term incentive awards
(including stock options and other equity-based awards). The Company believes
that it offers market competitive cash compensation packages and does not expect
that the current limits on its ability to issue stock options will have a
material adverse impact on its ability to attract and retain qualified
employees.
Amortization expense increased 60.6%, from $12.4 million in fiscal 1997, to
$19.9 million in fiscal 1998. This increase is due exclusively to the increase
in the number of purchase acquisitions, including the 12 acquisitions related to
continuing operations that had originally been 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 fiscal 1998 versus
fiscal 1997. The Company expects that amortization expense will be higher in
fiscal 1999 because amortization expense from these 12 acquisitions will be
included for the entire year. See "--Factors Affecting the Company's
Business--Intangible Assets."
The Company incurred non-recurring acquisition costs of approximately $8.0
million during fiscal 1997, in conjunction with business combinations that were
accounted for under the pooling-of-interests method. The Company did not incur
any non-recurring acquisition costs in fiscal 1998 because all of the Company's
acquisitions in fiscal 1998 were accounted for under the purchase 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. GAAP
requires 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 GAAP, the Company may be unable to utilize the pooling-
of-interests method to account for acquisitions for a period of up to six to
nine months following the completion of the Strategic Restructuring Plan. During
this period, the Company would not reflect any
22
<PAGE>
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.
The Company incurred restructuring costs of approximately $6.2 million
during fiscal 1998 and $4.2 million during fiscal 1997. 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. As discussed in "--Introduction," the
Company expects to record significant additional restructuring costs in the
first quarter of fiscal 1999 in connection with the consolidation of its
operations.
Interest expense, net of interest income, increased 23.3% from $29.2 million
in fiscal 1997, to $36.0 million in fiscal 1998. This was due primarily to a
reduction in interest income during fiscal 1998. The Company earned interest
income on the proceeds from the issuance of an aggregate of $230.0 million of
the 2003 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. As a result of the completion of the Strategic
Restructuring Plan and the related Financing Transactions, the amount of debt
outstanding and the interest rates related to such debt increased significantly,
as compared to April 25, 1998. As a result, the Company expects that interest
expense will increase significantly in fiscal 1999 as compared to fiscal 1998.
See "--Liquidity and Capital Resources" and "--Factors Affecting the Company's
Business--Substantial Leverage; Ability to Service Debt."
Other income increased 68.8%, from $4.2 million in fiscal 1997, to $7.1
million in fiscal 1998. Other income for fiscal 1998 of $7.1 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 from Dudley. The Company acquired
its interest in Dudley in November 1996. Other income for fiscal 1997 of $4.2
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 cannot predict whether or when such
opportunities will be realized, or what amount of other income might be
available to the Company.
Provision for income taxes increased from $27.9 million in fiscal 1997 to
$36.9 million in fiscal 1998, reflecting effective income tax rates of 46.7% and
45.9%, respectively. During both fiscal years, the effective income tax rates
reflect the recording of income tax provisions at the federal statutory rate of
35.0%, plus applicable state and local taxes. In addition, the effective income
tax rates were increased in both periods to reflect the incurrence of
non-deductible goodwill amortization expense. The provision for income taxes for
fiscal 1997 also reflects the incurrence of non-deductible, non-recurring
acquisition costs offset by the effect of several business combinations in such
period accounted for under the pooling-of-interests method, where the acquired
companies 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. As a result of the completion of the Strategic Restructuring
Plan, the amount of non-deductible goodwill has increased significantly and the
Company expects that income before income taxes will decrease. As a result, the
Company expects that its effective income tax rate will be significantly higher
in fiscal 1999 than it was in prior years.
Income from discontinued operations decreased 11.5% from $26.8 million in
fiscal 1997 to $23.7 million in fiscal 1998. See note 3 to the Company's audited
consolidated financial statements.
23
<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 of revenues from the 71 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 26 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 16 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 from
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.
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 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.
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 $373.8 million of 2001 Notes and 2003 Notes during the fourth
quarter of
24
<PAGE>
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 2001 Notes and the 2003 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 Dudley.
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
non-deductible 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 3 to the Company's audited
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.
LIQUIDITY AND CAPITAL RESOURCES
On a pro forma basis, at April 25, 1998, the Company had working capital of
$391.2 million, long-term debt of $1,162.6 million and capitalization of
$1,738.2 million. Such pro forma amounts give effect to the Strategic
Restructuring Plan, including the Financing Transactions, as if such
transactions had occurred on April 25, 1998.
In June 1998, the Company completed the Strategic Restructuring Plan. See
"--Introduction." The Company financed the aggregate cost of purchasing shares
in the Equity Tender, repurchasing $222.2 million of its 5 1/2% convertible
subordinated notes due 2003, and repaying its former credit facility with the
proceeds of the Equity Investment, the net proceeds from the sale and issuance
of the 2008 Notes and borrowings under the Credit Facility. The Company also
incurred significant transaction (including financing) costs and expenses. See
"--Results of Operations." In connection with the completion of the Strategic
Restructuring Plan, the Company incurred approximately $400.0 million of
additional indebtedness, and the weighted average annual interest rate on all
outstanding indebtedness increased from approximately 6.8% prior to completion
of the Strategic Restructuring Plan to approximately 9.2% after completion of
the Strategic Restructuring Plan. At June 24, 1998, the Company had $775.0
million outstanding under its Credit Facility and availability of $450.0
million.
Upon completion of the Strategic Restructuring Plan, the Company terminated
and repaid the balance outstanding under its former $500.0 million credit
facility and entered into the Credit Facility. The Credit Facility provides for
an aggregate principal amount of $1,225.0 million, consisting of (i) a
seven-year multi-draw term loan facility totaling $200.0 million, (ii) a
seven-year revolving credit facility totaling $250.0 million, (iii) a seven-year
term loan facility totaling $100.0 million, and (iv) an eight-year term loan
facility totaling $675.0 million. In connection with the completion of the
Strategic Restructuring Plan and the Financing Transactions, the Company
borrowed the full amount of the two single-draw term loan facilities. The
multi-draw facility and the revolving facility remain available for future
borrowings. Interest
25
<PAGE>
rates on such borrowings bear interest, at the Company's option, at the lending
bank's base rate plus an applicable margin of up to 1.50%, or a eurodollar rate
plus an applicable margin of up to 2.50%. The Company's obligations under the
Credit Facility are guaranteed by its present domestic subsidiaries; future
material domestic subsidiaries will also be required to guarantee these
obligations. The Credit Facility is secured by substantially all of the assets
of the Company and its domestic subsidiaries; future material domestic
subsidiaries also will be required to pledge their assets as security. The
Company was required to enter into arrangements to ensure that the effective
interest rate paid by the Company on at least 50% of the aggregate amount
outstanding under the Credit Facility and the 2008 Notes was at a fixed rate of
interest. As a result, the Company has entered into interest rate swap
arrangements to limit the LIBOR-based interest rate exposure on $500.0 million
of the outstanding balance under the Credit Facility to rates ranging from 5.7%
to 6.0%. The interest rate swap agreements expire over a period ranging from
2001 to 2003. As a result of these swap agreements, the Company has fixed the
interest rates on $900 million (77%) of the long-term debt outstanding at June
24, 1998.
The Credit Facility includes, 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, amendment
provisions and indemnification provisions. The Credit Facility is subject to
mandatory prepayment in a variety of circumstances, including upon certain asset
sales and financing transactions, and also from excess cash flow (as defined in
the Credit Facility). The 2008 Notes are also guaranteed by the Company's
present domestic subsidiaries and are secured by substantially all of the assets
of the Company and its domestic subsidiaries; future material domestic
subsidiaries will also be required to guarantee the 2008 Notes and pledge their
assets as security. The indenture governing the 2008 Notes places 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. The eight-year term loan facility contains negative covenants and
default provisions substantially similar to those contained in the indenture
governing the 2008 Notes.
On a historical basis, the Company's working capital was $234.0 million at
April 26, 1997 and $53.0 million at April 25, 1998. Long-term debt was $380.2
million at April 26, 1997 and $382.2 million at April 25, 1998. The decline in
working capital was due primarily to an increase in the Company's borrowings
under its former credit facility from $140.1 million at April 26, 1997 to $365.0
million at April 25, 1998. The increase in the borrowings under the former
credit facility was primarily to fund the purchase price of acquisitions and to
repay higher-cost debt assumed in acquisitions. In addition, in fiscal 1997 the
Company completed the public sale, at a gross price of $88.00 per share, of
approximately 3.3 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 former credit facility.
During fiscal 1998, the New Zealand and Australian dollars weakened against
the USD. The New Zealand exchange rate declined from U.S. $.69 at April 27, 1997
to U.S. $.56 at April 25, 1998. The Australian exchange rate declined from U.S.
$.78 at April 27, 1997 to U.S. $.65 at April 25, 1998. This resulted in a
reduction in stockholders' equity, through a cumulative translation adjustment,
of approximately $105.7 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 25, 1998, the New Zealand and
Australian dollars have continued to weaken against the USD. As of June 24,
1998, the New Zealand dollar equaled U.S. $0.51 and the Australian dollar
equaled U.S. $0.61. See "--Factors Affecting the Company's Business--Operations
Outside the United States."
26
<PAGE>
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 such items as New Zealand and Australian withholding and other taxes
and foreign currency hedging costs. Subsequent to April 25, 1998, the Company
has entered into foreign currency forward contracts against the New Zealand
dollar with an aggregate notional amount of $25.0 million expiring in January
through April 1999. The effect of these foreign currency forward contracts is to
limit the foreign currency exposure on $25.0 million of the Company's net
investment in its New Zealand subsidiary at rates of U.S. $.48 to U.S. $.51.
The Company anticipates its cash on hand, cash flows from operations and
borrowings available from the Credit Facility will be sufficient to meet its
liquidity requirements for its operations, capital expenditures and additional
debt service obligations for the remainder of the fiscal year. The Company does
not currently anticipate that any possible restructuring costs related to the
Company's planned cost reduction measures, coupled with the expected effects of
such cost reduction measures, would have a material adverse effect on the
Company's liquidity or cash flows. See "--Factors Affecting the Company's
Business--Change in Strategic Focus and Business and Growth Strategies" and
"--Factors Affecting the Company's Business--Challenges of Business
Integration." The Company anticipates capital expenditures of approximately
$40.0 million in both fiscal 1999 and fiscal 2000. The anticipated capital
expenditures will support the Company's district fulfillment center ("DFC")
program, computer system upgrades and maintenance of the Company's existing
infrastructure.
Subsequent to April 25, 1998 and through June 24, 1998, the Company
completed nine business combinations (eight related to continuing operations and
one related to discontinued operations) for an aggregate purchase price of $11.0
million, consisting of cash of $9.6 million and notes payable of $1.4 million.
During fiscal 1998, net cash provided by operating activities was $83.6
million. Net cash used in investing activities was $150.4 million, including
$69.3 million used for acquisitions, $46.7 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 equity investment in Dudley. Net borrowings
increased $60.7 million during fiscal 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
$2.4 million of cash during fiscal 1998.
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 2003 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 2001 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 discontinued operations was $1.7
million.
27
<PAGE>
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
revenues and profitability of the Company's operations in New Zealand and
Australia and at MBE 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 affected by the timing and magnitude 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, and general economic conditions. 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 25, 1998 and April 26, 1997 (in
thousands). The information has been derived from unaudited consolidated
financial 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 1998 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 614,814 $ 649,340 $ 665,959 $ 681,627 $ 2,611,740
Gross profit.............................................. 170,782 179,256 189,220 187,590 726,848
Operating income.......................................... 23,802 28,300 37,289 19,869 109,260
Income from continuing operations......................... 9,035 12,770 15,431 6,240 43,476
Income (loss) from discontinued operations................ 10,951 11,428 3,085 (1,752) 23,712
Net income................................................ 19,986 24,198 18,516 4,488 67,188
Per share amounts:
Basic:
Income from continuing operations....................... 0.34 0.46 0.48 0.18 1.45
Income (loss) from discontinued operations.............. 0.41 0.42 0.10 (0.05) 0.80
Net income.............................................. 0.75 0.88 0.58 0.13 2.25
Diluted:
Income from continuing operations....................... 0.33 0.45 0.47 0.18 1.43
Income (loss) from discontinued operations.............. 0.41 0.40 0.09 (0.05) 0.77
Net income.............................................. 0.74 0.85 0.56 0.13 2.20
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<CAPTION>
(UNAUDITED)
<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
Extraordinary items....................................... (612) (838) (1,450)
Net income................................................ 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before extraordinary
items................................................. 0.34 0.45 0.39 0.25 1.42
Income from discontinued operations..................... 0.46 0.41 0.09 0.25 1.19
Extraordinary items..................................... (0.03) (0.03) (0.06)
Net income.............................................. 0.80 0.83 0.48 0.47 2.55
Diluted:
Income from continuing operations before extraordinary
items................................................. 0.33 0.44 0.38 0.25 1.39
Income from discontinued operations..................... 0.45 0.40 0.09 0.25 1.17
Extraordinary items..................................... (0.02) (0.03) (0.06)
Net income.............................................. 0.78 0.82 0.47 0.47 2.50
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1996, 1997 or 1998.
NEW ACCOUNTING PRONOUNCEMENTS
REPORTING COMPREHENSIVE INCOME. In June 1997, the Financial Accounting
Standards Board ("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.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way management
organizes and evaluates financial information internally for making decisions
and assessing performance. It also requires related disclosures about products,
geographic areas, and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company intends to adopt SFAS No. 131 in
fiscal 1999.
29
<PAGE>
FACTORS AFFECTING THE COMPANY'S BUSINESS
A number of factors, including those discussed below, may affect the
Company's future operating results.
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 generation of increased revenues and margins in
existing businesses through, among other things, expansion into new markets and
additional "cross selling" activities; ability to continue to integrate existing
operations and new acquisitions without substantial delays or other problems;
and achievement of operating improvements and cost reductions, such as volume
purchasing arrangements, consolidation of general and administrative functions
and elimination of redundant facilities, and improvement of technology and
operating and distribution systems. 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.
CHALLENGES OF BUSINESS INTEGRATION. 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 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 the Company. 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 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 its operations and its continuing acquisition
activity.
RISKS RELATED TO ACQUISITIONS. The Company intends to pursue selected
acquisition opportunities; however, no assurance can be given that the Company
will be able to identify, finance and complete additional suitable acquisitions
on acceptable terms, or that future acquisitions, if completed, will be
successful. The Company will likely incur additional debt to finance any
additional acquisitions. Certain limitations under Section 355 of the Internal
Revenue Code of 1986, as amended (the "Code"), may restrict the Company's
ability to issue capital stock for a period of time after the Distributions.
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. See "--Potential Limitations on Stock Issuances."
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
30
<PAGE>
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.
OPERATIONS OUTSIDE OF THE UNITED STATES. Management also 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. In general, the factors described in
this "Factors Affecting the Company's Business" section that apply to the
Company's domestic operations 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
revenues or on its business, financial condition or results of operations.
Declines in the value of the New Zealand and Australian dollars relative to the
USD have adversely affected the Company's reported results. The Company cannot
predict whether these currencies will, in the future, continue to decline or
will increase in value relative to the USD. For a discussion of the impact of
recent declines in the value of these currencies on the Company's financial
condition and results of operations, see "--Results of Operations" and
"--Liquidity and Capital Resources."
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 indebtedness.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT. The Company incurred
substantial indebtedness in connection with the Strategic Restructuring Plan and
the Financing Transactions. As a result, total indebtedness at June 24, 1998 was
approximately $1,175 million. See "--Liquidity and Capital Resources." Subject
to limitations in its existing debt agreements, the Company could incur
additional indebtedness in the future. 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, 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, a portion
of 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. 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 flows 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
31
<PAGE>
business strategy. 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. There can be no assurances that the Company would be able to take
actions or be able to service such indebtedness. Even it additional financing
could be obtained, there can be no assurance that it would be on terms that are
acceptable to the Company. In addition, the pledge of substantially all of the
Company's assets as collateral under the Credit Facility could impair the
Company's ability to obtain financing on terms favorable to the Company. If the
Company were unable to repay its indebtedness to the lenders under the Credit
Facility, such lenders could proceed against the collateral securing such
indebtedness, including substantially all of the Company's assets, and the
Company could be prohibited from making any payments on the 2008 Notes. The
indenture to the 2008 Notes also contains a number of restrictive covenants
relating to the Company. The Company's management does not have experience to
date operating a business with a substantial amount of leverage.
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
transactions related to 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 accelerates)
in those markets. A number of the Company's major competitors are actively
pursuing acquisitions on a global basis.
RISKS AFFECTING MAIL BOXES ETC. Various factors may affect MBE's business.
The United Parcel Service ("UPS") is a key vendor for MBE. The Company estimates
that a significant percentage of the gross revenues of a typical MBE retail
center in the United States is attributable to services provided by UPS. 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 its 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.
ABILITY OF INVESTOR TO INFLUENCE MANAGEMENT. As part of the Strategic
Restructuring Plan, Investor acquired shares, amounting to 24.9% of the
outstanding shares of the common stock after giving effect to the issuance of
such shares. Investor also acquired various warrants that give it the right to
acquire additional shares of common stock in the future that in certain
circumstances could increase its ownership to as much as 39.9% of the common
stock (if no currently outstanding stock options are exercised). Investor has,
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 this right until Investor's
level of ownership of common stock declines by more than
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<PAGE>
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 the 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 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.
INTANGIBLE ASSETS. As of April 25, 1998, approximately $923.0 million, or
45.7% of the Company's total assets on a pro forma basis, 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. As a
result of the Equity Tender and the Distributions, the Company may be precluded
from completing business combinations accounted for under the
pooling-of-interests method for a period of up to six to nine months. Any
business combinations that the Company completes during this period will have to
be accounted for under the purchase method. As a result, the amount of goodwill
reflected on the Company's balance sheet will increase to the extent that the
Company acquires additional companies under the purchase method of accounting.
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
holds shares of common stock representing 24.9% of shares outstanding and
warrants to purchase an equal number of shares (plus additional shares in
certain circumstances). An investment agreement with Investor 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, upon exercise of outstanding options, options that may be issued in the
future, and warrants, and upon maturity or exercise of other rights to acquire
stock. 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.
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. In addition, the Company had 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. In connection
with the Strategic Restructuring Plan, the Company received an opinion of
counsel that the Distributions qualify as tax-free spin-offs under Section 355
of the Code, and that the Distributions are not taxable under Section 355(e) of
the Code. That opinion was subject to certain assumptions and limitations and is
not, in any event, binding upon either the Internal Revenue Service or any
court.
If a Distribution fails to qualify as a tax-free spin-off under Section 355
of the Code, the Company will recognize a gain equal to the difference between
the fair market value of the Spin-Off Company's common stock on the date of the
Distribution and the Company's adjusted tax basis in the Spin-Off Company's
33
<PAGE>
common stock on the date of the Distribution. 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 date of the Distribution) 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 the Distribution is taxable under Section 355(e), but otherwise satisfies
the requirements of 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 date of the Distribution and the Company's adjusted tax basis in
the Spin-Off Company's common stock on the date of the Distribution. 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.
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. 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 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.
YEAR 2000 COMPLIANCE. The Company is currently continuing to review the
year 2000 compliance of software that it uses in its business. The Company's
Trinity system, which it is currently installing throughout its NAOPG 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 yet 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. The Company also
is surveying major vendors and third-party service providers to ensure that
their systems are or will be year 2000 compliant. The Company is not presently
aware of any material problems in the year 2000 compliance plans of its major
vendors or service providers.
ITEM 7A. Not Applicable.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of U.S. Office Products
Company and its subsidiaries at April 25, 1998 and April 26, 1997, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended April 25, 1998, 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 included in the Company's income from discontinued
operations, net of income taxes, for the fiscal year ended April 30, 1996. 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.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
June 24, 1998
35
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the balance sheet of School Specialty, Inc. (formerly known
as EDA Corporation) (the Company) as of December 31, 1995, and the related
statements of operations, changes in shareholders' deficit and cash flows for
the year 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 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 the Company at 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.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheet of the Re-Print Corporation
as of December 31, 1995, and the related statements of income, stockholders'
equity, and cash flows for the year ended 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 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 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 The Re-Print Corporation at
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.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 8, 1996
37
<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
38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Fortran Corp.
Newington, Virginia
We have audited the balance sheet of Fortran Corp. as of March 31, 1996, and
1995 and the related statements of earnings, changes in stockholders' equity,
and cash flows for the years ended March 31, 1996 and 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 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 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 the years ended March 31, 1996 and 1995 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
39
<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 consolidated 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
40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheet of United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc., as at December 31, 1995, and the related
combined statements of income and retained earnings and cash flows for the year
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 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 United Envelope Co.,
Inc. and its affiliate as at December 31, 1995, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
41
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Huxley Envelope Corporation
We have audited the balance sheet of Huxley Envelope Corporation as at
December 31, 1995, and the related statements of income and accumulated deficit
and cash flows for the year 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 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 Huxley Envelope Corporation
as at 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.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 4, 1996
42
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
(NOTE 2)
APRIL 25, APRIL 25, APRIL 26,
1998 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ $ 52,021 $ 44,026
Accounts receivable, less allowance for doubtful accounts of $8,639
(unaudited), $8,639 and $7,337, respectively............................. 310,527 310,527 283,751
Inventories................................................................ 228,671 228,671 225,998
Prepaid expenses and other current assets.................................. 115,698 117,150 74,580
----------- --------- ---------
Total current assets..................................................... 654,896 708,369 628,355
Property and equipment, net.................................................. 228,715 228,715 182,633
Intangible assets, net....................................................... 923,024 923,024 611,474
Other assets................................................................. 213,050 194,701 118,289
Net assets from discontinued operations:
Amounts to become receivable upon the Distributions........................ 132,145 87,700
All other net assets....................................................... 354,473 83,422
----------- --------- ---------
Total assets............................................................. $2,019,685 $2,541,427 $1,711,873
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................................................ $ $ 368,227 $ 144,125
Accounts payable........................................................... 162,718 162,718 153,915
Accrued compensation....................................................... 43,013 43,013 32,515
Other accrued liabilities.................................................. 57,975 81,411 63,814
----------- --------- ---------
Total current liabilities................................................ 263,706 655,369 394,369
Long-term debt............................................................... 1,162,593 382,174 380,209
Other long-term liabilities and minority interests........................... 17,753 17,753 16,147
----------- --------- ---------
Total liabilities........................................................ 1,444,052 1,055,296 790,725
----------- --------- ---------
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,
36,681,394 (unaudited), 33,460,864 and 26,119,753 shares issued,
36,514,159 (unaudited), 33,460,864 and 26,119,753 shares outstanding, and
167,235 (unaudited), none and none held in treasury, respectively........ 37 33 26
Additional paid-in capital................................................... 704,388 1,472,125 867,117
Cumulative translation adjustment............................................ (112,803) (112,803) (5,583)
Retained earnings (deficit).................................................. (15,989) 126,776 59,588
----------- --------- ---------
Total stockholders' equity............................................... 575,633 1,486,131 921,148
----------- --------- ---------
Total liabilities and stockholders' equity............................... $2,019,685 $2,541,427 $1,711,873
----------- --------- ---------
----------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
----------------------------------------
APRIL 25, APRIL 26, APRIL 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues................................................................ $ 2,611,740 $ 2,115,954 $ 1,061,528
Cost of revenues........................................................ 1,884,892 1,518,287 789,436
------------ ------------ ------------
Gross profit........................................................ 726,848 597,667 272,092
Selling, general and administrative expenses............................ 591,463 488,215 231,569
Amortization expense.................................................... 19,938 12,416 2,711
Non-recurring acquisition costs......................................... 8,001 8,057
Restructuring costs..................................................... 6,187 4,201 682
------------ ------------ ------------
Operating income.................................................... 109,260 84,834 29,073
Interest expense........................................................ 37,837 36,047 8,132
Interest income......................................................... (1,853) (6,857) (3,506)
Other income............................................................ (7,146) (4,233) (684)
------------ ------------ ------------
Income from continuing operations before provision for income taxes and
extraordinary items................................................... 80,422 59,877 25,131
Provision for income taxes.............................................. 36,946 27,939 6,032
------------ ------------ ------------
Income from continuing operations before extraordinary items............ 43,476 31,938 19,099
Income from discontinued operations, net of income taxes................ 23,712 26,800 15,778
------------ ------------ ------------
Income before extraordinary items....................................... 67,188 58,738 34,877
Extraordinary items--losses on early terminations of credit facilities,
net of income taxes................................................... 1,450 701
------------ ------------ ------------
Net income.............................................................. $ 67,188 $ 57,288 $ 34,176
------------ ------------ ------------
------------ ------------ ------------
Per share amounts:
Basic:
Income from continuing operations before extraordinary items........ $ 1.45 $ 1.42 $ 1.13
Income from discontinued operations................................. 0.80 1.19 0.93
Extraordinary items................................................. (0.06) (0.04)
------------ ------------ ------------
Net income.......................................................... $ 2.25 $ 2.55 $ 2.02
------------ ------------ ------------
------------ ------------ ------------
Diluted:
Income from continuing operations before extraordinary items........ $ 1.43 $ 1.39 $ 1.12
Income from discontinued operations................................. 0.77 1.17 0.92
Extraordinary items................................................. (0.06) (0.04)
------------ ------------ ------------
Net Income.......................................................... $ 2.20 $ 2.50 $ 2.00
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
44
<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 STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS EQUITY
--------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995................. 12,799,839 $ 13 $ 57,053 $ (133) $ 69,562 $ 126,495
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offerings...................... 3,588,017 4 174,733 174,737
Acquisitions.......................... 2,780,041 3 68,615 68,618
Exercise of stock options, including
tax benefits........................ 23,756 1,023 1,023
Transactions of Pooled Companies:
Issuances of common stock for cash and
repayment of debt................... 218,062 8,298 8,298
Capital contributions................. 500 500
Exercise of warrants and stock
options............................. 244,731 1,753 1,753
Cash and stock dividends.............. 211,660 1,362 (32,017) (30,655)
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................. 19,866,106 20 313,337 770 80,619 394,746
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering....................... 3,255,874 3 275,709 275,712
Direct equity investment.............. 468,750 1 38,112 38,113
Acquisitions.......................... 2,171,363 2 166,078 166,080
Exercise of stock options, including
tax benefits........................ 49,436 2,843 2,843
Employee stock purchase plan.......... 57,500 3,145 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses................ 102,408 6,859 6,859
Capital contributions................. 3,086 1,857 1,857
Exercise of warrants and stock
options............................. 119,654 1,980 1,980
Retirement of common stock............ 25,576 (443) (34) (477)
Cash dividends paid and declared...... (20,931) (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...................... 286 286
Cumulative translation adjustments...... (6,353) (6,353)
Net income.............................. 57,288 57,288
--------- --- ----------- ----------- ----------- ------------
Balance at April 26, 1997................. 26,119,753 26 867,117 (5,583) 59,588 921,148
Issuance of common stock, net of
associated expenses in conjunction
with:.................................
Acquisitions.......................... 6,944,625 7 584,470 584,477
Repayment of debt..................... 7,044 570 570
Exercise of stock options, including
tax benefits........................ 335,516 15,908 15,908
Employee stock purchase plan.......... 62,974 4,060 4,060
Share adjustments at Pooled Companies..... (9,048)
Cumulative translation adjustments........ (107,220) (107,220)
Net income................................ 67,188 67,188
--------- --- ----------- ----------- ----------- ------------
Balance at April 25, 1998................. 33,460,864 $ 33 $1,472,125 $(112,803) $ 126,776 $1,486,131
--------- --- ----------- ----------- ----------- ------------
--------- --- ----------- ----------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
APRIL 25, APRIL 26, APRIL 30,
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net income............................................................... $ 67,188 $ 57,288 $ 34,176
Adjustments to reconcile net income to net cash provided by operating
activities:
Income from discontinued operations.................................... (23,712) (26,800) (15,778)
Depreciation and amortization.......................................... 57,167 36,102 10,999
Deferred income taxes.................................................. 4,534 (1,035) (196)
Equity in net income of affiliate...................................... (1,315) (782)
Gain on sale of investments............................................ (991)
Non-recurring acquisition costs........................................ 8,001 8,057
Unrealized foreign currency gain....................................... (3,420)
Extraordinary losses................................................... 1,450 701
Changes in current assets and liabilities (net of assets acquired and
liabilities assumed in business combinations):
Accounts receivable.................................................. (11,904) (26,237) 969
Inventories.......................................................... (3,785) (3,400) 1,861
Prepaid expenses and other current assets............................ (2,284) (6,059) (23,780)
Accounts payable..................................................... (3,258) (26,692) 2,802
Accrued liabilities.................................................. 1,922 7,396 (565)
Net cash provided by operating activities.......................... 83,562 15,812 19,246
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received.......................... (69,299) (345,319) (89,223)
Payments of acquisition costs............................................ (3,431) (5,343) (7,283)
Additions to property and equipment, net of disposals.................... (46,695) (34,036) (17,868)
Investment in affiliate.................................................. (40,773) (41,270)
Proceeds from sale of investments........................................ 5,729
Other.................................................................... 4,080 2,013 (5,687)
Net cash used in investing activities.............................. (150,389) (423,955) (120,061)
Cash flows from financing activities:
Proceeds from issuance of common stock................................... 15,696 318,899 180,230
Proceeds from issuance of long-term debt................................. 649 225,387 139,040
Payments of long-term debt............................................... (13,972) (174,788) (13,143)
Net advances to discontinued operations.................................. (132,653) (111,891)
Proceeds from (payments of) short-term debt, net......................... 206,698 24,132 (39,077)
Payments to terminate credit facility.................................... (261)
Payments of dividends at Pooled Companies................................ (6,158) (8,287)
Capital contributed by stockholders of Pooled Companies.................. 1,814 400
Adjustments to conform fiscal year-ends of certain Pooled Companies...... 286 (1,397)
----------- ----------- -----------
Net cash provided by financing activities.......................... 76,418 277,420 257,766
----------- ----------- -----------
Effect of exchange rates on cash and cash equivalents...................... (4,002) (511) (121)
Cash provided by (used in) discontinued operations......................... 2,406 (8,223) 1,707
Net increase (decrease) in cash and cash equivalents....................... 7,995 (139,457) 158,537
Cash and cash equivalents at beginning of period........................... 44,026 183,483 24,946
</TABLE>
46
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
APRIL 25, APRIL 26, APRIL 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents at end of period................................. $ 52,021 $ 44,026 $ 183,483
Supplemental disclosure of cash flow information:
Interest paid.............................................................. $ 37,211 $ 36,536 $ 3,426
Income taxes paid.......................................................... 27,944 22,734 7,814
</TABLE>
The Company issued common stock, notes payable and cash in connection with
certain business combinations accounted for under the purchase method during
fiscal 1998, 1997 and 1996. The fair values of the assets and liabilities of the
acquired companies at the dates of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-----------------------------------
<S> <C> <C> <C>
APRIL 25, APRIL 26, APRIL 30,
1998 1997 1996
---------- ----------- ----------
Accounts receivable......................................................... $ 33,270 $ 99,747 $ 70,640
Inventories................................................................. 22,136 115,995 49,602
Prepaid expenses and other current assets................................... 15,877 20,874 8,412
Property and equipment...................................................... 55,438 94,112 30,442
Intangible assets........................................................... 403,114 490,011 119,493
Other assets................................................................ 33,692 7,748 51,698
Short-term debt............................................................. (9,615) (20,612) (95,971)
Accounts payable............................................................ (27,161) (99,753) (44,034)
Accrued liabilities......................................................... (11,194) (52,464) (19,719)
Long-term debt.............................................................. (22,324) (153,448) (11,635)
Other long-term liabilities and minority interest........................... (834) (1,296) (7,751)
---------- ----------- ----------
Net assets acquired................................................. $ 492,399 $ 500,914 $ 151,177
---------- ----------- ----------
---------- ----------- ----------
The acquisitions were funded as follows:
Common stock................................................................ $ 423,100 $ 155,595 $ 61,167
Notes payable............................................................... 787
Cash........................................................................ 69,299 345,319 89,223
---------- ----------- ----------
Total............................................................... $ 492,399 $ 500,914 $ 151,177
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
NONCASH TRANSACTIONS:
- - During fiscal 1998, 1997 and 1996, the Company issued 7,044, 96,158 and 72,918
shares of common stock, respectively, to repay $570, $6,359 and $2,470 of
indebtedness, respectively.
- - During fiscal 1998, 1997 and 1996, the Company recorded additional paid-in
capital of approximately $4,272, $1,250 and $426, 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 211,660 shares of common stock.
See accompanying notes to consolidated financial statements.
47
<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
products and business services to corporate 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--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
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 1999", "fiscal 1998," "fiscal 1997"
and "fiscal 1996" refer to the Company's fiscal year ending April 24, 1999 and
fiscal years ended April 25, 1998, April 26, 1997 and April 30, 1996,
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.
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
48
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 term.
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 enters into interest rate swap agreements to reduce the impact
of changes in interest rates on its floating rate debt. The swap agreements are
contracts to exchange floating rate for fixed interest payments periodically
over the life of the agreements without the exchange of the underlying notional
amounts. The notional amounts of interest rate swap agreements are used to
measure interest to be paid or received and do not represent the amount of
exposure to credit loss. For interest rate instruments that effectively hedge
interest rate exposures, the net cash amounts paid or received on the agreements
are accrued and recognized as an adjustment to interest expense. As of April 25,
1998, the Company had one interest rate swap agreement in effect, which expires
in 2001, with a notional amount of $125,000. The effect of this agreement was to
limit the LIBOR-based interest rate exposure to 6.0% on $125,000 of the balance
outstanding under the Company's credit facility.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using the following methods and assumptions:
49
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- 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.
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
50
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
Delivery and occupancy costs are included in cost of revenues. Vendor
rebates are recorded as a reduction in the cost of inventory and recognized as a
reduction in cost of revenues when such inventory is sold.
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 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.
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
51
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
expenses. During fiscal 1998, 1997 and 1996, the Company incurred advertising
expenses of $18,473, $14,355 and $7,233, 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
In June 1997, the Financial Accounting Standards Board ("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 fiscal 1999. Implementation of this disclosure standard
will not affect the Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way management
organizes and evaluates financial information internally for making decisions
and assessing performance. It also requires related disclosures about products,
geographic areas, and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company intends to adopt SFAS No. 131 in
fiscal 1999. Implementation of this disclosure standard will not affect the
Company's financial position or results of operations.
PRO FORMA INFORMATION (UNAUDITED)
The pro forma balance sheet at April 25, 1998 adjusts the April 25, 1998
historical balance sheet amounts to give effect to the Strategic Restructuring
Plan described in Note 3, as if such Strategic Restructuring Plan had been
completed on April 25, 1998. The pro forma balance sheet is not necessarily
indicative of the financial position that would have been achieved had the
Strategic Restructuring Plan actually then occurred and should not be construed
as representative of future financial position.
NOTE 3--STRATEGIC RESTRUCTURING PLAN
In June 1998, the Company completed a comprehensive restructuring plan (the
"Strategic Restructuring Plan") that was approved by the Company's Board of
Directors in January 1998. The principal elements of the Strategic Restructuring
Plan were:
- EQUITY TENDER OFFER. Pursuant to a self-tender offer (the "Equity
Tender"), the Company repurchased 9,259,261 shares of its common stock,
including 1,140,186 shares that were issued on exercise of vested and
unvested options for common stock at $108.00 per share (or in the case of
stock options, at $108.00 per share minus the exercise price of the
options). The Company repurchased the shares for $934,569 in cash. In
fiscal 1999, the Company will record a non-cash
52
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
compensation expense of approximately $60,000, before the related benefit
from income taxes, related to the participation of stock options in the
Equity Tender.
- SPIN-OFF DISTRIBUTIONS. After acceptance of the shares in the Equity
Tender, the Company distributed to U.S. Office Products' stockholders the
shares of four separate companies: Aztec Technology Partners, Inc. (one
share for every 1.25 shares of U.S. Office Products common stock held),
Workflow Management, Inc. (one share for every 1.875 shares of U.S. Office
Products common stock held), School Specialty, Inc. (one share for every
2.25 shares of U.S. Office Products common stock held) and Navigant
International, Inc. (one share for every 2.5 shares of U.S. Office
Products common stock held) (collectively, the "Spin-Off Companies"). The
distributions of the shares of the Spin-Off Companies are referred to in
these consolidated financial statements as the "Distributions." The
Spin-Off Companies hold U.S. Office Products' former Technology Solutions,
Print Management, Educational Supplies and Corporate Travel Services
businesses, respectively.
- EQUITY INVESTMENT. After the Distributions, an affiliate ("Investor") of
an investment fund managed by Clayton, Dubilier & Rice, Inc., a private
investment firm, acquired the following equity securities of the Company
for $270.0 million: (i) approximately 9,092,106 shares (24.9%) of the
Company's common stock, (ii) special warrants (the "Special Warrants")
entitling Investor to purchase additional common stock in certain
circumstances intended to permit Investor to maintain its 24.9% equity
ownership position, and (iii) warrants (the "Warrants") entitling Investor
to purchase additional shares of common stock for $405 million equal to
the number of shares of common stock it purchased outright plus the number
of shares it acquires or is entitled to acquire pursuant to the Special
Warrants. The Warrants are exercisable at any time after June 10, 2000
until June 10, 2010. Investor did not acquire any interests in the
Spin-Off Companies.
U.S. Office Products will retain its North American Office Products Group
(which includes office supply, office furniture, and office coffee and beverage
services businesses), MBE, its New Zealand and Australia operations and its 49%
interest in Dudley Stationery Limited (a U.K. contract stationer).
In conjunction with the Strategic Restructuring Plan, U.S. Office Products
completed the following financing transactions in June 1998:
- Pursuant to a tender offer, the Company repurchased $222,215 of its 5 1/2%
convertible subordinated notes due 2003 for a purchase price of 94.5% of
the principal amount and accrued interest on such notes. In fiscal 1999,
the Company will record an extraordinary gain of $12,222, before provision
for income taxes, related to the early extinguishment of such notes. In
addition, in fiscal 1999, the Company will record a non-cash expense of
approximately $5,260, before benefit from income taxes, related to the
write-off of debt issue costs capitalized in connection with the issuance
of such notes.
- Pursuant to an exchange offer, the Company exchanged $130,989 of its
5 1/2% convertible subordinated notes due 2001 for 2,025,185 shares of
common stock at an exchange rate of 15.461 shares of U.S. Office Products
common stock for each $1 principal amount of such notes, which effectively
reduced the conversion price of such notes from $76.00 to $64.68 while the
exchange offer was open. In fiscal 1999, the company will record expense
of $20,436 as a result of the reduction in the conversion price of such
notes. In addition, in fiscal 1999, the Company will record a non-cash
expense of approximately $3,002, before benefit from income taxes, related
to the write-off of debt issue costs capitalized in connection with the
issuance of such notes.
53
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- The Company entered into a new $1,225,000 senior secured bank credit
facility (the "New Credit Facility") that consists of the following (i) a
$200,000 seven-year multi-draw loan facility; (ii) a $250,000 seven-year
revolving credit facility; (iii) a $100,000 seven-year term loan facility;
and (iv) a $675,000 eight-year term loan facility. As a result of the
Company entering into the New Credit Facility, the former credit facility
was terminated which will result in the Company recording a non-cash
expense of approximately $4,841, before benefit from income taxes, in
fiscal 1999, related to the write-off of debt issue costs capitalized in
connection with the former credit facility.
- The Company issued and sold $400,000 in 9 3/4% senior subordinated notes
due 2008 (the "2008 Notes") in a private placement at 99.583% of the
principal amount.
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 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 1998:
Revenues..................................... $ 353,351 $ 120,424 $ 310,455 $ 208,341 $ 992,571
Operating income............................. 16,776 7,808 18,103 13,091 55,778
Income before provision for income taxes..... 15,099 7,631 12,173 13,114 48,017
Provision for income taxes................... 7,392 4,569 6,065 6,279 24,305
Income from discontinued operations, net of
income taxes............................... 7,707 3,062 6,108 6,835 23,712
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 (benefit from)
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
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
</TABLE>
54
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Income (loss) from discontinued operations,
net of income taxes........................ 6,966 2,298 (3,367) 9,881 15,778
</TABLE>
The results of the Spin-Off Companies include allocations of interest
expense, at U.S. Office Products' weighted average interest rates, based on 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 the
Company 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 assets 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 25, 1998:
Current assets....................................... $ 90,961 $ 21,993 $ 99,643 $ 66,835 $ 279,432
Property, plant and equipment, net................... 33,210 18,008 22,553 5,831 79,602
Intangible assets, net............................... 14,014 87,590 99,613 63,829 265,046
Other assets......................................... 8,259 852 34 574 9,719
Current liabilities.................................. (57,434) (18,643) (54,642) (33,363) (164,082)
Long-term liabilities................................ (30,250) (16,523) (63,415) (5,056) (115,244)
------------ ---------- ----------- ----------- ------------
Other net assets of discontinued operations........ $ 58,760 $ 93,277 $ 103,786 $ 98,650 $ 354,473
------------ ---------- ----------- ----------- ------------
------------ ---------- ----------- ----------- ------------
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
------------ ---------- ----------- ----------- ------------
------------ ---------- ----------- ----------- ------------
</TABLE>
The amounts to become receivable upon the Distributions reflected in the
April 25, 1998 consolidated balance sheet were recovered from the Spin-Off
Companies in connection with the Distributions.
55
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 MBE 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
1997 and 1996 by $17,811 (or $0.20 per share) and $14,998 (or $0.22 per share),
respectively. Additionally, the restatement of the 22 business combinations as
purchase transactions gave rise to approximately $422,800 of goodwill,
associated with both continuing and discontinued operations, during fiscal 1998.
NOTE 4--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1997 and 1996, the Company issued 8,290,791 and 3,165,320 shares
of common stock, respectively, to acquire 40 companies, including 25 companies
related to continuing operations, (the "1997 Poolings") and 14 companies (the
"1996 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 26, 1997 and April 30, 1996.
Commencing on May 1, 1996 and 1995, the year-ends of the 1997 Poolings and
the 1996 Poolings were changed to April 26, 1997 and April 30, 1996,
respectively, resulting in adjustments to retained earnings of $286 and $8,898
during fiscal 1997 and 1996, respectively. Following is a summary of the results
related to the adjustments to retained earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
----------------------
APRIL 26, APRIL 30,
1997 1996
---------- ----------
<S> <C> <C>
Revenues.................................................................................. $ (9,907) $ 245,737
Costs and expenses........................................................................ (10,193) 236,839
---------- ----------
Net adjustment........................................................................ $ 286 $ 8,898
---------- ----------
---------- ----------
</TABLE>
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>
</TABLE>
56
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C> <C>
Fiscal 1997:
Revenues............................................................... $ 1,906,496 $ 209,458 $ 2,115,954
Income from continuing operations before extraordinary items........... $ 27,978 $ 3,960 $ 31,938
Fiscal 1996:
Revenues............................................................... $ 488,670 $ 572,858 $ 1,061,528
Income from continuing operations before extraordinary items........... $ 7,828 $ 11,271 $ 19,099
</TABLE>
57
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PURCHASE METHOD
In fiscal 1998, the Company made 73 acquisitions, including 51 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $762,456, consisting of $177,979 of cash and 6,944,625 shares
of common stock with a market value of $584,477. The total assets related to
these 73 acquisitions were $900,870, including goodwill of $643,413. 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 2,171,363 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.
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 notes
payable and 2,780,041 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 addition, there is the potential for the payment of up to an additional
750,000 shares of common stock, subject to an upward adjustment on the share
limit (which the Company currently estimates could be up to three times such
limit) to reflect the completion of the Strategic Restructuring Plan, related to
a purchase acquisition based upon the financial performance of such purchase
acquisition and the value of the Company's common stock. In light of the
completion of the Strategic Restructuring Plan, the Company is currently in
discussions with the seller regarding the renegotiation of this agreement, which
could result in the recognition of additional goodwill. The issuance of shares
under this agreement would also entitle Investor to anti-dilution protection
under the terms of the Special Warrants. The Company has included, in prepaid
expenses and other current assets, $5,310 of cash held in escrow related to
certain business combinations.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1998 and 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 1997. 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
----------------------------
APRIL 25, APRIL 26,
1998 1997
------------ ------------
<S> <C> <C>
Revenues............................................ $ 2,776,472 $ 2,817,202
Income from continuing operations before
extraordinary items............................... 46,545 45,046
Basic income per share from continuing operations
before extraordinary items........................ 1.39 1.33
Diluted income per share from continuing operations
before extraordinary items........................ 1.37 1.31
</TABLE>
58
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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 invested $82,043 in
Dudley. The investment in Dudley, of which $33,627 represents the excess of the
Company's proportionate share of the underlying net assets of Dudley, is
included in other assets on the consolidated balance sheet. The portion of the
investment in excess of the Company's proportionate share of the underlying
assets of Dudley is being amortized over 40 years. The Company has included its
share of Dudley's net income as a component of other income on the consolidated
statement of income.
NOTE 5--ACCRUED ACQUISITION COSTS
In conjunction with the acquisitions of the fiscal 1998 and 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 the 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.
The following table sets forth the Company's accrued acquisition costs for
the periods ended April 30, 1996, April 26, 1997 and April 25, 1998:
<TABLE>
<CAPTION>
EMPLOYEE DISPOSAL OF
REDUNDANT SEVERANCE AND ASSETS AND
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
Additions.................................................. 3,836 7,494 4,844 16,174
Utilizations............................................... (3,046) (6,861) (6,164) (16,071)
----------- ------------- ----------- ----------
Balance at April 25, 1998.................................... $ 2,383 $ 3,117 $ 5,392 $ 10,892
----------- ------------- ----------- ----------
----------- ------------- ----------- ----------
</TABLE>
NOTE 6--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. The following table sets forth the Company's accrued restructuring
costs for the periods ended April 30, 1996, April 26, 1997 and April 25, 1998:
59
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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, 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
Additions.................................................. 2,008 3,053 1,126 6,187
Utilizations............................................... (2,076) (1,877) (1,058) (5,011)
------------- ------------ ----------- ---------
Balance at April 25, 1998.................................... $ 967 $ 1,255 $ 474 $ 2,696
------------- ------------ ----------- ---------
------------- ------------ ----------- ---------
</TABLE>
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 1997
---------- ----------
<S> <C> <C>
Land...................................................................................... $ 27,728 $ 31,934
Buildings................................................................................. 45,268 44,814
Furniture and fixtures.................................................................... 136,198 121,701
Warehouse equipment....................................................................... 72,929 24,726
Equipment under capital leases............................................................ 17,719 8,602
Leasehold improvements.................................................................... 10,162 16,107
---------- ----------
310,004 247,884
Less: Accumulated depreciation............................................................ (81,289) (65,251)
---------- ----------
Net property and equipment................................................................ $ 228,715 $ 182,633
---------- ----------
---------- ----------
</TABLE>
Depreciation expense for fiscal years 1998, 1997 and 1996 was $33,260, $20,699
and $7,926, respectively.
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 1997
---------- ----------
<S> <C> <C>
Goodwill.................................................................................. $ 953,819 $ 625,074
Other..................................................................................... 4,036 3,063
---------- ----------
957,855 628,137
Less: Accumulated amortization............................................................ (34,831) (16,663)
---------- ----------
$ 923,024 $ 611,474
---------- ----------
---------- ----------
</TABLE>
Amortization expense for fiscal years 1998, 1997 and 1996 was $19,938, $12,416
and $2,711, respectively.
60
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 1997
---------- ----------
<S> <C> <C>
Credit Facility, average interest rates of 6.4% at April 25, 1998 and
7.6% at April 26, 1997.............................................. $ 365,000 $ 140,090
Other................................................................. 1,367
Current maturities of long-term debt.................................. 3,227 2,668
---------- ----------
Total short-term debt............................................. $ 368,227 $ 144,125
---------- ----------
---------- ----------
</TABLE>
At April 25, 1998, the Company had an agreement under which a syndicate of
financial institutions, led by Bankers Trust Company, as Agent (the "Bank"), was
providing the Company with a $500,000 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 was subject to certain
sublimits including $100,000 for working capital loans and $400,000 for
acquisition loans. The Credit Facility was secured by a majority of the assets
of the Company and its subsidiaries and contained 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 these
covenants at April 25, 1998. At April 25, 1998, the balance outstanding under
the Credit Facility was $365,000 and included six eurodollar contracts, expiring
within 30 days, totaling $351,000 at an average interest rate of 6.38%.
In conjunction with the Strategic Restructuring Plan, the Credit Facility
was terminated, the balances outstanding were paid in full and the Company
entered into the New Credit Facility. In fiscal 1999, the Company will record a
non-cash expense of approximately $4,841, before benefit from income taxes,
related to the write-off of debt issue costs capitalized in conjunction with the
Credit Facility.
61
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 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 $126.40 per share,
subject to adjustment in certain events................................................. $ 230,000 $ 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 $76.00 per share,
subject to adjustment in certain events................................................. 143,750 143,750
Other..................................................................................... 3,074 3,610
Capital lease obligations................................................................. 8,577 5,517
---------- ----------
385,401 382,877
Less: Current maturities of long-term debt................................................ (3,227) (2,668)
---------- ----------
Total long-term debt.................................................................. $ 382,174 $ 380,209
---------- ----------
---------- ----------
</TABLE>
The 5 1/2% Convertible Subordinated Notes due 2003 (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 25, 1998, based upon quoted market prices, totaled
$190,613. In conjunction with the Strategic Restructuring Plan, $222,215 of the
2003 Notes were retired at 94.5% of the principal amount, resulting in an
extraordinary gain in fiscal 1999 of $12,222, before provision for income taxes,
and the conversion price on the remaining outstanding 2003 Notes was adjusted to
$64.36. In addition, in fiscal 1999 the Company will record expense of
approximately $5,260, before benefit from income taxes, related to the write-off
of debt issue costs capitalized in connection with the issuance of the 2003
Notes.
The 5 1/2% Convertible Subordinated Notes due 2001 (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 25, 1998, based upon quoted market prices,
totaled $146,625. In conjunction with the Strategic Restructuring Plan, $130,989
of the 2001 Notes were exchanged for 2,025,185 shares of common stock at a
conversion price that was temporarily reduced from $76.00 per share to $64.68
per share, resulting in an expense in fiscal 1999 of $20,436 as a result of the
reduction in the conversion price, and the conversion price on the remaining
outstanding 2001 Notes was adjusted to $38.70. In addition, in fiscal 1999 the
Company will record expense of approximately $3,002, before benefit from income
taxes, related to the write-off of debt issue costs capitalized in connection
with the issuance of the 2001 Notes.
62
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1999.............................................................. $ 3,227
2000.............................................................. 2,737
2001.............................................................. 145,650
2002.............................................................. 1,219
2003.............................................................. 230,351
Thereafter........................................................ 2,217
---------
$ 385,401
---------
---------
</TABLE>
NOTE 10--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
-------------------------------
<S> <C> <C> <C>
APRIL 25, APRIL 26, APRIL 30,
1998 1997 1996
--------- --------- ---------
Domestic..................................................... $ 53,478 $ 37,244 $ 22,139
Foreign...................................................... 26,944 22,633 2,992
--------- --------- ---------
Total...................................................... $ 80,422 $ 59,877 $ 25,131
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 25, APRIL 26, APRIL 30,
1998 1997 1996
--------- --------- -----------
Income taxes currently payable:
Federal..................................................... $ 16,746 $ 18,776 $ 4,632
State....................................................... 4,161 1,987 351
Foreign..................................................... 11,505 8,211 1,245
--------- --------- -----------
32,412 28,974 6,228
--------- --------- -----------
Deferred income tax expense (benefit)......................... 4,534 (1,035) (196)
--------- --------- -----------
Total provision for income taxes............................ $ 36,946 $ 27,939 $ 6,032
--------- --------- -----------
--------- --------- -----------
</TABLE>
63
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 1997
---------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory................................................................................. $ 6,788 $ 708
Allowance for doubtful accounts........................................................... 2,921 1,253
Accrued liabilities....................................................................... 7,191 6,091
Realized foreign exchange loss on debt conversion......................................... 3,042
---------- ---------
Total current deferred tax assets....................................................... 19,942 8,052
---------- ---------
Long-term deferred tax assets
Realized foreign exchange loss on debt conversion......................................... 30,622
Restructuring reserve..................................................................... 2,130 4,882
---------- ---------
Total long-term deferred tax assets..................................................... 32,752 4,882
---------- ---------
Long-term deferred tax liabilities:
Property and equipment.................................................................... (6,042) (2,357)
Intangible assets......................................................................... (2,141) (961)
Internal Revenue Service tax assessment................................................... (3,383) (3,383)
Other..................................................................................... (2,368) (639)
---------- ---------
Total long-term deferred tax liabilities................................................ (13,934) (7,340)
---------- ---------
Net deferred tax asset.................................................................. $ 38,760 $ 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.
64
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--INCOME TAXES (CONTINUED)
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
-------------------------------------
<S> <C> <C> <C>
APRIL 25, APRIL 26, APRIL 30,
1998 1997 1996
----------- ----------- -----------
U.S. federal statutory rate........................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit.............................. 4.1 3.3 1.4
Subchapter S corporation income not subject to corporate level taxation............ (3.3) (26.1)
Foreign earnings not subject to U.S. taxes......................................... (11.7) (12.8) (4.1)
Nondeductible goodwill............................................................. 3.9 4.9 3.7
Nondeductible acquisition costs.................................................... 4.7 8.4
Foreign taxes...................................................................... 14.3 13.7 4.9
Other.............................................................................. 0.3 1.2 0.8
----- ----- -----
Effective income tax rate.......................................................... 45.9% 46.7% 24.0%
----- ----- -----
----- ----- -----
</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.
NOTE 11--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>
1999................................................................... $ 2,354 $ 44,159
2000................................................................... 2,160 35,395
2001................................................................... 1,759 28,723
2002................................................................... 1,204 22,703
2003................................................................... 328 14,909
Thereafter............................................................. 3,158 60,405
--------- ----------
Total minimum lease payments........................................... 10,963 $ 206,294
----------
----------
Less: Amounts representing interest.................................... (2,386)
---------
Present value of net minimum lease payments............................ $ 8,577
---------
---------
</TABLE>
Rent expense for all operating leases for fiscal 1998, 1997 and 1996 was
$57,535, $40,183 and $19,023, respectively.
65
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 12--COMMITMENTS AND CONTINGENCIES
LITIGATION
During fiscal 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 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.
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.
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 25, 1998 or April
26, 1997 related to these agreements.
NOTE 13--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 six months of
service. In fiscal 1998 and 1997, the Company's matching contribution expense
was $2,906 and $1,195, respectively.
NOTE 14--STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
In February 1997, the FASB 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 consolidated 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 fiscal 1998 and has restated all
prior period EPS data. The following information presents the Company's
computations of basic and diluted
66
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
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 1998:
Basic EPS.............................................................. $ 43,476 29,889,007 $ 1.45
-----
-----
Effect of dilutive employee stock options.............................. 592,787
------------ -------------
Diluted EPS............................................................ $ 43,476 30,481,794 $ 1.43
------------ ------------- -----
------------ ------------- -----
FISCAL 1997:
Basic EPS.............................................................. $ 31,938 22,506,428 $ 1.42
-----
-----
Effect of dilutive employee stock options.............................. 433,765
------------ -------------
Diluted EPS............................................................ $ 31,938 22,940,193 $ 1.39
------------ ------------- -----
------------ ------------- -----
FISCAL 1996:
Basic EPS.............................................................. $ 19,099 16,886,171 $ 1.13
-----
-----
Effect of dilutive employee stock options.............................. 207,280
------------ -------------
Diluted EPS............................................................ $ 19,099 17,093,451 $ 1.12
------------ ------------- -----
------------ ------------- -----
</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 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 Company's
Restated Certificate 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. In May 1998, the Board of
Directors of the Company approved a one-for-four reverse split of the Company's
common stock. The financial statements give retroactive effect for the splits
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
67
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
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 have been
reserved for issuance under the Directors' Plan. At April 25, 1998, options to
acquire 57,375 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 1998, 1997 and 1996.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
<S> <C> <C> <C>
APRIL 25, APRIL 26, APRIL 30,
1998 1997 1996
--------- --------- ---------
Income from continuing operations:
As reported.................................................................... $ 43,476 $ 31,938 $ 19,099
Pro forma...................................................................... 24,333 19,292 16,942
Income from continuing operations per share:
As reported:
Basic........................................................................ $ 1.45 $ 1.42 $ 1.13
Diluted...................................................................... 1.43 1.39 1.12
Pro forma:
Basic........................................................................ $ 0.81 $ 0.86 $ 1.00
Diluted...................................................................... 0.80 0.84 0.99
</TABLE>
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>
<S> <C> <C> <C>
Expected life of option 7 years 7 years 7 years
Risk free interest rate 6.36% 6.66% 6.58%
Expected volatility of USOP stock 44.1% 44.0% 58.5%
</TABLE>
The weighted-average fair value of options granted was $34.77 and $45.49 for
fiscal 1998 and 1997, respectively.
68
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
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, 1995.................... 264,812 $ 21.15 44,499 $ 7.57
Granted.................................... 1,036,722 50.22
Exercised.................................. (23,756) 24.98
Canceled................................... (6,075) 33.88
----------
Balance at April 30, 1996.................... 1,271,703 44.71 81,199 15.08
Granted.................................... 1,682,291 81.66
Exercised.................................. (49,436) 33.54
Canceled................................... (18,361) 50.62
----------
Balance at April 26, 1997.................... 2,886,197 66.40 399,557 40.41
Granted.................................... 3,259,442 63.22
Exercised.................................. (330,516) 34.88
Canceled................................... (283,230) 70.17
----------
Balance at April 25, 1998.................... 5,531,891 $ 66.21 950,035 $ 63.99
----------
----------
</TABLE>
The following table summarizes information about stock options outstanding
at April 25, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- ---------------------------------- ---------- ----------- ----------- --------- -----------
$1.80 to $20.00................... 15,532 8.9 years $ 3.28 2,024 $ 1.59
$20.01 to $40.00.................. 649,232 7.5 years 30.86 363,840 16.54
$40.01 to $60.00.................. 274,288 8.8 years 47.05 132,759 24.15
$60.01 to $80.00.................. 3,469,013 9.0 years 66.26 248,268 4.92
$80.01 to $119.68................. 1,123,826 8.6 years 92.05 203,144 16.42
---------- ----------- --------- -----------
$1.80 to $119.68................ 5,531,891 8.7 years $ 66.21 950,035 $ 63.99
---------- ----------- --------- -----------
---------- ----------- --------- -----------
</TABLE>
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.
In June 1998, 1,140,186 stock options were exercised as part of the Equity
Tender. In addition, as a result of the Distributions, 713,015 stock options
held by employees of the Spin-Off Companies were canceled as they were replaced
with stock options of the Spin-Off Companies and, consistent with the anti-
dilution provisions of the Plan and the Director's Plan, the Company increased
the number of options outstanding and reduced the exercise prices of such
options in order to keep option holders in the same
69
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
economic position immediately before and after the Distributions. This was
accomplished by multiplying the number of options by 2.18 and dividing the
exercise prices of such options by 2.18.
NOTE 15--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 1998:
Revenues.............................................................. $ 1,738,885 $ 872,855 $ 2,611,740
Operating income...................................................... 71,756 37,504 109,260
Identifiable assets of continuing operations at year-end.............. 1,255,856 798,953 2,054,809
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.............. 782,615 758,136 1,540,751
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
</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 $486,618, $171,122
and $33,674 at April 25, 1998, April 26, 1997 and April 30, 1996, respectively,
were excluded from the above analysis but are included in total assets on the
Company's consolidated balance sheet.
70
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 16--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during fiscal 1998 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
companies acquired during fiscal 1997 in business combinations accounted for
under the pooling-of-interests method and as a result of the Strategic
Restructuring Plan, which restated the results of the Spin-Off Companies as
discontinued operations and caused the restatement of certain business
combinations originally accounted for under the pooling-of-interests method to
the purchase method.
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 614,814 $ 649,340 $ 665,959 $ 681,627 $ 2,611,740
Gross profit.............................................. 170,782 179,256 189,220 187,590 726,848
Operating income.......................................... 23,802 28,300 37,289 19,869 109,260
Income from continuing operations......................... 9,035 12,770 15,431 6,240 43,476
Income (loss) from discontinued operations................ 10,951 11,428 3,085 (1,752) 23,712
Net income................................................ 19,986 24,198 18,516 4,488 67,188
Per share amounts:
Basic:
Income from continuing operations..................... 0.34 0.46 0.48 0.18 1.45
Income (loss) from discontinued operations............ 0.41 0.42 0.10 (0.05) 0.80
Net income............................................ 0.75 0.88 0.58 0.13 2.25
Diluted:
Income from continuing operations..................... 0.33 0.45 0.47 0.18 1.43
Income (loss) from discontinued operations............ 0.41 0.40 0.09 (0.05) 0.77
Net income............................................ 0.74 0.85 0.56 0.13 2.20
</TABLE>
71
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 16--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
------------------------------------------------------------
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
Extraordinary items....................................... (612) (838) (1,450)
Net income................................................ 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before extraordinary
items............................................... 0.34 0.45 0.39 0.25 1.42
Income from discontinued operations................... 0.46 0.41 0.09 0.25 1.19
Extraordinary items................................... (0.03) (0.03) (0.06)
Net income............................................ 0.80 0.83 0.48 0.47 2.55
Diluted:
Income from continuing operations before extraordinary
items............................................... 0.33 0.44 0.38 0.25 1.39
Income from discontinued operations................... 0.45 0.40 0.09 0.25 1.17
Extraordinary items................................... (0.02) (0.03) (0.06)
Net income............................................ 0.78 0.82 0.47 0.47 2.50
</TABLE>
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial information
for the Company, segregating guarantor subsidiaries and non-guarantor
subsidiaries. The accompanying financial information in the "Guarantor
Subsidiaries" column represents the financial information of the domestic
subsidiaries that will guarantee the New Credit Facility and the 2008 Notes. The
guarantor subsidiaries are wholly-owned subsidiaries of the Company and the
guarantees are full, unconditional and joint and several. Separate financial
statements of the guarantor subsidiaries are not presented because management
believes that separate financial statements would not be material to investors.
72
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 25, 1998
---------------------------------------------------------------------------------
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 19,684 $ 15,743 $ 16,594 $ $ 52,021
Accounts receivable, less allowance for
doubtful accounts........................... 219,046 91,481 310,527
Inventory..................................... 118,553 110,248 (130)(b) 228,671
Prepaid expenses and other current assets..... 29,799 34,753 52,598 117,150
---------------- ------------ ------------ ------------- ------------
Total current assets.......................... 49,483 388,095 270,921 (130) 708,369
Property and equipment, net..................... 11,441 101,671 116,103 (500)(b) 228,715
Intangible assets, net.......................... 567,010 356,014 923,024
Investment in subsidiaries...................... 1,140,020 (1,140,020)(a)
Other assets.................................... 97,683 30,334 66,684 194,701
Net assets of discontinued operations:
Amounts to become receivable upon the
Distributions............................... 132,145 132,145
All other net assets.......................... 354,473 354,473
---------------- ------------ ------------ ------------- ------------
Total assets.............................. $1,430,772 $ 1,087,110 $ 1,164,195 $ (1,140,650) $2,541,427
---------------- ------------ ------------ ------------- ------------
---------------- ------------ ------------ ------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................... $ 365,000 $ 1,859 $ 1,368 $ $ 368,227
Short-term intercompany balances.............. 66,027 (100,324) 34,297
Accounts payable.............................. 2,303 85,712 74,703 162,718
Accrued compensation.......................... 4,218 20,918 17,877 43,013
Other accrued liabilities (26,456) 60,113 47,988 (234)(b) 81,411
---------------- ------------ ------------ ------------- ------------
Total current liabilities................. 411,092 68,278 176,233 (234) 655,369
Long-term debt.................................. 373,750 5,083 3,341 382,174
Other long-term liabilities and minority
interests..................................... 13,908 3,510 335 17,753
Long-term intercompany balances................. (651,930) 195,242 456,785 (97)(b)
---------------- ------------ ------------ ------------- ------------
Total liabilities......................... 146,820 272,113 636,694 (331) 1,055,296
---------------- ------------ ------------ ------------- ------------
Stockholders' equity:
Common stock.................................. 33 33
Additional paid-in capital.................... 1,417,917 709,266 484,962 (1,140,020)(a) 1,472,125
Cumulative translation adjustment............. (66,472) (46,331) (112,803)
Retained earnings (deficit)................... (67,526) 105,731 88,870 (299)(b) 126,776
---------------- ------------ ------------ ------------- ------------
Total stockholders' equity................ 1,283,952 814,997 527,501 (1,140,319) 1,486,131
---------------- ------------ ------------ ------------- ------------
Total liabilities and stockholders'
equity.................................. $1,430,772 $ 1,087,110 $ 1,164,195 $ (1,140,650) $2,541,427
---------------- ------------ ------------ ------------- ------------
---------------- ------------ ------------ ------------- ------------
</TABLE>
73
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
APRIL 26, 1997
---------------------------------------------------------------------------------
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 13,210 $ 7,758 $ 23,058 $ $ 44,026
Accounts receivable, less allowance for
doubtful accounts........................... 200,073 83,678 283,751
Inventory..................................... (118) 104,988 121,131 (3)(b) 225,998
Prepaid expenses and other current assets..... 9,585 18,216 46,779 74,580
---------------- ------------ ------------ ------------- ------------
Total current assets...................... 22,677 331,035 274,646 (3) 628,355
Property and equipment, net..................... 5,512 82,315 94,984 (178)(b) 182,633
Intangible assets, net.......................... 1,252 264,745 345,477 611,474
Investment in subsidiaries...................... 769,871 (769,871)(a)
Other assets.................................... 64,352 4,107 49,830 118,289
Net assets of discontinued operations:
Amounts to become receivable upon the
Distributions............................... 87,700 87,700
All other net assets.......................... 83,422 83,422
---------------- ------------ ------------ ------------- ------------
Total assets.............................. $ 951,364 $ 682,202 $ 848,359 $ (770,052) $1,711,873
---------------- ------------ ------------ ------------- ------------
---------------- ------------ ------------ ------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................... $ 138,784 $ 4,050 $ 1,291 $ $ 144,125
Short-term intercompany balances.............. (32,591) 32,142 449
Accounts payable.............................. 3,041 76,430 74,444 153,915
Accrued compensation.......................... 1,894 15,326 15,295 32,515
Other accrued liabilities..................... (13,679) 49,117 28,459 (83)(b) 63,814
---------------- ------------ ------------ ------------- ------------
Total current liabilities................. 97,449 177,065 119,938 (83) 394,369
Long-term debt.................................. 373,667 6,011 531 380,209
Other long-term liabilities and minority
interests..................................... 7,444 6,363 2,340 16,147
Long-term intercompany balances................. (267,434) 106,745 160,689
---------------- ------------ ------------ ------------- ------------
Total liabilities......................... 211,126 296,184 283,498 (83) 790,725
---------------- ------------ ------------ ------------- ------------
Stockholders' equity:
Common stock.................................. 26 26
Additional paid-in capital.................... 800,541 315,789 520,658 (769,871)(a) 867,117
Cumulative translation adjustment............. (5,583) (5,583)
Retained earnings (deficit)................... (60,329) 70,229 49,786 (98)(b) 59,588
---------------- ------------ ------------ ------------- ------------
Total stockholders' equity................ 740,238 386,018 564,861 (769,969) 921,148
---------------- ------------ ------------ ------------- ------------
Total liabilities and stockholders'
equity.................................. $ 951,364 $ 682,202 $ 848,359 $ (770,052) $1,711,873
---------------- ------------ ------------ ------------- ------------
---------------- ------------ ------------ ------------- ------------
</TABLE>
74
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED APRIL 25, 1998
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ------------- ------------
Revenues........................................ $ $ 1,749,247 $885,292 $(22,799)(c) $2,611,740
Cost of revenues................................ (1,647) 1,297,349 611,415 (22,225)(c) 1,884,892
-------- ------------ ------------ ------------- ------------
Gross profit.............................. 1,647 451,898 273,877 (574) 726,848
Selling, general and administrative expenses.... 19,025 346,826 225,834 (222)(c) 591,463
Amortization expense............................ 10,771 9,167 19,938
Restructuring costs............................. 685 5,331 171 6,187
-------- ------------ ------------ ------------- ------------
Operating income (loss)................... (18,063) 88,970 38,705 (352) 109,260
Interest expense................................ 30,464 (7,789) 15,162 37,837
Interest income................................. 8,279 (8,325) (1,807) (1,853)
Other........................................... (43,090) 37,423 (1,479) (7,146)
-------- ------------ ------------ ------------- ------------
Income (loss) from continuing operations before
provision for (benefit from) income taxes..... (13,716) 67,661 26,829 (352) 80,422
Provision for (benefit from) income taxes....... (6,519) 32,159 11,457 (151)(c) 36,946
-------- ------------ ------------ ------------- ------------
Income (loss) from continuing operations........ (7,197) 35,502 15,372 (201) 43,476
Income from discontinued operations, net of
income taxes.................................. 23,712 23,712
-------- ------------ ------------ ------------- ------------
Net income (loss)............................... $ (7,197) $ 35,502 $ 39,084 $ (201) $ 67,188
-------- ------------ ------------ ------------- ------------
-------- ------------ ------------ ------------- ------------
</TABLE>
75
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
---------------------------------------------------------------------------
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ------------ ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ $ 1,408,102 $ 708,389 $ (537)(c) $2,115,954
Cost of revenues.......................... (4,487) 1,046,069 477,061 (356)(c) 1,518,287
-------- ------------ ----------- ----- ------------
Gross profit........................ 4,487 362,033 231,328 (181) 597,667
Selling, general and administrative
expenses................................ 11,183 284,280 192,752 488,215
Amortization expense...................... 5,307 7,109 12,416
Non-recurring acquisition costs........... 2,288 5,437 276 8,001
Restructuring costs....................... 750 1,759 1,692 4,201
-------- ------------ ----------- ----- ------------
Operating income (loss)............. (9,734) 65,250 29,499 (181) 84,834
Interest expense.......................... 18,473 5,067 12,507 36,047
Interest income........................... (3,038) (1,727) (2,092) (6,857)
Other..................................... (19,509) 18,826 (3,550) (4,233)
-------- ------------ ----------- ----- ------------
Income (loss) from continuing operations
before provision for (benefit from)
income taxes and extraordinary items.... (5,660) 43,084 22,634 (181) 59,877
Provision for (benefit from) income
taxes................................... (2,931) 22,314 8,639 (83)(c) 27,939
-------- ------------ ----------- ----- ------------
Income (loss) from continuing operations
before extraordinary items.............. (2,729) 20,770 13,995 (98) 31,938
Income from discontinued operations, net
of income taxes......................... 26,800 26,800
-------- ------------ ----------- ----- ------------
Income (loss) before extraordinary
items................................... (2,729) 20,770 40,795 (98) 58,738
Extraordinary items-losses on early
terminations of credit facilities, net
of income taxes......................... 612 40 798 1,450
-------- ------------ ----------- ----- ------------
Net income (loss)......................... $ (3,341) $ 20,730 $ 39,997 $ (98) $ 57,288
-------- ------------ ----------- ----- ------------
-------- ------------ ----------- ----- ------------
</TABLE>
76
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED APRIL 30, 1996
------------------------------------------------------------------------
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ $ 976,676 $ 84,852 $ $1,061,528
Cost of revenues...................... (138) 729,834 59,740 789,436
------- ----------- ----------- ------------- ------------
Gross profit.................... 138 246,842 25,112 272,092
Selling, general and administrative
expenses............................ 2,970 208,174 20,425 231,569
Amortization expense.................. 2,436 275 2,711
Non-recurring acquisition costs....... 8,057 8,057
Restructuring costs................... 682 682
------- ----------- ----------- ------------- ------------
Operating income (loss)......... (2,832) 27,493 4,412 29,073
Interest expense...................... 1,219 5,837 1,076 8,132
Interest income....................... (2,109) (1,139) (258) (3,506)
Other................................. (2,674) 1,582 408 (684)
------- ----------- ----------- ------------- ------------
Income from continuing operations
before provision for income taxes
and extraordinary items............. 732 21,213 3,186 25,131
Provision for income taxes............ 159 4,604 1,269 6,032
------- ----------- ----------- ------------- ------------
Income from continuing operations
before extraordinary items.......... 573 16,609 1,917 19,099
Income from discontinued operations,
net of income taxes................. 15,778 15,778
------- ----------- ----------- ------------- ------------
Income before extraordinary items..... 573 16,609 17,695 34,877
Extraordinary items-losses on early
terminations of credit facilities,
net of income taxes................. 701 701
------- ----------- ----------- ------------- ------------
Net income............................ $ 573 $ 16,609 $ 16,994 $ $ 34,176
------- ----------- ----------- ------------- ------------
------- ----------- ----------- ------------- ------------
</TABLE>
77
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED APRIL 25, 1998
--------------------------------------------------------------------------
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities....... $ (34,147) $ 66,097 $ 51,837 $ (225)(d) $ 83,562
Cash flows from investing activities....... (21,240) (20,700) (108,771) 322(d) (150,389)
Cash flows from financing activities....... 61,861 (37,412) 52,066 (97)(d) 76,418
Effect of exchange rates on cash and cash
equivalents.............................. (4,002) (4,002)
Cash provided by discontinued operations... 2,406 2,406
-------- ----------- ----------- ----- ------------
Net increase (decrease) in cash and cash
equivalents.............................. 6,474 7,985 (6,464) 7,995
Cash and cash equivalents at beginning of
period................................... 13,210 7,758 23,058 44,026
-------- ----------- ----------- ----- ------------
Cash and cash equivalents at end of
period................................... $ 19,684 $ 15,743 $ 16,594 $ $ 52,021
-------- ----------- ----------- ----- ------------
-------- ----------- ----------- ----- ------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
--------------------------------------------------------------------------
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities.......... $ (17,528) $ 44,291 $ (10,773) $ (178)(d) $ 15,812
Cash flows from investing activities.......... (110,042) (19,850) (294,241) 178(d) (423,955)
Cash flows from financing activities.......... (27,357) (26,901) 331,678 277,420
Effect of exchange rates on cash and cash
equivalents................................. (511) (511)
Cash used in discontinued operations.......... (8,223) (8,223)
----------------- ----------- ----------- ----- ------------
Net increase (decrease) in cash and cash
equivalents................................. (154,927) (2,460) 17,930 (139,457)
Cash and cash equivalents at beginning of
period...................................... 168,137 10,218 5,128 183,483
----------------- ----------- ----------- ----- ------------
Cash and cash equivalents at end of period.... $ 13,210 $ 7,758 $ 23,058 $ $ 44,026
----------------- ----------- ----------- ----- ------------
----------------- ----------- ----------- ----- ------------
</TABLE>
78
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED APRIL 30, 1996
--------------------------------------------------------------------------
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities.......... $ 5,103 $ 10,973 $ 3,170 $ $ 19,246
Cash flows from investing activities.......... (65,649) (27,247) (27,165) (120,061)
Cash flows from financing activities.......... 215,954 14,527 27,285 257,766
Effect of exchange rates on cash and cash
equivalents................................. (121) (121)
Cash provided by discontinued operations...... 1,707 1,707
----------------- ----------- ----------- ----- ------------
Net increase (decrease) in cash and cash
equivalents................................. 155,408 (1,747) 4,876 158,537
Cash and cash equivalents at beginning of
period...................................... 12,729 11,965 252 24,946
----------------- ----------- ----------- ----- ------------
Cash and cash equivalents at end of period.... $ 168,137 $ 10,218 $ 5,128 $ $ 183,483
----------------- ----------- ----------- ----- ------------
----------------- ----------- ----------- ----- ------------
</TABLE>
The "U.S. Office Products Company (Parent Company)" column in the foregoing
condensed consolidating financial information reflects equity method accounting
for the Company's investment in subsidiaries.
Consolidating adjustments to the condensed consolidating balance sheets
include the following:
(a) Elimination of investments in subsidiaries.
(b) Elimination of intercompany profit in inventory and property and
equipment.
Consolidating adjustments to the condensed consolidating statements of
income include the following:
(c) Elimination of intercompany sales.
Consolidating adjustments to the condensed consolidating statements of cash
flows include the following:
(d) Elimination of intercompany profits.
NOTE 18--SUBSEQUENT EVENTS
In June 1998, U.S. Office Products completed the Strategic Restructuring
Plan described in Note 3. In addition, subsequent to April 25, 1998 and through
June 24, 1998, the Company completed eight purchase acquisitions related to
continuing operations for an aggregate cash purchase price of $7,978.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1998 as if the Strategic Restructuring Plan and the
acquisitions described above had been consummated as of the beginning of fiscal
1998. 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 restating for 12 business combinations as purchase
acquisitions (including the Company's acquisition of MBE), rather than
79
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 18--SUBSEQUENT EVENTS (CONTINUED)
pooling-of-interests acquisitions, as the Company had expected when it completed
those acquisitions); (ii) substantially higher interest expense, as a result of
increased borrowing that the Company incurred to help finance the cost of the
Equity Tender; 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
APRIL 25, 1998
----------------
<S> <C>
Revenues.................................................................... $ 2,794,820
Income from continuing operations........................................... 6,197
Basic income per share from continuing operations........................... 0.17
Diluted income per share from continuing operations......................... 0.17
</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 1998 or the
results which may occur in the future.
In June 1998, the Company entered into four interest rate swap agreements
with expiration dates ranging from 2001 to 2003 and an aggregate notional amount
of $375,000. The effect of these agreements is to limit the LIBOR-based interest
rate exposure to 5.73% to 5.78% on $375,000 of the Company's New Credit
Facility.
In June 1998, the Company entered into five foreign currency forward
contracts, expiring in 1999, with an aggregate notional amount of approximately
$25,000, against the New Zealand dollar to hedge a portion of the net investment
in its New Zealand subsidiary. The effect of these agreements is to limit the
foreign currency exposure to U.S. $.48 to U.S. $.51 on $25,000 of the Company's
net investment in its New Zealand subsidiary.
80
<PAGE>
SCHEDULE II
U.S. OFFICE PRODUCTS COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE FISCAL YEARS ENDED APRIL 25, 1998
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION DATE OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS DATE PERIOD
- ------------------------------------ ------------- ---------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
April 30,
Allowance for doubtful accounts..... May 1, 1995 $ 960,000 $1,720,000 $2,335,000(a) $(1,429,000)(b) 1996 $3,586,000
April 26,
May 1, 1996 3,586,000 5,085,000 685,000(a) (2,019,000 (b) 1997 7,337,000
April 27, April 25,
1997 7,337,000 5,298,000 1,402,000(a) (5,398,000 (b) 1998 8,639,000
Accumulated amortization April 30,
of intangibles.................... May 1, 1995 2,244,000 2,711,000 (1,208,000 (c) 1996 3,747,000
April 26,
May 1, 1996 3,747,000 12,416,000 524,000(d) (24,000 (c) 1997 16,663,000
April 27, April 25,
1997 16,663,000 19,938,000 (1,770,000 (c) 1998 34,831,000
</TABLE>
- ------------------------------
(a) Allowance for doubtful accounts acquired in purchase acquisitions.
(b) Represents write-offs of uncollectible accounts receivable.
(c) Represents write-offs of fully amortized intangible assets.
(d) Represents a $524,000 adjustment to conform the year-ends of certain Pooled
Companies.
81
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on September
16, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on September
16, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on September
16, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on September
16, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, EXHIBITS AND SCHEDULES
1. FINANCIAL STATEMENTS (See Item 8 hereof.)
Consolidated Balance Sheet as of April 25, 1998 and April 26, 1997
Consolidated Statement of Income for the fiscal years ended April 25,
1998, April 26, 1997 and April 30, 1996
Consolidated Statement of Stockholders' Equity for the fiscal years
ended April 25, 1998, April 26, 1997 and April 30, 1996
Consolidated Statement of Cash Flows for the fiscal years ended April
25, 1998, April 26, 1997 and April 30, 1996
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES (See Item 8 hereof.)
Schedule II--Valuation and Qualifying Accounts and Reserves
All schedules, other than those outlined above, are omitted as the
information is not required or is otherwise furnished.
3. EXHIBITS
82
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Distribution dated as of June 9, 1998 between U.S. Office Products Company,
Workflow Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc. and Navigant
International, Inc. (Exhibit 2.1 to the Company's Form 8-K (Commission file No. 000-25372), filed June
25, 1998, is hereby incorporated by reference).
3.1 Amended and Restated Certificate of Incorporation of U.S. Office Products Company as amended through
June 9, 1998.
3.2 Amended and Restated Bylaws of U.S. Office Products Company as amended through November 4, 1997.
4.1 Form of Indenture relating to the Company's $143.75 million 5 1/2% Convertible Subordinated Notes due
2001 (including form of Note) (Exhibit 4.1 of the Company's Registration Statement on Form S-1 (File
No. 33-80553) is hereby incorporated by reference)
4.2 Form of Indenture relating to the Company's $230.0 million 5 1/2% Convertible Subordinated Notes due
2003 (including form of Note) (Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year
ended April 30, 1996 is hereby incorporated by reference)
4.3 Registration Rights Agreement, dated as of May 22, 1996, by and among the Company and Robertson
Stephens & Company LLC and Natwest Securities Limited, as Managers (Exhibit 4.3 of the Company's Annual
Report on Form 10-K for the year ended April 30, 1996 is hereby incorporated by reference)
4.4 Indenture dated as of June 10, 1998 between U.S. Office Products Company and State Street Bank and
Trust Company (Exhibit 4.1 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25,
1998, is hereby incorporated by reference).
4.5 Registration Rights Agreement dated as of June 10, 1998 between U.S. Office Products Company and Morgan
Stanley & Co., Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BT Alex. Brown
Incorporated and Chase Securities, Inc. (Exhibit 99.1 to the Company's Form 8-K (Commission file No.
000-25372), filed June 25, 1998, is hereby incorporated by reference).
4.6 Common Stock Purchase Warrant dated June 10, 1998 (Exhibit 99.4 of the Company's Form 8-K (Commission
file No. 000-25372), filed June 25, 1998, is hereby incorporated by reference)
4.7 Common Stock Purchase Special Warrant dated June 10, 1998 (Exhibit 99.5 of the Company's Form 8-K
(Commission file No. 000-25372), filed June 25, 1998, is hereby incorporated by reference)
4.8 Registration Rights Agreement dated as of June 10, 1998 among U.S. Office Products Company and CDR-PC
Acqusition, L.L.C. (Exhibit 99.6 of the Company's Form 8-K (Commission file No. 000-25372), filed June
25, 1998, is hereby incorporated by reference)
10.1 U.S. Office Products Company Amended and Restated 1994 Long-Term Incentive Plan, as amended (Exhibit A
to the Company's Proxy Statement, dated July 22, 1996, is hereby incorporated by reference)
10.2 Amended Services Agreement dated as of June 8, 1998 between U.S. Office Products Company and Jonathan
J. Ledecky (Exhibit 99.13 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25,
1998, is hereby incorporated by reference)
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.3 Employment Agreement for Timothy J. Flynn (Exhibit 10.4 of the Company's Post-Effective Amendment No. 6
to the Registration Statement on Form S-1 (File No. 33-89978) is hereby incorporated by reference)
10.4 Employment Agreement for Donald H. Platt (Exhibit 10.14 of the Company's Post-Effective Amendment No. 2
to the Registration Statement on Form S-1 (File No. 33-89978) is hereby incorporated by reference)
10.5 Employment Agreement for Mark D. Director (Exhibit 10.14 of the Company's Annual Report on Form 10-K
for the year ended April 30, 1996 is hereby incorporated by reference)
10.6 Employment Agreement for Thomas I. Morgan (Exhibit 10.34 of the Company's Annual Report on Form 10-K
for the year ended April 26, 1997 is hereby incorporated by reference)
10.7 Amendment No. 1, dated as of December 5, 1997, to Employment Agreement, dated as of February 3, 1997,
by and between the Company and Thomas I. Morgan (Exhibit 10.1 of the Company's Form 10- Q for the
quarter ended October 25, 1997 is hereby incorporated by reference).
10.8 Amended and Restated Employment Agreement, dated as of August 1, 1997, by and between the Company and
Michael J. Barnell (Exhibit 10.2 of the Company's Form 10-Q for the quarter ended October 25, 1997 is
hereby incorporated by reference).
10.9 Stock Purchase Agreement, dated as of January 31, 1996, by and between U.S. Office Products Company and
Eric John Watson (Exhibit 2.8 of the Company's Post-Effective Amendment No. 1 to Form S-1 (File No.
33-80117) is hereby incorporated by reference)
10.10 Amendment to Stock Purchase Agreement, dated as of June 20, 1996, by and between the Company and Eric
John Watson (Exhibit 10.24 of the Company's Annual Report on Form 10-K for the year ended April 30,
1996 is hereby incorporated by reference)
10.11 Stock Purchase Agreement, dated as of July 22, 1996, by and among Blue Star Group Limited, Rank
Commercial Limited, the Company and Graeme Richard Hart (Exhibit 10.1 of the Company's Current Report
on Form 8-K (File No. 000-25372), filed on July 26, 1996, is hereby incorporated by reference)
10.12 Credit Agreement dated as of June 9, 1998 between U.S. Office Products Company and The Chase Manhattan
Bank, as Administrative Agent, Bankers Trust Company, as Syndication Agent, Merrill Lynch Capital
Corporation, as Documentation Agent, Chase Securities Inc., BT Alex. Brown Incorporated, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as co-arrangers and the other lenders named therein
(Exhibit 99.2 of the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is hereby
incorporated by reference)
10.13 U.S. Office Products Company Executive Deferred Compensation Plan (Exhibit B to the Company's Proxy
Statement, dated July 22, 1996, is hereby incorporated by reference)
10.14 U.S. Office Products Company 1996 Non-Employee Directors' Stock Plan (Exhibit C to the Company's Proxy
Statement, dated July 22, 1996, is hereby incorporated by reference)
10.15 U.S. Office Products Company Amended and Restated Employee Stock Purchase Plan, as amended (Exhibit D
to the Company's Proxy Statement, dated July 22, 1996, is hereby incorporated by reference)
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.16 Investment Agreement dated January 12, 1998, by and between U.S. Office Products Company and CDR-PC
Acquisition, L.L.C. (Exhibit 99.1 of the Company's Form 8-K (Commission file No. 000-25372), filed
January 16, 1998, is hereby incorporated by reference)
10.17 Amendment No. 1 to Investment Agreement, dated as of February 3, 1998 (Exhibit 99.1 of the Company's
Form 8-K (Commission file No. 000-25372), filed February 12, 1998, is hereby incorporated by reference)
10.18 Tax Allocation Agreement dated as of June 9, 1998 among U.S. Office Products Company, Workflow
Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc. and Navigant International,
Inc. (Exhibit 99.9 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is
hereby incorporated by reference).
10.19 Consulting Agreement dated as of June 10, 1998 by and between U.S. Office Products Company and Clayton,
Dubilier & Rice, Inc. (Exhibit 99.7 of the Company's Form 8-K (Commission file No. 000-25372), filed
June 25, 1998, is hereby incorporated by reference)
10.20 Indemnification Agreement dated as of June 10, 1998 by and among U.S. Office Products Company, CDR-PC
Acquisition, L.L.C., Clayton, Dubilier & Rice Fund V Limited Partnership, and Clayton, Dubilier & Rice,
Inc. (Exhibit 99.8 of the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is
hereby incorporated by reference)
10.21 Employee Benefits Services and Liabilities Agreement dated as of June 9, 1998 between U.S. Office
Products Company, Workflow Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc.
and Navigant International, Inc. (Exhibit 99.10 to the Company's Form 8-K (Commission file No.
000-25372), filed June 25, 1998, is hereby incorporated by reference)
10.22 Section 162(M) Bonus Plan of U.S. Office Products Company (Annex A to the Company's Proxy Statement,
filed with the Commission September 8, 1997, is hereby incorporated by reference)
10.23 Agreement and Plan of Merger, dated as of May 22, 1997, among U.S. Office Products Company, Santa Fe
Acqusition Corp. and Mail Boxes Etc. (Exhibit 2.1 to the Company's Form 8-K (Commission file No.
000-25372), filed May 29, 1997, is hereby incorporated by reference)
10.24 Agreement and Plan of Reorganization, dated as of July 26, 1996, by and among Mile High Office Supply,
Inc., MHOS Acquisition Corp, the Company and the stockholders named therein (Exhibit 10.2 of the
Company's Current Report on Form 8-K (File No. 000-25372), filed on July 26, 1996 is hereby
incorporated by reference)
10.25 Agreement and Plan of Reorganization, dated as of July 26, 1996, by and among American Looseleaf,
Acquisition Corp., the Company and the stockholders named therein (Exhibit 10.3 of the Company's
Current Report on Form 8-K (File No. 000-25372), filed on July 26, 1996, is hereby incorporated by
reference)
10.26 Guarantee and Collateral Agreement, dated as of June 10, 1998, made by U.S. Office Products Company and
each of the other signatories thereto, in favor of The Chase Manhattan Bank, as administrative agent
for the banks and other financial institutions (the "Lenders") from time to time parties to the Credit
Agreement, dated as of June 9, 1998, among U.S. Office Products Company, Blue Star Group Limited, the
Lenders, The Chase Manhattan Bank, as administrative agent, Bankers Trust Company, as syndication agent
and Merrill Lynch Capital Corporation, as documentation agent.
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
21.1 List of subsidiaries of U.S. Office Products Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of BDO Seidman, LLP
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of Rubin, Koehmstedt & Nadler, PLC
23.5 Consent of Deloitte & Touche LLP
23.6 Consent of Hertz, Herson & Company LLP
23.7 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K. During the last quarter of the fiscal year covered
by this report, the Company filed the following Current Reports on Form 8-K:
i. Form 8-K dated February 3, 1998 and filed with the Commission on
February 12, 1998 reporting information under Item 5.
ii. Form 8-K dated March 9, 1998 and filed with the Commission on March 9,
1998 reporting information under Item 5, including the following financial
statements:
(a) Pro Forma Financial Information for Workflow Management, Inc. as of
October 25, 1997, for the six months ended October 25, 1997 and October 26,
1996 and for the fiscal year ended April 26, 1997.
(b) Consolidated Financial Statements for Workflow Management, Inc. as
of April 30, 1996, April 26, 1997 and October 25, 1997 and for the years
ended December 31, 1994 and 1995, the months ended April 30, 1996, the
fiscal year ended April 26, 1997 and the six months ended October 25, 1997.
(c) Pro Forma Financial Information for School Specialty, Inc. as of
October 25, 1997, for the six months ended October 25, 1997 and October 26,
1996 and for the fiscal year ended April 26, 1997.
(d) Consolidated Financial Statements for School Specialty, Inc. as of
April 30, 1996, April 26, 1997 and October 25, 1997 and for the years ended
December 31, 1994 and 1995, the months ended April 30, 1996, the fiscal year
ended April 26, 1997 and the six months ended October 25, 1997.
(e) Pro Forma Financial Information for Paradigm Concepts, Inc. as of
October 25, 1997, for the six months ended October 25, 1997 and October 26,
1996 and for the fiscal year ended April 26, 1997.
(f) Consolidated Financial Statements for Paradigm Concepts, Inc. as of
April 30, 1996, April 26, 1997 and October 25, 1997 and for the years ended
December 31, 1994 and 1995, the months ended April 30, 1996, the fiscal year
ended April 26, 1997 and the six months ended October 25, 1997.
(g) Pro Forma Financial Information for TDOP, Inc. as of October 25,
1997, for the six months ended October 25, 1997 and October 26, 1996 and for
the fiscal year ended April 26, 1997.
(h) Consolidated Financial Statements for TDOP, Inc. as of April 30,
1996, April 26, 1997 and October 25, 1997 and for the years ended December
31, 1994 and 1995, the months ended April 30, 1996, the fiscal year ended
April 26, 1997 and the six months ended October 25, 1997.
iii. Form 8-K dated March 12, 1998 and filed with the Commission on March
12, 1998 reporting information under Item 5, including the following financial
statements:
86
<PAGE>
(a) Pro Forma Financial Information for the Company as of January 24,
1998, for the nine months ended January 24, 1998 and January 25, 1997 and
for the fiscal year ended April 26, 1997.
(b) Consolidated Financial Statements for the Company as of April 30,
1996, April 26, 1997 and January 24, 1998 and for the fiscal years ended
April 30, 1995 and 1996, April 26, 1997 the nine months ended January 25,
1997 and January 24, 1998.
iv. Form 8-K dated April 7, 1998 and filed with the Commission on April 7,
1998 reporting information under Item 5 and Item 7, including the following
financial statements:
(a) Consolidated Financial Statements for Mail Boxes, Etc. as of April
30, 1997 and 1996 and for fiscal years ended April 30, 1997, 1996 and 1995.
(b) Condensed Consolidated Financial Statements for Mail Boxes, Etc. as
of October 31, 1997, for the three months and six months ended October 31,
1997 and 1996.
v. Form 8-K/A filed with the Commission on April 7, 1998 reporting
information under Item 5 and Item 7, including the following financial
statements:
(a) Pro Forma Combined Financial Information for the Company as of
October 25, 1997, for the six months ended October 25, 1997 and for the
fiscal year ended.
(b) Consolidated Financial Statements for the Company as of April 30,
1997 and 1996 and for the fiscal years ended April 30, 1997, 1996 and 1995.
87
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
U.S. OFFICE PRODUCTS COMPANY
By: /s/ THOMAS MORGAN
-----------------------------------------
Name: Thomas Morgan
Title: Chief Executive Officer
Date: July 18, 1998
Each person whose signature appears below hereby appoints Thomas Morgan and
Mark D. Director, and both of them, either of whom may act without the joinder
of the other, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits thereto and all
other documents in connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents full power and authority to perform each and every
act and thing appropriate or necessary to be done, as fully and for all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ THOMAS MORGAN Officer and Director
- ------------------------------ (Principal Executive July 18, 1998
Thomas Morgan Officer)
Executive Vice
President--Financial,
/s/ DONALD H. PLATT Chief Financial Officer
- ------------------------------ and Treasurer (Principal July 18, 1998
Donald H. Platt Financial Officer and
Principal Accounting
Officer)
/s/ CHARLES P. PIEPER
- ------------------------------ Chairman of the Board of July 18, 1998
Charles P. Pieper Directors
/s/ KEVIN J. CONWAY
- ------------------------------ Director July 18, 1998
Kevin J. Conway
/s/ FRANK P. DOYLE
- ------------------------------ Director July 18, 1998
Frank P. Doyle
/s/ BRIAN D. FINN
- ------------------------------ Director July 18, 1998
Brian D. Finn
/s/ L. DENNIS KOZLOWSKI
- ------------------------------ Director July 18, 1998
L. Dennis Kozlowski
/s/ MILTON H. KUYERS
- ------------------------------ Director July 18, 1998
Milton H. Kuyers
/s/ ALLON H. LEFEVER
- ------------------------------ Director July 18, 1998
Allon H. Lefever
/s/ EDWARD J. MATHIAS
- ------------------------------ Director July 18, 1998
Edward J. Mathias
</TABLE>
88
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Distribution dated as of June 9, 1998 between U.S. Office Products Company,
Workflow Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc. and Navigant
International, Inc. (Exhibit 2.1 to the Company's Form 8-K (Commission file No. 000-25372), filed June
25, 1998, is hereby incorporated by reference).
3.1 Amended and Restated Certificate of Incorporation of U.S. Office Products Company as amended through
June 9, 1998.
3.2 Amended and Restated Bylaws of U.S. Office Products Company as amended through November 4, 1997.
4.1 Form of Indenture relating to the Company's $143.75 million 5 1/2% Convertible Subordinated Notes due
2001 (including form of Note) (Exhibit 4.1 of the Company's Registration Statement on Form S-1 (File
No. 33-80553) is hereby incorporated by reference)
4.2 Form of Indenture relating to the Company's $230.0 million 5 1/2% Convertible Subordinated Notes due
2003 (including form of Note) (Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year
ended April 30, 1996 is hereby incorporated by reference)
4.3 Registration Rights Agreement, dated as of May 22, 1996, by and among the Company and Robertson
Stephens & Company LLC and Natwest Securities Limited, as Managers (Exhibit 4.3 of the Company's Annual
Report on Form 10-K for the year ended April 30, 1996 is hereby incorporated by reference)
4.4 Indenture dated as of June 10, 1998 between U.S. Office Products Company and State Street Bank and
Trust Company (Exhibit 4.1 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25,
1998, is hereby incorporated by reference).
4.5 Registration Rights Agreement dated as of June 10, 1998 between U.S. Office Products Company and Morgan
Stanley & Co., Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BT Alex. Brown
Incorporated and Chase Securities, Inc. (Exhibit 99.1 to the Company's Form 8-K (Commission file No.
000-25372), filed June 25, 1998, is hereby incorporated by reference).
4.6 Common Stock Purchase Warrant dated June 10, 1998 (Exhibit 99.4 of the Company's Form 8-K (Commission
file No. 000-25372), filed June 25, 1998, is hereby incorporated by reference)
4.7 Common Stock Purchase Special Warrant dated June 10, 1998 (Exhibit 99.5 of the Company's Form 8-K
(Commission file No. 000-25372), filed June 25, 1998, is hereby incorporated by reference)
4.8 Registration Rights Agreement dated as of June 10, 1998 among U.S. Office Products Company and CDR-PC
Acqusition, L.L.C. (Exhibit 99.6 of the Company's Form 8-K (Commission file No. 000-25372), filed June
25, 1998, is hereby incorporated by reference)
10.1 U.S. Office Products Company Amended and Restated 1994 Long-Term Incentive Plan, as amended (Exhibit A
to the Company's Proxy Statement, dated July 22, 1996, is hereby incorporated by reference)
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.2 Amended Services Agreement dated as of June 8, 1998 between U.S. Office Products Company and Jonathan
J. Ledecky (Exhibit 99.13 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25,
1998, is hereby incorporated by reference)
10.3 Employment Agreement for Timothy J. Flynn (Exhibit 10.4 of the Company's Post-Effective Amendment No. 6
to the Registration Statement on Form S-1 (File No. 33-89978) is hereby incorporated by reference)
10.4 Employment Agreement for Donald H. Platt (Exhibit 10.14 of the Company's Post-Effective Amendment No. 2
to the Registration Statement on Form S-1 (File No. 33-89978) is hereby incorporated by reference)
10.5 Employment Agreement for Mark D. Director (Exhibit 10.14 of the Company's Annual Report on Form 10-K
for the year ended April 30, 1996 is hereby incorporated by reference)
10.6 Employment Agreement for Thomas I. Morgan (Exhibit 10.34 of the Company's Annual Report on Form 10-K
for the year ended April 26, 1997 is hereby incorporated by reference)
10.7 Amendment No. 1, dated as of December 5, 1997, to Employment Agreement, dated as of February 3, 1997,
by and between the Company and Thomas I. Morgan (Exhibit 10.1 of the Company's Form 10- Q for the
quarter ended October 25, 1997 is hereby incorporated by reference).
10.8 Amended and Restated Employment Agreement, dated as of August 1, 1997, by and between the Company and
Michael J. Barnell (Exhibit 10.2 of the Company's Form 10-Q for the quarter ended October 25, 1997 is
hereby incorporated by reference).
10.9 Stock Purchase Agreement, dated as of January 31, 1996, by and between U.S. Office Products Company and
Eric John Watson (Exhibit 2.8 of the Company's Post-Effective Amendment No. 1 to Form S-1 (File No.
33-80117) is hereby incorporated by reference)
10.10 Amendment to Stock Purchase Agreement, dated as of June 20, 1996, by and between the Company and Eric
John Watson (Exhibit 10.24 of the Company's Annual Report on Form 10-K for the year ended April 30,
1996 1996, is hereby incorporated by reference)
10.11 Stock Purchase Agreement, dated as of July 22, 1996, by and among Blue Star Group Limited, Rank
Commercial Limited, the Company and Graeme Richard Hart (Exhibit 10.1 of the Company's Current Report
on Form 8-K (File No. 000-25372), filed on July 26, 1996, is hereby incorporated by reference)
10.12 Credit Agreement dated as of June 9, 1998 between U.S. Office Products Company and The Chase Manhattan
Bank, as Administrative Agent, Bankers Trust Company, as Syndication Agent, Merrill Lynch Capital
Corporation, as Documentation Agent, Chase Securities Inc., BT Alex. Brown Incorporated, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as co-arrangers and the other lenders named therein
(Exhibit 99.2 of the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is hereby
incorporated by reference)
10.13 U.S. Office Products Company Executive Deferred Compensation Plan (Exhibit B to the Company's Proxy
Statement, dated July 22, 1996, is hereby incorporated by reference)
10.14 U.S. Office Products Company 1996 Non-Employee Directors' Stock Plan (Exhibit C to the Company's Proxy
Statement, dated July 22, 1996, is hereby incorporated by reference)
10.15 U.S. Office Products Company Amended and Restated Employee Stock Purchase Plan, as amended (Exhibit D
to the Company's Proxy Statement, dated July 22, 1996, is hereby incorporated by reference)
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.16 Investment Agreement dated January 12, 1998, by and between U.S. Office Products Company and CDR-PC
Acquisition, L.L.C. (Exhibit 99.1 of the Company's Form 8-K (Commission file No. 000-25372), filed
January 16, 1998, is hereby incorporated by reference)
10.17 Amendment No. 1 to Investment Agreement, dated as of February 3, 1998 (Exhibit 99.1 of the Company's
Form 8-K (Commission file No. 000-25372), filed February 12, 1998, is hereby incorporated by reference)
10.18 Tax Allocation Agreement dated as of June 9, 1998 among U.S. Office Products Company, Workflow
Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc. and Navigant International,
Inc. (Exhibit 99.9 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is
hereby incorporated by reference).
10.19 Consulting Agreement dated as of June 10, 1998 by and between U.S. Office Products Company and Clayton,
Dubilier & Rice, Inc. (Exhibit 99.7 of the Company's Form 8-K (Commission file No. 000-25372), filed
June 25, 1998, is hereby incorporated by reference)
10.20 Indemnification Agreement dated as of June 10, 1998 by and among U.S. Office Products Company, CDR-PC
Acquisition, L.L.C., Clayton, Dubilier & Rice Fund V Limited Partnership, and Clayton, Dubilier & Rice,
Inc. (Exhibit 99.8 of the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is
hereby incorporated by reference)
10.21 Employee Benefits Services and Liabilities Agreement dated as of June 9, 1998 between U.S. Office
Products Company, Workflow Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc.
and Navigant International, Inc. (Exhibit 99.10 to the Company's Form 8-K (Commission file No.
000-25372), filed June 25, 1998, is hereby incorporated by reference)
10.22 Section 162(M) Bonus Plan of U.S. Office Products Company (Annex A to the Company's Proxy Statement,
filed with the Commission September 8, 1997, is hereby incorporated by reference)
10.23 Agreement and Plan of Merger, dated as of May 22, 1997, among U.S. Office Products Company, Santa Fe
Acqusition Corp. and Mail Boxes Etc. (Exhibit 2.1 to the Company's Form 8-K (Commission file No.
000-25372), filed May 29, 1997, is hereby incorporated by reference)
10.24 Agreement and Plan of Reorganization, dated as of July 26, 1996, by and among Mile High Office Supply,
Inc., MHOS Acquisition Corp, the Company and the stockholders named therein (Exhibit 10.2 of the
Company's Current Report on Form 8-K (File No. 000-25372), filed on July 26, 1996, is hereby
incorporated by reference)
10.25 Agreement and Plan of Reorganization, dated as of July 26, 1996, by and among American Looseleaf,
Acquisition Corp., the Company and the stockholders named therein (Exhibit 10.3 of the Company's
Current Report on Form 8-K (File No. 000-25372), filed on July 26, 1996, is hereby incorporated by
reference)
10.26 Guarantee and Collateral Agreement, dated as of June 10, 1998, made by U.S. Office Products Company and
each of the other signatories thereto, in favor of The Chase Manhattan Bank, as administrative agent
for the banks and other financial institutions (the "Lenders") from time to time parties to the Credit
Agreement, dated as of June 9, 1998, among U.S. Office Products Company, Blue Star Group Limited, the
Lenders, The Chase Manhattan Bank, as administrative agent, Bankers Trust Company, as syndication agent
and Merrill Lynch Capital Corporation, as documentation agent.
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
21.1 List of subsidiaries of U.S. Office Products Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of BDO Seidman, LLP
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of Rubin, Koehmstedt & Nadler, PLC
23.5 Consent of Deloitte & Touche LLP
23.6 Consent of Hertz, Herson & Company LLP
23.7 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
92
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
U.S. OFFICE PRODUCTS COMPANY
AS AMENDED THROUGH JUNE 9, 1998
ARTICLE ONE
The name of the Corporation is: U.S. OFFICE PRODUCTS COMPANY.
ARTICLE TWO
The address of the Corporation's registered office in the
State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE FOUR
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Five Hundred Million Five Hundred
Thousand (500,500,000) shares, of which Five Hundred Thousand (500,000) shares,
designated as Preferred Stock, shall have a par value of One Tenth of One Cent
($.001) per share (the "Preferred Stock"), and Five Hundred Million
(500,000,000) shares, designated as Common Stock, shall have a par value of One
Tenth of One Cent ($.001) per share (the "Common Stock").
A statement of the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, in respect of each class of
stock of the Corporation is as follows:
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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 this Restated Certificate of Incorporation and the limitations
prescribed by law, the Board of Directors is expressly authorized by adopting
resolutions to issue the shares, fix the number of shares and 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 (and whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), a redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
class or series of the Preferred Stock, without any further action or vote by
the stockholders.
COMMON STOCK
1. Dividends.
Subject to the preferred rights of the holders of shares of
any class or series of Preferred Stock as provided by the Board of Directors
with respect to any such class or series of Preferred Stock, the holders of the
Common Stock shall be entitled to receive, as and when declared by the Board of
Directors out of the funds of the Corporation legally available therefor, such
dividends (payable in cash, stock or otherwise) as the Board of Directors may
from time to time determine, payable to stockholders of record on such dates,
not exceeding 60 days preceding the dividend payment dates, as shall be fixed
for such purpose by the Board of Directors in advance of payment of each
particular dividend.
2. Liquidation.
In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, after the distribution or
payment to the holders of shares of any class or series of Preferred Stock as
provided by the Board of Directors with respect to any such class or series of
Preferred Stock, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among and paid to the holders
of Common Stock ratably in proportion to the number of shares of Common Stock
held by them respectively.
3. Voting Rights.
Except as otherwise required by law or as provided by the
Board of Directors with respect to any class or series of Preferred Stock, the
entire voting power and all voting rights shall be vested exclusively in the
Common Stock. Each holder of shares of Common Stock shall be entitled to one
vote for each share standing in his name on the books of the Corporation.
4. Reclassification
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As of 5:00 p.m., Eastern time, on the date on which this
Certificate of Amendment is filed with the Secretary of State of Delaware (the
"Effective Time"), each four outstanding shares of common stock, $.001 per share
("Old Common Stock") shall thereupon be reclassified and
changed into one share of common stock, par value $.001 per share ("New Common
Stock"). Upon such Effective Time, each holder of Old Common Stock shall
thereupon automatically be and become the holder of one share of New Common
Stock for every four shares of Old Common Stock held by such holder prior
thereto. Upon such Effective Time, each certificate formerly representing a
stated number of shares of Old Common Stock shall thereupon be deemed for all
corporate purposes to evidence ownership of New Common Stock in the
appropriately reduced whole number of shares. As soon as practicable after such
Effective Time, stockholders as of the record date for the reclassification will
be notified thereof and upon their delivery of their certificates of Old Common
Stock to the Corporation or its designated agent, will be sent stock
certificates representing their shares of New Common Stock, rounded down to the
nearest whole number, together with cash representing the fair value of such
holder's fractional shares of Old Common Stock. No scrip or fractional share
certificate for New Common Stock will be issued in connection with this reverse
stock split. All references elsewhere in the Amended and Restated Certificate of
Incorporation to the "Common Stock" shall, after the Effective Time, refer to
the New Common Stock.
ARTICLE FIVE
1. Board of Directors.
The Directors shall be elected at each annual meeting of
stockholders to hold office until their successors have been duly elected and
qualified. At each annual meeting of stockholders at which a quorum is present,
the persons receiving a plurality of the votes cast shall be directors. No
director or class of directors may be removed from office by a vote of the
stockholders at any time except for cause. Election of directors need not be by
written ballot unless the By-laws of the Corporation so provide.
2. Vacancies.
Any vacancy on the Board of Directors resulting from death,
retirement, resignation, disqualification or removal from office or other cause,
as well as any vacancy resulting from an increase in the number of directors
which occurs between annual meetings of the stockholders at which directors are
elected, shall be filled only by a majority vote of the remaining directors then
in office, though less than a quorum, except that those vacancies resulting from
removal from office by a vote of the stockholders may be filled by a vote of the
stockholders at the same meeting at which such removal occurs. The directors
chosen to fill vacancies shall hold office for a term expiring at the end of the
next annual meeting of stockholders. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
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Notwithstanding the foregoing, whenever the holders of one or
more classes or series of Preferred Stock shall have the right, voting
separately, as a class or series, to elect directors, the election, term of
office, filling of vacancies, removal and other features of such directorships
shall be governed by the terms of the resolution or resolutions adopted by the
Board of Directors pursuant to ARTICLE FOUR applicable thereto, and each
director so elected shall not be subject to the provisions of this ARTICLE FIVE
unless otherwise provided therein.
3. Power to Make, Alter and Repeal By-laws.
In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter and
repeal the By-laws of the Corporation.
ARTICLE SIX
The Corporation reserves the right to amend, alter, change or
repeal any provision in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute.
ARTICLE SEVEN
No director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law or (iv) for any transaction from which the director derived an improper
personal benefit.
ARTICLE EIGHT
The Corporation shall, to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, as the same may be amended
and supplemented, indemnify each director and officer of the Corporation from
and against any and all of the expenses, liabilities or other matters referred
to in or covered by said section and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under any By-law, agreement, vote of stockholders, vote of
disinterested directors or otherwise, and shall continue as to a person who has
ceased to be a director or officer and shall inure to the benefit of the heirs,
executors and administrators of such persons and the Corporation may purchase
and maintain insurance on behalf of any director or officer to the extent
permitted by Section 145 of the Delaware General Corporation Law.
ARTICLE NINE
Whenever a compromise or arrangement is proposed between
the Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
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jurisdiction within the State of Delaware may, on the application in a
summary way of the Corporation or of any creditor or stockholder thereof or
on the application of any receiver or receivers appointed for the Corporation
under the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for the Corporation under the provisions of section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as
the case may be, to be summoned in such manner as the said court directs. If
a majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of
the Corporation, as the case may be, agree to any compromise or arrangement
and to any reorganization of the Corporation as a consequence of such
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
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Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
U.S. OFFICE PRODUCTS COMPANY
AS AMENDED THROUGH NOVEMBER 4, 1997
ARTICLE I
Stockholders
SECTION 1. Annual Meeting. The annual meeting of the stockholders of the
Corporation shall be held on such date, at such time and at such place within or
without the State of Delaware as may be designated by the Board of Directors,
for the purpose of electing Directors and for the transaction of such other
business as may be properly brought before the meeting.
SECTION 2. Special Meetings. Except as otherwise provided in the
Certificate of Incorporation, a special meeting of the stockholders of the
Corporation may be called at any time by the Board of Directors, the Chairman of
the Board or the President and shall be called by the Chairman of the Board, the
President or the Secretary at the request in writing of stockholders holding
together at least twenty-five percent of the number of shares of stock
outstanding and entitled to vote at such meeting. Any special meeting of the
stockholders shall be held on such date, at such time and at such place within
or without the State of Delaware as the Board of Directors or the officer
calling the meeting may designate. At a special meeting of the stockholders, no
business shall be transacted and no corporate action shall be taken other than
that stated in the notice of the meeting unless all of the stockholders are
present in person or by proxy, in which case any and all business may be
transacted at the meeting even though the meeting is held without notice.
SECTION 3. Notice of Meetings. Except as otherwise provided in these
By-Laws or by law, a written notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of the Corporation entitled to vote at such
meeting at his address as it appears on the records of the Corporation. The
notice shall state the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
SECTION 4. Quorum. At any meeting of the stockholders, the holders of a
majority in number of the total outstanding shares of stock of the Corporation
entitled to vote at such meeting, present in person or represented by proxy,
shall constitute a quorum of the stockholders for all purposes, unless the
representation of a larger number of shares shall be required by law, by the
Certificate of Incorporation or by these By-Laws, in which case the
representation of the number of shares so required shall constitute a quorum;
provided that at any meeting of the
<PAGE>
stockholders at which the holders of any class of stock of the Corporation shall
be entitled to vote separately as a class, the holders of a majority in number
of the total outstanding shares of such class, present in person or represented
by proxy, shall constitute a quorum for purposes of such class vote unless the
representation of a larger number of shares of such class shall be required by
law, by the Certificate of Incorporation or by these By-Laws.
SECTION 5. Adjourned Meetings. Whether or not a quorum shall be present
in person or represented at any meeting of the stockholders, the holders of a
majority in number of the shares of stock of the Corporation present in person
or represented by proxy and entitled to vote at such meeting may adjourn from
time to time; provided, however, that if the holders of any class of stock of
the Corporation are entitled to vote separately as a class upon any matter at
such meeting, any adjournment of the meeting in respect of action by such class
upon such matter shall be determined by the holders of a majority of the shares
of such class present in person or represented by proxy and entitled to vote at
such meeting. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the stockholders, or the holders of any class of stock entitled to vote
separately as a class, as the case may be, may transact any business which might
have been transacted by them at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the adjourned meeting.
SECTION 6. Organization. The Chairman of the Board or, in his absence,
the President or any Vice President shall call all meetings of the stockholders
to order, and shall act as Chairman of such meetings. In the absence of the
Chairman of the Board, the President and all of the Vice Presidents, the holders
of a majority in number of the shares of stock of the Corporation present in
person or represented by proxy and entitled to vote at such meeting shall elect
a Chairman.
The Secretary of the Corporation shall act as Secretary of all meetings of
the stockholders; but in the absence of the Secretary, the Chairman may appoint
any person to act as Secretary of the meeting. It shall be the duty of the
Secretary to prepare and make, at least ten days before every meeting of
stockholders, a complete list of stockholders entitled to vote at such meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list
shall be open, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held, for the ten days next
preceding the meeting, to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, and shall be produced
and kept at the time and place of the meeting during the whole time thereof and
subject to the inspection of any stockholder who may be present.
SECTION 7. Voting. Except as otherwise provided in the Certificate of
Incorporation or
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by law, each stockholder shall be entitled to one vote for each share of the
capital stock of the Corporation registered in the name of such stockholder upon
the books of the Corporation. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. When directed by the
presiding officer or upon the demand of any stockholder, the vote upon any
matter before a meeting of stockholders shall be by ballot. Except as otherwise
provided by law or by the Certificate of Incorporation, Directors shall be
elected by a plurality of the votes cast at a meeting of stockholders by the
stockholders entitled to vote in the election and, whenever any corporate
action, other than the election of Directors is to be taken, it shall be
authorized by a majority of the votes cast at a meeting of stockholders by the
stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to the Corporation
or to another corporation, if a majority of the shares entitled to vote in the
election of directors of such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes.
SECTION 8. Inspectors. When required by law or directed by the presiding
officer or upon the demand of any stockholder entitled to vote, but not
otherwise, the polls shall be opened and closed, the proxies and ballots shall
be received and taken in charge, and all questions touching the qualification of
voters, the validity of proxies and the acceptance or rejection of votes shall
be decided at any meeting of the stockholders by two or more Inspectors who may
be appointed by the Board of Directors before the meeting, or if not so
appointed, shall be appointed by the presiding officer at the meeting. If any
person so appointed fails to appear or act, the vacancy may be filled by
appointment in like manner.
SECTION 9. Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided in the Certificate of Incorporation, any action required to be taken or
which may be taken at any annual or special meeting of the stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of any such corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE II
Board of Directors
SECTION 1. Number and Term of Office. The business and affairs of the
Corporation
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shall be managed by or under the direction of a Board of Directors, none of whom
need be stockholders of the Corporation. The number of Directors constituting
the Board of Directors shall be fixed from time to time by resolution passed by
a majority of the Board of Directors. The Directors shall, except as
hereinafter otherwise provided for filling vacancies, be elected at the annual
meeting of stockholders, and shall hold office until their respective successors
are elected and qualified or until their earlier resignation or removal.
SECTION 2. Removal, Vacancies and Additional Directors. The stockholders
may, at any special meeting the notice of which shall state that it is called
for that purpose, remove, with or without cause, any Director and fill the
vacancy; provided that whenever any Director shall have been elected by the
holders of any class of stock of the Corporation voting separately as a class
under the provisions of the Certificate of Incorporation, such Director may be
removed and the vacancy filled only by the holders of that class of stock voting
separately as a class. Vacancies caused by any such removal and not filled by
the stockholders at the meeting at which such removal shall have been made, or
any vacancy caused by the death or resignation of any Director or for any other
reason, and any newly created directorship resulting from any increase in the
authorized number of Directors, may be filled by the affirmative vote of a
majority of the Directors then in office, although less than a quorum, and any
Director so elected to fill any such vacancy or newly created directorship shall
hold office until his successor is elected and qualified or until his earlier
resignation or removal.
When one or more Directors shall resign effective at a future date, a
majority of the Directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office as herein provided in connection with the
filling of other vacancies.
SECTION 3. Place of Meeting. The Board of Directors may hold its meetings
in such place or places in the State of Delaware or outside the State of
Delaware as the Board from time to time shall determine.
SECTION 4. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as the Board from time to time by
resolution shall determine. No notice shall be required for any regular meeting
of the Board of Directors; but a copy of every resolution fixing or changing the
time or place of regular meetings shall be mailed to every Director at least
five days before the first meeting held in pursuance thereof.
SECTION 5. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by direction of the Chairman of the Board, the
President or by any two of the Directors then in office.
Notice of the day, hour and place of holding of each special meeting shall
be given by mailing the same at least two days before the meeting or by causing
the same to be transmitted
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by telegraph, cable or wireless at least one day before the meeting to each
Director. Unless otherwise indicated in the notice thereof, any and all
business other than an amendment of these By-Laws may be transacted at any
special meeting, and an amendment of these By-Laws may be acted upon if the
notice of the meeting shall have stated that the amendment of these By-Laws is
one of the purposes of the meeting. At any meeting at which every Director
shall be present, even though without any notice, any business may be
transacted, including the amendment of these By-Laws.
SECTION 6. Quorum. Subject to the provisions of Section 2 of this Article
II, a majority of the members of the Board of Directors in office (but in no
case less than one-third of the total number of Directors nor less than two
Directors) shall constitute a quorum for the transaction of business and the
vote of the majority of the Directors present at any meeting of the Board of
Directors at which a quorum is present shall be the act of the Board of
Directors. If at any meeting of the Board there is less than a quorum present,
a majority of those present may adjourn the meeting from time to time.
SECTION 7. Organization. The Chairman of the Board shall preside at all
meetings of the Board of Directors. In the absence of the Chairman of the
Board, an acting Chairman shall be elected from the Directors present to preside
at such meeting. The Secretary of the Corporation shall act as Secretary of all
meetings of the Directors; but in the absence of the Secretary, the Chairman may
appoint any person to act as Secretary of the meeting.
SECTION 8. Committees. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the Directors of the Corporation. The
Board may designate one or more Directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided by resolution passed by a majority of the whole Board, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and the affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to amending
the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending these By-Laws; and unless such resolution, these
By-laws, or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
SECTION 9. Conference Telephone Meetings. Unless otherwise restricted by
the
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Certificate of Incorporation or by these By-Laws, the members of the Board of
Directors or any committee designated by the Board, may participate in a meeting
of the Board or such committee, as the case may be, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting.
SECTION 10. Consent of Directors or Committee in Lieu of Meeting. Unless
otherwise restricted by the Certificate of Incorporation or by these By-Laws,
any action required or permitted to be taken at any meeting of the Board of
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.
ARTICLE III
Officers
SECTION 1. Officers. The officers of the Corporation shall be a Chairman
of the Board, a President, one or more Vice Presidents, a Secretary and a
Treasurer, and such additional officers, if any, as shall be elected by the
Board of Directors pursuant to the provisions of Section 7 of this Article III.
The Chairman of the Board, the President, one or more Vice Presidents, the
Secretary and the Treasurer shall be elected by the Board of Directors at its
first meeting after each annual meeting of the stockholders. The failure to
hold such election shall not of itself terminate the term of office of any
officer. All officers shall hold office at the pleasure of the Board of
Directors. Any officer may resign at any time upon written notice to the
Corporation. Officers may, but need not, be Directors. Any number of offices
may be held by the same person.
All officers, agents and employees shall be subject to removal, with or
without cause, at any time by the Board of Directors. The removal of an officer
without cause shall be without prejudice to his contract rights, if any. The
election or appointment of an officer shall not of itself create contract
rights. All agents and employees other than officers elected by the Board of
Directors shall also be subject to removal, with or without cause, at any time
by the officers appointing them.
Any vacancy caused by the death of any officer, his resignation, his
removal, or otherwise, may be filled by the Board of Directors, and any officer
so elected shall hold office at the pleasure of the Board of Directors.
In addition to the powers and duties of the officers of the Corporation as
set forth in these By-Laws, the officers shall have such authority and shall
perform such duties as from time to time may be determined by the Board of
Directors.
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SECTION 2. Powers and Duties of the Chairman of the Board. The
Chairman of the Board shall be subject to the control of the Board of Directors,
and shall have such powers and shall perform such duties as maybe assigned to
him from time to time by these By-Laws or by the Board of Directors. In
addition, he shall preside at all meetings of the stockholders and at all
meetings of the Board of Directors and shall have such other powers and perform
such other duties as may from time to time be assigned to him by these By-Laws
or by the Board of Directors. All actions heretofore taken by the Chairman of
the Board in the name or on behalf of the Corporation, including the execution
and delivery in the name and on behalf of the Corporation of agreements, bonds,
contracts, deeds, mortgages, certificates for shares of stock of the Corporation
and other instruments, documents and certificates are in all respects ratified,
approved, confirmed and adopted as of the date of such action, execution or
delivery, with the same effect as if expressly authorized by the By-laws of the
Corporation on the date thereof.
Section 3. Powers and Duties of the President. Unless otherwise
specified by the Board of Directors, the President shall be the Chief Executive
Officer of the Corporation and, subject to the control of the Board of
Directors, shall have general charge and control of all the Corporation's
business and affairs, and shall have all powers and perform all duties incident
to the office of President. In the absence of the Chairman of the Board, he
shall preside at all meetings of the stockholders and at all meetings of the
Board of Directors and shall have such other powers and perform such other
duties as may from time to time be assigned to him by these By-Laws or by the
Board of Directors.
SECTION 4. Powers and Duties of the Vice Presidents. Each Vice
President shall have all powers and shall perform all duties incident to the
office of Vice President and shall have such other powers and perform such other
duties as may from time to time be assigned to him by these By-Laws or by the
Board of Directors or the President.
SECTION 5. Powers and Duties of the Secretary. The Secretary shall
keep the minutes of all meetings of the Board of Directors and the minutes of
all meetings of the stockholders in books provided for that purpose; he shall
attend to the giving or serving of all notices of the Corporation; he shall have
custody of the corporate seal of the Corporation and shall affix the same to
such documents and other papers as the Board of Directors or the President shall
authorize and direct; he shall have charge of the stock certificate books,
transfer books and stock ledgers and such other books and papers as the Board of
Directors or the President shall direct, all of which shall at all reasonable
times be open to the examination of any Director, upon application, at the
office of the Corporation during business hours; and he shall have all powers
and shall perform all duties incident to the office of Secretary and shall also
have such other powers and shall perform such other duties as may from time to
time be assigned to him by these By-Laws or by the Board of Directors or the
President.
SECTION 6. The Powers and Duties of the Treasurer. The Treasurer shall
have custody of, and when proper shall pay out, disburse or otherwise dispose
of, all funds and securities of the Corporation which may have come into his
hands; he may endorse on behalf of the Corporation
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for collection checks, notes and other obligations and shall deposit the same to
the credit of the Corporation in such bank or banks or depositary or
depositaries as the Board of Directors may designate; he shall sign all receipts
and vouchers for payments made to the Corporation; he shall enter or cause to be
entered regularly in the books of the Corporation kept for the purpose full and
accurate accounts of all moneys received or paid or otherwise disposed of by him
and whenever required by the Board of Directors or the President shall render
statements of such accounts; he shall, at all reasonable times, exhibit his
books and accounts to any Director of the Corporation upon application at the
office of the Corporation during business hours; and he shall have all powers
and he shall perform all duties incident to the office of Treasurer and shall
also have such other powers and shall perform such other duties as may from time
to time be assigned to him by these By-Laws or by the Board of Directors or the
President.
Section 7. Additional Officers. The Board of Directors may from time to
time elect such other officers (who may but need not be Directors), including a
Controller, Assistant Treasurers, Assistant Secretaries and Assistant
Controllers, as the Board may deem advisable and such officers shall have such
authority and shall perform such duties as may from time to time be assigned to
them by the Board of Directors or the President.
The Board of Directors may from time to time by resolution delegate to any
Assistant Treasurer or Assistant Treasurers any of the powers or duties herein
assigned to the Treasurer; and may similarly delegate to any Assistant Secretary
or Assistant Secretaries any of the powers or duties herein assigned to the
Secretary.
Section 8. Giving of Bond by Officers. All officers of the Corporation,
if required to do so by the Board of Directors, shall furnish bonds to the
Corporation for the faithful performance of their duties, in such penalties and
with such conditions and security as the Board shall require.
Section 9. Voting Upon Stocks. Unless otherwise ordered by the Board of
Directors, the President or any Vice President shall have full power and
authority on behalf of the Corporation to attend and to act and to vote, or in
the name of the Corporation to execute proxies to vote, at any meeting of
stockholders of any corporation in which the Corporation may hold stock, and at
any such meeting shall possess and may exercise, in person or by proxy, any and
all rights, powers and privileges incident to the ownership of such stock. The
Board of Directors may from time to time, by resolution, confer like powers upon
any other person or persons.
Section 10. Compensation of Officers. The officers of the Corporation
shall be entitled to receive such compensation for their services as shall from
time to time be determined by the Board of Directors.
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ARTICLE IV
Indemnification of Directors and Officers
SECTION 1. Nature of Indemnity. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was or has agreed to become a Director or officer of the Corporation, or is or
was serving or has agreed to serve at the request of the Corporation as a
Director or officer of another corporation, partnership, joint venture, trust or
other enterprise, or by reason of any action alleged to have been taken or
omitted in such capacity, and may indemnify any person who was or is a party or
is threatened to be made a party to such an action, suit or proceeding by reason
of the fact that he is or was or has agreed to become an employee or agent of
the Corporation, or is or was serving or has agreed to serve at the request of
the Corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or on his behalf in connection with such action, suit or
proceeding and any appeal therefrom, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; except that in the case of
an action or suit by or in the right of the Corporation to procure a judgment in
its favor (1) such indemnification shall be limited to expenses (including
attorneys' fees) actually and reasonably incurred by such person in the defense
or settlement of such action or suit, and (2) no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
SECTION 2. Successful Defense. To the extent that a Director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section 1
of this Article IV or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
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SECTION 3. Determination that Indemnification is Proper. Any
indemnification of a Director or officer of the Corporation under Section 1 of
this Article IV (unless ordered by a court) shall be made by the Corporation
unless a determination is made that indemnification of the Director or officer
is not proper in the circumstances because he has not met the applicable
standard of conduct set forth in Section 1. Any indemnification of an employee
or agent of the Corporation under Section 1 (unless ordered by a court) may be
made by the Corporation upon a determination that indemnification of the
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 1. Any such determination
shall be made (1) by the Board of Directors by a majority vote of a quorum
consisting of Directors who were not parties to such action, suit or proceeding,
or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested Directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
SECTION 4. Advance Payment of Expenses. Unless the Board of Directors
otherwise determines in a specific case, expenses incurred by a Director or
officer in defending a civil or criminal action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of the Director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article IV.
Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate. The
Board of Directors may authorize the Corporation's legal counsel to represent
such Director, officer, employee or agent in any action, suit or proceeding,
whether or not the Corporation is a party to such action, suit or proceeding.
SECTION 5. Survival; Preservation of Other Rights. The foregoing
indemnification provisions shall be deemed to be a contract between the
Corporation and each Director, officer, employee and agent who serves in any
such capacity at any time while these provisions as well as the relevant
provisions of the Delaware General Corporation Law are in effect and any repeal
or modification thereof shall not affect any right or obligation then existing
with respect to any state of facts then or previously existing or any action,
suit, or proceeding previously or thereafter brought or threatened based in
whole or in part upon any such state of facts. Such a contract right may not be
modified retroactively without the consent of such Director, officer, employee
or agent.
The indemnification provided by this Article IV shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person. The
corporation may enter into an agreement with any of its Directors, officers,
employees or agents providing for indemnification and advancement of expenses,
including attorneys' fees, that may change, enhance, qualify or limit any right
to indemnification or advancement of expenses created by this Article IV.
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SECTION 6. Severability. If this Article IV or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Director or officer and may
indemnify each employee or agent of the Corporation as to costs, charges and
expenses (including attorneys' fees), judgment, fines and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Corporation, to the fullest extent permitted by any applicable
portion of this Article IV that shall not have been invalidated and to the
fullest extent permitted by applicable law.
SECTION 7. Subrogation. In the event of payment of indemnification to a
person described in Section 1 of this Article IV, the Corporation shall be
subrogated to the extent of such payment to any right of recovery such person
may have and such person, as a condition of receiving indemnification from the
Corporation, shall execute all documents and do all things that the Corporation
may deem necessary or desirable to perfect such right of recovery, including the
execution of such documents necessary to enable the Corporation effectively to
enforce any such recovery.
SECTION 8. No Duplication of Payments. The Corporation shall not be
liable under this Article IV to make any payment in connection with any claim
made against a person described in Section 1 of this Article IV to the extent
such person has otherwise received payment (under any insurance policy, by-law
or otherwise) of the amounts otherwise indemnifiable hereunder.
ARTICLE V
Stock-Seal-Fiscal Year
SECTION 1. Certificates For Shares of Stock. The certificates for shares
of stock of the Corporation shall be in such form, not inconsistent with the
Certificate of Incorporation, as shall be approved by the Board of Directors.
All certificates shall be signed by the Chairman of the Board, the President or
a Vice President and by the Secretary or an Assistant Secretary or the Treasurer
or an Assistant Treasurer, and shall not be valid unless so signed.
In case any officer or officers who shall have signed any such certificate
or certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the Corporation, such certificate or
certificates may nevertheless be issued and delivered as though the person or
persons who signed such certificate or certificates had not ceased to be such
officer or officers of the Corporation.
All certificates for shares of stock shall be consecutively numbered as the
same are issued. The name of the person owning the shares represented thereby
with the number of such
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shares and the date of issue thereof shall be entered on the books of the
Corporation.
Except as hereinafter provided, all certificates surrendered to the
Corporation for transfer shall be cancelled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered and cancelled.
SECTION 2. Lost, Stolen or Destroyed Certificates. Whenever a person
owning a certificate for shares of stock of the Corporation alleges that it has
been lost, stolen or destroyed, he shall file in the office of the Corporation
an affidavit setting forth, to the best of his knowledge and belief, the time,
place and circumstances of the loss, theft or destruction, and, if required by
the Board of Directors, a bond of indemnity or other indemnification sufficient
in the opinion of the Board of Directors to indemnify the Corporation and its
agents against any claim that may be made against it or them on account of the
alleged loss, theft or destruction of any such certificate or the issuance of a
new certificate in replacement therefor. Thereupon the Corporation may cause to
be issued to such person a new certificate in replacement for the certificate
alleged to have been lost, stolen or destroyed. Upon the stub of every new
certificate so issued shall be noted the fact of such issue and the number, date
and the name of the registered owner of the lost, stolen or destroyed
certificate in lieu of which the new certificate is issued.
SECTION 3. Transfer of Shares. Shares of stock of the Corporation shall
be transferred on the books of the Corporation by the holder thereof, in person
or by his attorney duly authorized in writing, upon surrender and cancellation
of certificates for the number of shares of stock to be transferred, except as
provided in Section 2 of this Article IV.
SECTION 4. Regulations. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 5. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting or to receive payment of any dividend or other distribution or
allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
as the case may be, the Board of Directors may fix, in advance, a record date,
which shall not be (i) more than sixty (60) nor less than ten (10) days before
the date of such meeting, or (ii) in the case of corporate action to be taken by
consent in writing without a meeting, prior to, or more than ten (10) days
after, the date upon which the resolution fixing the record date is adopted by
the Board of Directors, or (iii) more than sixty (60) days prior to any other
action.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held; the record date for determining
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stockholders entitled to express consent to corporate action in writing without
a meeting, when no prior action by the Board of Directors is necessary, shall be
the day on which the first written consent is delivered to the Corporation; and
the record date for determining stockholders for any other purpose shall be at
the close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
SECTION 6. Dividends. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors shall have power to declare and pay
dividends upon shares of stock of the Corporation, but only out of funds
available for the payment of dividends as provided by law.
Subject to the provisions of the Certificate of Incorporation, any
dividends declared upon the stock of the Corporation shall be payable on such
date or dates as the Board of Directors shall determine. If the date fixed for
the payment of any dividend shall in any year fall upon a legal holiday, then
the dividend payable on such date shall be paid on the next day not a legal
holiday.
SECTION 7. Corporate Seal. The Board of Directors shall provide a
suitable seal, containing the name of the Corporation, which seal shall be kept
in the custody of the Secretary. A duplicate of the seal may be kept and be
used by any officer of the Corporation designated by the Board of Directors, the
Chairman of the Board or the President.
SECTION 8. Fiscal Year. The fiscal year of the Corporation shall be such
fiscal year as the Board of Directors from time to time by resolution shall
determine.
ARTICLE VI
Miscellaneous Provisions
SECTION 1. Checks, Notes, Etc. All checks, drafts, bills of exchange,
acceptances, notes or other obligations or orders for the payment of money shall
be signed and, if so required by the Board of Directors, countersigned by such
officers of the Corporation and/or other persons as the Board of Directors from
time to time shall designate.
Checks, drafts, bills of exchange, acceptances, notes, obligations and
orders for the payment of money made payable to the Corporation may be endorsed
for deposit to the credit of the Corporation with a duly authorized depository
by the Treasurer and/or such other officers or persons as the Board of
Directors from time to time may designate.
SECTION 2. Loans. No loans and no renewals of any loans shall be
contracted on behalf of the Corporation except as authorized by the Board of
Directors. When authorized to do so, any officer or agent of the Corporation
may effect loans and advances for the Corporation
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from any bank, trust company or other institution or from any firm, corporation
or individual, and for such loans and advances may make, execute and deliver
promissory notes, bonds or other evidences of indebtedness of the Corporation.
When authorized so to do, any officer or agent of the Corporation may pledge,
hypothecate or transfer, as security for the payment of any and all loans,
advances, indebtedness and liabilities of the Corporation, any and all stocks,
securities and other personal property at any time held by the Corporation, and
to that end may endorse, assign and deliver the same. Such authority may be
general or confined to specific instances.
SECTION 3. Contracts. Except as otherwise provided in these By-Laws or by
law or as otherwise directed by the Board of Directors, the Chairman of the
Board, the President or any Vice President shall be authorized to execute and
deliver, in the name and on behalf of the Corporation, all agreements, bonds,
contracts, deeds, mortgages, and other instruments, either for the Corporation's
own account or in a fiduciary or other capacity, and the seal of the
Corporation, if appropriate, shall be affixed thereto by any of such officers or
the Secretary or an Assistant Secretary. The Board of Directors, the Chairman
of the Board, the President or any Vice President designated by the Board of
Directors, the Chairman of the Board or the President may authorize any other
officer, employee or agent to execute and deliver, in the name and on behalf of
the Corporation, agreements, bonds, contracts, deeds, mortgages, and other
instruments, either for the Corporation's own account or in a fiduciary or other
capacity, and, if appropriate, to affix the seal of the Corporation thereto.
The grant of such authority by the Board or any such officer may be general or
confined to specific instances.
SECTION 4. Waivers of Notice. Whenever any notice whatever is required to
be given by law, by the Certificate of Incorporation or by these By-Laws to any
person or persons, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
SECTION 5. Offices Outside of Delaware. Except as otherwise required by
the laws of the State of Delaware, the Corporation may have an office or offices
and keep its books, documents and papers outside of the State of Delaware at
such place or places as from time to time may be determined by the Board of
Directors or the Chairman of the Board.
ARTICLE VII
Amendments
These By-Laws and any amendment thereof may be altered, amended or
repealed, or new By-Laws may be adopted, by the Board of Directors at any
regular or special meeting by the affirmative vote of a majority of all of the
members of the Board, provided in the case of any special meeting at which all
of the members of the Board are not present, that the notice of such meeting
shall have stated that the amendment of these By-Laws was one of the purposes of
the meeting; but these By-Laws and any amendment thereof may be altered, amended
or repealed or new By-Laws
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may be adopted by the holders of a majority of the total outstanding stock of
the Corporation entitled to vote at any annual meeting or at any special
meeting, provided, in the case of any special meeting, that notice of such
proposed alteration, amendment, repeal or adoption is included in the notice of
the meeting.
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<PAGE>
Exhibit 10.26
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GUARANTEE AND COLLATERAL AGREEMENT
made by
U.S. OFFICE PRODUCTS COMPANY
and certain of its Subsidiaries
in favor of
THE CHASE MANHATTAN BANK,
as Administrative Agent
Dated as of June 10, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
SECTION 1. DEFINED TERMS...............................................................................2
1.1 Definitions.................................................................................2
1.2 Other Definitional Provisions...............................................................7
SECTION 2. GUARANTEE...................................................................................8
2.1 Guarantee...................................................................................8
2.2 Right of Contribution.......................................................................9
2.3 No Subrogation..............................................................................9
2.4 Amendments, etc. with respect to the Borrower Obligations...................................9
2.5 Guarantee Absolute and Unconditional...................................................... 10
2.6 Reinstatement............................................................................. 11
2.7 Payments.................................................................................. 11
SECTION 3. GRANT OF SECURITY INTEREST................................................................ 11
3.1 Collateral................................................................................ 11
3.2 Pledged Collateral........................................................................ 12
3.3 Certain Exceptions........................................................................ 12
3.4 Investment Property....................................................................... 13
SECTION 4. REPRESENTATIONS AND WARRANTIES............................................................ 13
4.1 Representations and Warranties of Each Guarantor.......................................... 13
4.2 Representations and Warranties of Each Grantor............................................ 13
4.2.1 Title; No Other Liens.............................................................. 14
4.2.2 Perfected First Priority Liens..................................................... 14
4.2.3 Chief Executive Office............................................................. 16
4.2.4 Inventory and Equipment............................................................ 16
4.2.5 Farm Products...................................................................... 16
4.2.6 Receivables........................................................................ 16
4.2.7 Intellectual Property.............................................................. 16
4.3 Representations and Warranties of Each Pledgor............................................ 17
SECTION 5. COVENANTS................................................................................. 18
5.1 Covenants of Each Guarantor............................................................... 18
5.2 Covenants of Each Grantor................................................................. 18
5.2.1 Delivery of Instruments and Chattel Paper.......................................... 18
5.2.2 Maintenance of Insurance........................................................... 18
5.2.3 Payment of Obligations............................................................. 19
</TABLE>
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<TABLE>
<S> <C> <C>
5.2.4 Maintenance of Perfected Security Interest; Further
Documentation...................................................................... 19
5.2.5 Changes in Locations, Name, etc. .................................................. 19
5.2.6 Notices............................................................................ 20
5.2.7 Pledged Securities................................................................. 20
5.2.8 Receivables........................................................................ 20
5.2.9 Maintenance of Records............................................................. 21
5.2.10 Acquisition of Intellectual Property............................................... 21
5.2.11 Protection of Trade Secrets........................................................ 21
5.2.12 Contracts.......................................................................... 21
5.3 Covenants of Each Pledgor................................................................. 21
SECTION 6. REMEDIAL PROVISIONS....................................................................... 23
6.1 Certain Matters Relating to Receivables................................................... 23
6.2 Communications with Obligors; Grantors Remain Liable...................................... 24
6.3 Pledged Stock............................................................................. 24
6.4 Proceeds to be Turned Over To Administrative Agent........................................ 25
6.5 Application of Proceeds................................................................... 26
6.6 Code and Other Remedies................................................................... 26
6.7 Registration Rights....................................................................... 27
6.8 Waiver; Deficiency........................................................................ 28
SECTION 7. THE ADMINISTRATIVE AGENT.................................................................. 28
7.1 Administrative Agent's Appointment as Attorney-in-Fact, etc............................... 28
7.2 Duty of Administrative Agent.............................................................. 30
7.3 Execution of Financing Statements......................................................... 31
7.4 Authority of Administrative Agent......................................................... 31
7.5 Right Of Inspection....................................................................... 31
SECTION 8. MISCELLANEOUS............................................................................. 32
8.1 Amendments in Writing..................................................................... 32
8.2 Notices................................................................................... 32
8.3 No Waiver by Course of Conduct; Cumulative Remedies....................................... 32
8.4 Enforcement Expenses; Indemnification..................................................... 32
8.5 Successors and Assigns.................................................................... 33
8.6 Set-Off................................................................................... 33
8.7 Counterparts.............................................................................. 33
8.8 Severability.............................................................................. 33
8.9 Section Headings.......................................................................... 34
8.10 Integration............................................................................... 34
8.11 GOVERNING LAW............................................................................. 34
8.12 Submission To Jurisdiction; Waivers....................................................... 34
8.13 Acknowledgements.......................................................................... 35
8.14 WAIVER OF JURY TRIAL...................................................................... 35
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
8.15 Additional Granting Parties............................................................... 35
8.16 Releases.................................................................................. 35
</TABLE>
<PAGE>
GUARANTEE AND COLLATERAL AGREEMENT
GUARANTEE AND COLLATERAL AGREEMENT, dated as of June 10,
1998, made by U.S. OFFICE PRODUCTS COMPANY, a Delaware corporation ("USOP" or
the "Borrower"), and each of the other signatories hereto (together with the
Borrower and any other Domestic Subsidiary of the Borrower that becomes a party
hereto from time to time after the date hereof, collectively, the "Granting
Parties"; individually, a "Granting Party"), in favor of THE CHASE MANHATTAN
BANK, as administrative agent (in such capacity, the "Administrative Agent") for
the banks and other financial institutions (collectively, the "Lenders";
individually, a "Lender") from time to time parties to the Credit Agreement,
dated as of June 9, 1998 (as amended, waived, supplemented or otherwise modified
from time to time, the "Credit Agreement"), among the Borrower, Blue Star Group
Limited, a New Zealand corporation ("Blue Star Group"), the Lenders, the
Administrative Agent, BANKERS TRUST COMPANY, as syndication agent (in such
capacity, the "Syndication Agent") and MERRILL LYNCH CAPITAL CORPORATION, as
documentation agent (in such capacity, the "Documentation Agent" and, together
with the Administrative Agent and the Syndication Agent, the "Agents").
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Lenders have
severally agreed to make extensions of credit to the Borrower upon the terms and
subject to the conditions set forth therein;
WHEREAS, it is a condition to the obligation of the Lenders
to make their respective extensions of credit to the Borrower under the Credit
Agreement that the Granting Parties shall execute and deliver this Agreement to
the Administrative Agent for the benefit of the Lenders;
WHEREAS, the proceeds of the extensions of credit under the
Credit Agreement will be used in part to enable the Borrower to make valuable
transfers to one or more of the other Granting Parties in connection with the
operation of their respective businesses; and
WHEREAS, the Borrower and the other Granting Parties are
engaged in related businesses, and each such Granting Party will derive
substantial direct and indirect benefit from the making of the extensions of
credit under the Credit Agreement;
NOW, THEREFORE, in consideration of the premises and to
induce the Agents and the Lenders to enter into the Credit Agreement and to
induce the Lenders to make their respective extensions of credit to the Borrower
thereunder, each Granting Party hereby agrees with the Administrative Agent, for
the ratable benefit of the Secured Parties (as defined below), as follows:
SECTION 1. DEFINED TERMS
1.1 Definitions. (a) Unless otherwise defined herein, terms
defined in the Credit Agreement and used herein shall have the meanings given to
them in the Credit Agreement, and the following terms which are defined in the
Code (as defined below) are used
<PAGE>
herein as so defined: Chattel Paper, Documents, Equipment, Farm Products,
Fixtures, General Intangibles and Inventory.
(b) The following terms shall have the following meanings:
"Accounts": all accounts (as defined in the Code) of the
Grantors, including, without limitation, all Accounts (as defined in
the Credit Agreement) of the Grantors, but in any event excluding all
Accounts that have been sold or otherwise transferred in connection
with a Permitted Receivables Securitization.
"Administrative Agent": as defined in the Preamble hereto.
"Agents": as defined in the Preamble hereto.
"Agreement": this Guarantee and Collateral Agreement, as
the same may be amended, waived, supplemented or otherwise modified
from time to time.
"Blue Star Obligations": the collective reference to the
unpaid principal of and interest on the Loans and Reimbursement
Obligations and all other obligations and liabilities of Blue Star
Group (including, without limitation, interest accruing at the then
applicable rate provided in the Credit Agreement after the maturity of
the Loans and Reimbursement Obligations and interest accruing at the
then applicable rate provided in the Credit Agreement after the filing
of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to Blue Star Group, whether
or not a claim for post-filing or post-petition interest is allowed in
such proceeding) to any Agent or any Lender, whether direct or
indirect, absolute or contingent, due or to become due, or now existing
or hereafter incurred, which may arise under, out of, or in connection
with, the Credit Agreement, this Agreement, the other Loan Documents or
any other document made, delivered or given in connection therewith, in
each case whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses or otherwise
(including, without limitation, all reasonable fees and disbursements
of counsel to the Administrative Agent or to the Lenders that are
required to be paid by Blue Star Group pursuant to the terms of any of
the foregoing agreements) and obligations in respect of over-drafts and
related liabilities owed to the Administrative Agent or any of its
Affiliates and arising from treasury, depository and cash management
services or in connection with any automated clearing house transfers
of funds.
"Borrower": as defined in the Preamble hereto.
"Borrower Obligations": the collective reference to the
unpaid principal of and interest on the Loans and Reimbursement
Obligations and all other obligations and liabilities of the Borrower
(including, without limitation, interest accruing at the then
applicable rate provided in the Credit Agreement after the maturity of
the Loans and Reimbursement Obligations and interest accruing at the
then applicable rate provided in the Credit Agreement after the filing
of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to the Borrower, whether or
not a claim for post-filing or post-petition interest is allowed in
2
<PAGE>
such proceeding) to any Agent or any Lender (or, in the case of any
Lender Hedge Agreement, any affiliate of any Lender and, in the case of
any L/C Obligations arising in connection with any Blue Star Letters of
Credit, any Blue Star L/C Issuing Lender), whether direct or indirect,
absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection
with, the Credit Agreement, this Agreement, the other Loan Documents,
any Letter of Credit, any letter of credit referred to in subsection
8.2(i) of the Credit Agreement issued by any Lender or any affiliate of
any Lender, any Lender Hedge Agreement or any other document made,
delivered or given in connection therewith, in each case whether on
account of principal, interest, reimbursement obligations, fees,
indemnities, costs, expenses or otherwise (including, without
limitation, all reasonable fees and disbursements of counsel to the
Administrative Agent or to the Lenders that are required to be paid by
the Borrower pursuant to the terms of any of the foregoing agreements)
and obligations in respect of over-drafts and related liabilities owed
to the Administrative Agent or any of the Affiliates and arising from
treasury, depository and cash management services or in connection with
any automated clearing house transfers of funds.
"Code": the Uniform Commercial Code as from time to
time in effect in the State of New York.
"Collateral": as defined in Section 3.1, subject to
the exclusions of Section 3.3.
"Collateral Account Bank": The Chase Manhattan Bank
or another bank which at all times is a Lender as selected
by the relevant Grantor and notified to the Administrative
Agent in writing promptly following such selection.
"Collateral Proceeds Account": the cash collateral
account established by the relevant Grantor at an office of
the Collateral Account Bank in the name of the Administrative Agent.
"Commitments": the collective reference to: (i) the
Revolving Credit Commitments, (ii) the obligation of each
Multi-Draw Term Loan Lender, Tranche A Term Loan Lender and
each Tranche B Term Loan Lender, respectively, to make
Multi-Draw Term Loans, a Tranche A Term Loan and a Tranche B
Term Loan, respectively, to the Borrower pursuant to subsection 2.6 of
the Credit Agreement, (iii) the Swing Line Commitment and (iv) the
obligation of the Issuing Lender to issue Letters of Credit to the
Borrower pursuant to subsection 3.1 of the Credit Agreement.
"Contracts": with respect to any Grantor, all of its
contracts, agreements, instruments and indentures except for the
contracts listed on Schedule 7, as the same may from time to time be
amended, waived, supplemented or otherwise modified, including, without
limitation, (i) all rights of such Grantor to receive moneys due and to
become due to it thereunder or in connection therewith, (ii) all rights
of such Grantor to damages arising thereunder and (iii) all rights of
such Grantor to perform and to exercise all remedies thereunder.
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"Copyright Licenses": with respect to any Grantor, all
United States written license agreements of such Grantor with any
Person who is not an Affiliate or a Subsidiary of the Grantor providing
for the grant by or to such Grantor of any right to use any Copyright
of such Grantor, including, without limitation, the license agreements
listed on Schedule 5 hereto subject, in each case, to the terms of such
license agreements, and the right to prepare for sale, sell and
advertise for sale, all Inventory now or hereafter covered by such
licenses.
"Copyrights": with respect to any Grantor, all of such
Grantor's right, title and interest in and to all United States
copyrights, whether or not the underlying works of authorship have been
published or registered, United States copyright registrations and
copyright applications, including, without limitation, the copyright
registrations listed on Schedule 5, and (a) all renewals thereof, (b)
all income, royalties, damages and payments now and hereafter due
and/or payable with respect thereto, including, without limitation,
payments under all licenses entered into in connection therewith, and
damages and payments for past, present or future infringements thereof
and (c) the right to sue or otherwise recover for past, present and
future infringements thereof.
"Credit Agreement": as defined in the Preamble hereto.
"Documentation Agent": as defined in the Preamble hereto.
"General Fund Account": the general fund account of
the relevant Grantor.
"Granting Party" and "Granting Parties": as defined
in the Preamble hereto.
"Grantor": the Borrower and each Domestic
Subsidiary of the Borrower that from time to time becomes a party
hereto.
"Guarantor Obligations": with respect to any Guarantor,
all obligations and liabilities of such Guarantor which may arise under
or in connection with this Agreement (including, without limitation,
Section 2) or any other Loan Document to which such Guarantor is a
party, in each case whether on account of guarantee obligations,
reimbursement obligations, fees, indemnities, costs, expenses or
otherwise (including, without limitation, all fees and disbursements of
counsel to the Administrative Agent, to the Other Representatives or to
the Lenders that are required to be paid by such Guarantor pursuant to
the terms of this Agreement or any other Loan Document).
"Guarantors": the collective reference to each
Granting Party other than the Borrower.
"Instruments": has the meaning specified in the
Code, but excluding the Pledged Securities.
"Intellectual Property": with respect to any
Grantor, the collective reference to such Grantor's
Copyrights, Copyright Licenses, Patents, Patent Licenses,
Trade Secrets, Trademarks and Trademark Licenses.
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"Intercompany Note": with respect to any Grantor,
any promissory note in a principal amount in excess of
$1,000,000 evidencing loans made by such Grantor to the Borrower or any
of its Subsidiaries.
"Investment Property": the collective reference to:
(i) all "investment property" as such term is defined in
Section 9-115 of the Uniform Commercial Code in effect in
the State of New York on the date hereof, and (ii) whether
or not constituting "investment property" as so defined, all
Pledged Securities.
"IP Collateral": with respect to any Grantor, the
collective reference to such Grantor's Patents, Patent Licenses,
Trademarks, Trademark Licenses, General Intangibles connected with the
use of or symbolized by the Trademarks and Patents and, to the extent
not otherwise included, all Proceeds and products of any and all of the
foregoing and all collateral security and guarantees given by any
Person with respect to any of the foregoing.
"Issuers": the collective reference to each issuer
of a Pledged Security.
"Lender" and "Lenders": as defined in the Preamble
hereto.
"Lender Hedge Agreements": as to any Grantor, all interest
rate swaps, caps or collar agreements or similar arrangements entered
into by such Person with any Lender (or any affiliate of any Lender)
providing for protection against fluctuations in interest rates or
currency exchange rates or the exchange of nominal interest
obligations, either generally or under specific contingencies,
including, without limitation, all Interest Rate Protection Agreements
and Permitted Hedging Arrangements.
"Obligations": (i) in the case of the Borrower, the
Borrower Obligations, and (ii) in the case of each Guarantor, its
Guarantor Obligations.
"Patent Licenses": with respect to any Grantor, all United
States written license agreements of such Grantor with any Person who
is not an Affiliate or a Subsidiary concerning any of the Patents of
such Grantor or such other Person's patents, whether such Grantor is a
licensor or a licensee under any such agreement, including, without
limitation, the license agreements listed on Schedule 5, subject, in
each case, to the terms of such license agreements, and the right to
prepare for sale, sell and advertise for sale, all Inventory now or
hereafter covered by such licenses.
"Patents": with respect to any Grantor, all of such
Grantor's right, title and interest in and to all United States
patents, patent applications and patentable inventions, including,
without limitation, all patents and patent applications identified in
Schedule 5, and including, without limitation, (a) all inventions and
improvements described and claimed therein, (b) the right to sue or
otherwise recover for any and all past, present and future
infringements thereof, (c) all income, royalties, damages and other
payments now and hereafter due and/or payable with respect thereto
(including, without limitation, payments under all licenses entered
into in connection therewith, and damages and payments for past,
present or future infringements thereof), and (d)
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all other rights corresponding thereto in the United States and all
reissues, divisions, continuations, continuations-in-part, substitutes,
renewals, and extensions thereof, all improvements thereon, and all
other rights of any kind whatsoever of such Grantor accruing thereunder
or pertaining thereto.
"Pledged Collateral": as defined in Section 3.2,
subject to the exclusions of Section 3.3.
"Pledged Notes": with respect to any Pledgor, all
Intercompany Notes at any time issued to such Pledgor and each other
promissory note in a principal amount in excess of $1,000,000 issued to
or held by such Pledgor (other than promissory notes issued in
connection with extensions of trade credit by any Pledgor in the
ordinary course of business) including, without limitation, all such
notes listed on Schedule 2; provided, however, that only 65% of each
Blue Star Intercompany Note shall be a Pledged Note.
"Pledged Securities": the collective reference to
the Pledged Notes and the Pledged Stock.
"Pledged Stock": with respect to any Pledgor, the
shares of Capital Stock listed on Schedule 2 as held by such
Pledgor, provided that in no event shall there be pledged, nor shall
any Pledgor be required to pledge, directly or indirectly, (x) any
Capital Stock of any Subsidiary other than a Material Subsidiary or (y)
more than 65% of any series of the outstanding Capital Stock of any
Foreign Subsidiary or Foreign Subsidiary Holdco pursuant to this
Agreement.
"Pledgor": the Borrower (with respect to Pledged
Securities held by the Borrower) and any other Granting
Party (with respect to Pledged Securities held by such Granting Party).
"Proceeds": all "proceeds" as such term is defined in
Section 9-306(1) of the Uniform Commercial Code in effect in the State
of New York on the date hereof and, in any event, Proceeds of Pledged
Securities shall include, without limitation, all dividends or other
income from the Pledged Securities, collections thereon or
distributions or payments with respect thereto.
"Receivable": any right to payment for goods sold or
leased or for services rendered, whether or not such right is evidenced
by an Instrument or Chattel Paper and whether or not it has been earned
by performance, including, without limitation, any Account.
"Secured Parties": the collective reference to (a) each of
the Agents, (b) the Lenders (including, without limitation, the Issuing
Lender and the Swing Line Lender), (c) each Lender or any affiliate of
such Lender which has entered into any Lender Hedge Agreement with the
Borrower or any of its Subsidiaries issued any letter of credit
referred to in subsection 8.2(i) of the Credit Agreement and (d) the
successors, indorsees, transferees and assigns (to the extent permitted
by the Loan Documents) of any of the foregoing.
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"Security Collateral": as defined in Section 3.2,
subject to the exclusions of Section 3.3.
"Subsidiary Guarantor": each Material Subsidiary of
the Borrower other than any Foreign Subsidiary or Foreign Subsidiary
Holdco.
"Syndication Agent": as defined in the Preamble hereto.
"Trademark Licenses": with respect to any Grantor, all
United States written license agreements of such Grantor with any
Person who is not an Affiliate or a Subsidiary concerning any of the
Trademarks of such Grantor or such other Person's names or trademarks,
whether such Grantor is a licensor or a licensee under any such
agreement, including, without limitation, the license agreements listed
on Schedule 5, subject, in each case, to the terms of such license
agreements, and the right to prepare for sale, sell and advertise for
sale, all Inventory now or hereafter covered by such licenses.
"Trademarks": with respect to any Grantor, all of such
Grantor's right, title and interest in and to all United States
trademarks, service marks, trade names, trade dress or other indicia of
trade origin or business identifiers, trademark and service mark
registrations, and applications for trademark or service mark
registrations (except for "intent to use" applications for trademark or
service mark registrations filed pursuant to Section 1(b) of the Lanham
Act, 15 U.S.C. Section. 1051, unless and until an Amendment to Allege
Use or a Statement of Use under Sections 1(c) and 1(d) of said Act has
been filed), and any renewals thereof, including, without limitation,
each registration and application identified in Schedule 5, and
including, without limitation, (a) the right to sue or otherwise
recover for any and all past, present and future infringements or
dilutions thereof, (b) all income, royalties, damages and other
payments now and hereafter due and/or payable with respect thereto
(including, without limitation, payments under all licenses entered
into in connection therewith, and damages and payments for past,
present or future infringements thereof), and (c) all other rights
corresponding thereto in the United States and all other rights of
any kind whatsoever of such Grantor accruing thereunder or pertaining
thereto in the United States, together in each case with the goodwill
of the business connected with the use of, and symbolized by, each such
trademark, service mark, trade name, trade dress or other indicia of
trade origin or business identifiers.
"Trade Secrets": with respect to any Grantor, all of such
Grantor's right, title and interest in and to all United States trade
secrets, including, without limitation, know-how, processes, formulae,
compositions, designs, and confidential business and technical
information, and all rights of any kind whatsoever accruing thereunder
or pertaining thereto, including, without limitation, (a) all income,
royalties, damages and payments now and hereafter due and/or payable
with respect thereto, including, without limitation, payments under all
licenses, non-disclosure agreements and memoranda of understanding
entered into in connection therewith, and damages and payments for
past, present or future misappropriations thereof and (b) the right to
sue or otherwise recover for past, present or future misappropriations
thereof.
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"Vehicles": all cars, trucks, trailers, construction and
earth moving equipment and other vehicles covered by a certificate of
title law of any state and all tires and other appurtenances to any of
the foregoing.
1.2 Other Definitional Provisions. (a) The words
"hereof", "herein", "hereto" and "hereunder" and words of similar import when
used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement, and Section, Schedule and Annex
references are to this Agreement unless otherwise specified.
(b) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
(c) Where the context requires, terms relating to
the Collateral, Pledged Collateral or Security Collateral, or any part thereof,
when used in relation to a Granting Party shall refer to such Granting Party's
Collateral, Pledged Collateral or Security Collateral or the relevant part
thereof.
SECTION 2. GUARANTEE
2.1 Guarantee. (a) Each of the Guarantors hereby,
jointly and severally, unconditionally and irrevocably, guarantees to the
Administrative Agent, for the ratable benefit of the Secured Parties, the prompt
and complete payment and performance by the Borrower when due and payable
(whether at the stated maturity, by acceleration or otherwise) of the Borrower
Obligations.
(b) Each of the Guarantors and the Borrower hereby,
jointly and severally, unconditionally and irrevocably, guarantees to the
Administrative Agent, for the ratable benefit of the Secured Parties, the prompt
and complete payment and performance by Blue Star Group when due and payable
(whether at the stated maturity, by acceleration or otherwise) of the Blue Star
Obligations.
(c) Anything herein or in any other Loan Document
to the contrary notwithstanding, the maximum liability of each Guarantor
hereunder and under the other Loan Documents shall in no event exceed the amount
which can be guaranteed by such Guarantor under applicable law, including
applicable federal and state laws relating to the insolvency of debtors (after
giving effect to the right of contribution established in Section 2.2).
(d) Each Guarantor agrees that the Borrower Obligations
may at any time and from time to time exceed the amount of the liability of such
Guarantor hereunder without impairing the guarantee contained in this Section 2
or affecting the rights and remedies of the Administrative Agent or any other
Secured Party hereunder.
(e) The guarantee contained in this Section 2 shall
remain in full force and effect until the earlier to occur of (i) the first date
on which all the Loans, any Reimbursement Obligations, all other Borrower
Obligations then due and owing, and the obligations of each Guarantor under the
guarantee contained in this Section 2 then due and owing shall have been
satisfied by payment in full in cash, no Letter of Credit shall be outstanding
and the
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Commitments shall be terminated, notwithstanding that from time to time
during the term of the Credit Agreement the Borrower may be free from any
Borrower Obligations or (ii) as to any Guarantor, the sale or other
disposition of all of the Capital Stock of such Guarantor as
permitted under the Credit Agreement.
(f) No payment made by the Borrower, any of the
Guarantors, any other guarantor or any other Person or received or collected by
the Administrative Agent or any other Secured Party from the Borrower, any of
the Guarantors, any other guarantor or any other Person by virtue of any action
or proceeding or any set-off or appropriation or application at any time or from
time to time in reduction of or in payment of the Borrower Obligations shall be
deemed to modify, reduce, release or otherwise affect the liability of any
Guarantor hereunder which shall, notwithstanding any such payment (other than
any payment made by such Guarantor in respect of the Borrower Obligations or any
payment received or collected from such Guarantor in respect of the Borrower
Obligations), remain liable for the Borrower Obligations up to the maximum
liability of such Guarantor hereunder until the earlier to occur of (i) the
first date on which all the Loans, any Reimbursement Obligations, and all other
Borrower Obligations then due and owing are paid in full in cash, no Letter of
Credit shall be outstanding and the Commitments are terminated or (ii) the sale
or other disposition of all of the Capital Stock of such Guarantor as permitted
under the Credit Agreement.
2.2 Right of Contribution. Each Guarantor hereby
agrees that to the extent that a Guarantor shall have paid more than its
proportionate share of any payment made hereunder, such Guarantor shall be
entitled to seek and receive contribution from and against any other Guarantor
hereunder which has not paid its proportionate share of such payment. Each
Guarantor's right of contribution shall be subject to the terms and conditions
of Section 2.3. The provisions of this Section 2.2 shall in no respect limit the
obligations and liabilities of any Guarantor to the Administrative Agent and the
other Secured Parties, and each Guarantor shall remain liable to the
Administrative Agent and the other Secured Parties for the full amount
guaranteed by such Guarantor hereunder.
2.3 No Subrogation. Notwithstanding any payment made by
any Guarantor hereunder or any set-off or application of funds of any Guarantor
by the Administrative Agent or any other Secured Party, no Guarantor shall be
entitled to be subrogated to any of the rights of the Administrative Agent or
any other Secured Party against the Borrower or any other Guarantor or any
collateral security or guarantee or right of offset held by the Administrative
Agent or any other Secured Party for the payment of the Borrower Obligations,
nor shall any Guarantor seek or be entitled to seek any contribution or
reimbursement from the Borrower or any other Guarantor in respect of payments
made by such Guarantor hereunder, until all amounts owing to the Administrative
Agent and the other Secured Parties by the Borrower on account of the Borrower
Obligations are paid in full in cash, no Letter of Credit shall be outstanding
and the Commitments are terminated. If any amount shall be paid to any Guarantor
on account of such subrogation rights at any time when all of the Borrower
Obligations shall not have been paid in full in cash, such amount shall be held
by such Guarantor in trust for the Administrative Agent and the other Secured
Parties, segregated from other funds of such Guarantor, and shall, forthwith
upon receipt by such Guarantor, be turned over to the Administrative Agent in
the exact form received by such Guarantor (duly indorsed by such Guarantor to
the Administrative Agent, if required), to be held as collateral security
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for the Borrower Obligations (whether matured or unmatured) and/or then or at
any time thereafter may be applied against the Borrower Obligations, whether
matured or unmatured, in such order as the Administrative Agent may determine.
2.4 Amendments, etc. with respect to the Borrower
Obligations. To the maximum extent permitted by applicable law, each Guarantor
shall remain obligated hereunder notwithstanding that, without any reservation
of rights against any Guarantor and without notice to or further assent by any
Guarantor, any demand for payment of any of the Borrower Obligations made by the
Administrative Agent or any other Secured Party may be rescinded by the
Administrative Agent or such other Secured Party and any of the Borrower
Obligations continued, and the Borrower Obligations, or the liability of any
other Person upon or for any part thereof, or any collateral security or
guarantee therefor or right of offset with respect thereto, may, from time to
time, in whole or in part, be renewed, extended, amended, modified, accelerated,
compromised, waived, surrendered or released by the Administrative Agent or any
other Secured Party, and the Credit Agreement and the other Loan Documents and
any other documents executed and delivered in connection therewith may be
amended, waived, modified, supplemented or terminated, in whole or in part, as
the Administrative Agent (or the Required Lenders and/or such other requisite
percentage of the Lenders as is required pursuant to subsection 12.1 of the
Credit Agreement, as the case may be) may deem advisable from time to time, and
any collateral security, guarantee or right of offset at any time held by the
Administrative Agent or any other Secured Party for the payment of the Borrower
Obligations may be sold, exchanged, waived, surrendered or released. Neither the
Administrative Agent nor any other Secured Party shall have any obligation to
protect, secure, perfect or insure any Lien at any time held by it as security
for the Borrower Obligations or for the guarantee contained in this Section 2 or
any property subject thereto, except to the extent required by applicable law.
2.5 Guarantee Absolute and Unconditional. Each
Guarantor waives, to the maximum extent permitted by applicable law, any and all
notice of the creation, renewal, extension or accrual of any of the Borrower
Obligations and notice of or proof of reliance by the Administrative Agent or
any other Secured Party upon the guarantee contained in this Section 2 or
acceptance of the guarantee contained in this Section 2; the Borrower
Obligations, and any of them, shall conclusively be deemed to have been created,
contracted or incurred, or renewed, extended, amended or waived, in reliance
upon the guarantee contained in this Section 2; and all dealings between the
Borrower and any of the Guarantors, on the one hand, and the Administrative
Agent and the other Secured Parties, on the other hand, likewise shall be
conclusively presumed to have been had or consummated in reliance upon the
guarantee contained in this Section 2. Each Guarantor waives, to the maximum
extent permitted by applicable law, diligence, presentment, protest, demand for
payment and notice of default or nonpayment to or upon the Borrower or any of
the other Guarantors with respect to the Borrower Obligations. Each Guarantor
understands and agrees, to the extent permitted by applicable law, that the
guarantee contained in this Section 2 shall be construed as a continuing,
absolute and unconditional guarantee of payment. Each Guarantor hereby waives,
to the maximum extent permitted by applicable law, any and all defenses that it
may have arising out of or in connection with any and all of the following: (a)
the validity or enforceability of the Credit Agreement or any other Loan
Document, any of the Borrower Obligations or any other collateral security
therefor or guarantee or right of offset with respect thereto at any time or
from time to time held by the Administrative Agent or any other
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Secured Party, (b) any defense, set-off or counterclaim (other than a defense of
payment or performance) which may at any time be available to or be asserted by
the Borrower against the Administrative Agent or any other Secured Party, (c)
any change in the time, place or manner of payment, amendment, or waiver or
increase in the Obligations, (d) any exchange, taking, or release of Collateral,
(e) any change in the corporate structure or existence of the Borrower, (f) any
application of Collateral to Obligations in accordance with the terms of this
Agreement or (g) any other circumstance whatsoever, other than indefeasible
payment in full in cash of the Borrower Obligations, which (with or without
notice to or knowledge of the Borrower or such Guarantor) constitutes, or might
be construed to constitute, an equitable or legal discharge of the Borrower for
the Borrower Obligations, or of such Guarantor under the guarantee contained in
this Section 2, in bankruptcy or in any other instance. When making any demand
hereunder or otherwise pursuing its rights and remedies hereunder against any
Guarantor, the Administrative Agent or any other Secured Party may, but shall be
under no obligation to, make a similar demand on or otherwise pursue such rights
and remedies as it may have against the Borrower, any other Guarantor or any
other Person or against any collateral security or guarantee for the Borrower
Obligations or any right of offset with respect thereto, and any failure by the
Administrative Agent or any other Secured Party to make any such demand, to
pursue such other rights or remedies or to collect any payments from the
Borrower, any other Guarantor or any other Person or to realize upon any such
collateral security or guarantee or to exercise any such right of offset, or any
release of the Borrower, any other Guarantor or any other Person or any such
collateral security, guarantee or right of offset, shall not relieve any
Guarantor of any obligation or liability hereunder, and shall not impair or
affect the rights and remedies, whether express, implied or available as a
matter of law, of the Administrative Agent or any other Secured Party against
any Guarantor. For the purposes hereof "demand" shall include the commencement
and continuance of any legal proceedings.
2.6 Reinstatement. The guarantee contained in this
Section 2 shall continue to be effective, or be reinstated, as the case may be,
if at any time payment, or any part thereof, of any of the Borrower Obligations
is rescinded or must otherwise be restored or returned by the Administrative
Agent or any other Secured Party upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of the Borrower or any Guarantor, or upon or as a
result of the appointment of a receiver, intervenor or conservator of, or
trustee or similar officer for, the Borrower or any Guarantor or any substantial
part of its property, or otherwise, all as though such payments had not been
made.
2.7 Payments. Each Guarantor hereby guarantees that
payments hereunder will be paid to the Administrative Agent without set-off or
counterclaim in Dollars at the office of the Administrative Agent located at 270
Park Avenue, New York, New York 10017 or such other address of the
Administrative Agent as may be designated to the Borrower and such Guarantor
from time to time in accordance with subsection 12.2 of the Credit Agreement.
SECTION 3. GRANT OF SECURITY INTEREST
3.1 Collateral. Subject to Section 3.3, each Granting
Party that is a Grantor hereby grants to the Administrative Agent, for the
ratable benefit of the Secured Parties, a security interest in all of the
following property now owned or at any time hereafter acquired
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by such Grantor or in which such Grantor now has or at any time in the future
may acquire any right, title or interest (collectively, the "Collateral"), as
collateral security for the prompt and complete payment and performance when due
(whether at the stated maturity, by acceleration or otherwise) of the
Obligations of such Grantor:
(a) all Accounts;
(b) all Chattel Paper;
(c) all Contracts;
(d) all Documents;
(e) all Equipment (other than Vehicles);
(f) all General Intangibles;
(g) all Instruments;
(h) all Intellectual Property;
(i) all Inventory;
(j) the Collateral Proceeds Account;
(k) all books and records pertaining to any of the
foregoing; and
(l) to the extent not otherwise included, all Proceeds and
products of any and all of the foregoing and all collateral security
and guarantees given by any Person with respect to any of the
foregoing;
provided that Collateral shall not include any Pledged Collateral, or any
property or assets specifically excluded from Pledged Collateral (including any
Capital Stock of any Foreign Subsidiary or Foreign Subsidiary Holdco in excess
of 65% of any series of such stock).
3.2 Pledged Collateral. Subject to Section 3.3, each
Granting Party that is a Pledgor hereby grants to the Administrative Agent, for
the ratable benefit of the Secured Parties, a security interest in all of the
Pledged Securities and other Investment Property now owned or at any time
hereafter acquired by such Pledgor, and any Proceeds thereof (the "Pledged
Collateral"), as collateral security for the prompt and complete performance
when due (whether at the stated maturity, by acceleration or otherwise) of the
obligations of the Pledgor; (the Collateral (if any) and the Pledged Collateral
(if any) of any Granting Party being collectively referred to herein as such
Granting Party's "Security Collateral"); provided that Pledged Collateral shall
not include any Capital Stock of any Foreign Subsidiary or Foreign Subsidiary
Holdco in excess of 65% of any series of such stock but shall include Investment
Property in the nature of Capital Stock of a Subsidiary that is not a Material
Subsidiary; and provided further that the Borrower shall use its reasonable best
efforts to promptly grant to the Administrative Agent, for the ratable benefit
of the Secured Parties, a
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security interest in all of the Pledged Securities and other Investment Property
now owned or at any time hereafter acquired by the Pledgor listed on Schedule
3.2.
3.3 Certain Exceptions. No security interest is or will
be granted pursuant hereto in (and the terms Collateral, Pledged Collateral and
Security Collateral shall not include) the right, title and interest of any
Granting Party under or in:
(a) any Instruments, Contracts, Chattel Paper, General
Intangibles, Investment Property, Copyright Licenses, Patent Licenses,
Trademark Licenses or other contracts or agreements with or issued by
Persons other than a Subsidiary of the Borrower (collectively,
"Excluded Agreements") that would otherwise be included in the Security
Collateral (and such Excluded Agreements shall not be deemed to
constitute a part of the Security Collateral) for so long as, and to
the extent that, the granting of such a security interest pursuant
hereto would result in a breach, default or termination of such
Excluded Agreements;
(b) any Equipment that would otherwise be included in the
Security Collateral (and such Equipment shall not be deemed to
constitute a part of the Security Collateral) if such Equipment is
subject to a Lien permitted by subsection 8.3(h) of the Credit
Agreement; or
(c) any property that would otherwise be included in
Security Collateral that has been sold or otherwise transferred in a
Permitted Receivables Securitization or that is subject to any Lien
permitted under subsection 8.3(p) of the Credit Agreement or
constitutes the Proceeds or products of any property that has been so
sold or otherwise transferred; or
(d) any Blue Star Intercompany Notes, so long as such Blue
Star Intercompany Notes are held by a BSIN Subsidiary 65% of the
Capital Stock of which is pledged pursuant hereto.
3.4 Investment Property. It is agreed that,
notwithstanding any other provision hereof to the contrary, no Granting Party
shall be required to deliver or otherwise grant "control" (as defined in Section
8-106 of the Code) over any Cash Equivalent or similar item of Investment
Property pursuant hereto (it being understood that perfection of the security
interest therein shall be solely by the filing of financing statements) and any
representation as to the security interest in such Investment Property is
qualified by reference by the foregoing.
3.5 Blue Star Intercompany Notes. It is agreed that,
notwithstanding any other provision hereof to the contrary, the security
interest in that portion of the Blue Star Intercompany Notes provided for herein
shall be released, at the request of the Borrower, upon the consummation of any
contribution or transfer thereof to a BSIN Subsidiary.
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SECTION 4. REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of Each Guarantor.
To induce the Administrative Agent and the Lenders to enter into the Credit
Agreement and to induce the Lenders to make their respective extensions of
credit to the Borrower thereunder, each Guarantor hereby represents and warrants
to the Administrative Agent and each other Secured Party that the
representations and warranties set forth in Section 5 of the Credit Agreement as
they relate to such Guarantor or to the Loan Documents to which such Guarantor
is a party, each of which representations and warranties is hereby incorporated
herein by reference, are true and correct in all material respects, and the
Administrative Agent and each other Secured Party shall be entitled to rely on
each of such representations and warranties as if fully set forth herein;
provided that each reference in each such representation and warranty to the
Borrower's knowledge shall, for the purposes of this Section 4.1, be deemed to
be a reference to such Guarantor's knowledge.
4.2 Representations and Warranties of Each Grantor.
To induce the Administrative Agent and the Lenders to enter into the Credit
Agreement and to induce the Lenders to make their respective extensions of
credit to the Borrower thereunder, each Grantor hereby represents and warrants
to the Administrative Agent and each other Secured Party that:
4.2.1 Title; No Other Liens. Except for the security
interests granted to the Administrative Agent, for the ratable benefit of the
Secured Parties, pursuant to this Agreement and the other Liens permitted to
exist on such Grantor's Collateral by the Credit Agreement (including without
limitation subsection 8.3 thereof), such Grantor owns each material item of such
Grantor's Collateral free and clear of any and all Liens. Except as set forth on
Schedule 6, as of the date hereof no currently effective financing statement or
other similar public notice with respect to all or any part of such Grantor's
Collateral is on file or of record in any public office, except such as have
been filed in favor of the Administrative Agent, for the ratable benefit of the
Secured Parties, pursuant to this Agreement or as are permitted by the Credit
Agreement (including without limitation subsection 8.3 thereof) or any other
Loan Document or with respect to which termination statements will be delivered
on the Effective Date.
4.2.2 Perfected First Priority Liens. (i) This
Agreement is effective to create, as collateral security for the Obligations of
such Grantor, valid and enforceable Liens on such Grantor's Collateral in favor
of the Administrative Agent, for the benefit of the Secured Parties, except as
enforceability may be affected by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditor's rights generally, general equitable principles (whether considered in
a proceeding in equity or at law) and an implied covenant of good faith and fair
dealing.
(ii) Except with regard to Liens (if any) on Specified
Assets, upon the completion of the Filings, and the delivery to and continuing
possession by the Administrative Agent of all Instruments, Chattel Paper and
Documents, a security interest in which is perfected by possession, the Liens
created pursuant to this Agreement will constitute valid Liens on and (to the
extent provided herein) perfected security interests in such Grantor's
Collateral in favor of the Administrative Agent for the benefit of the Secured
Parties, and will be prior to all other Liens of all other Persons other than
Permitted Liens, and which Liens are
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enforceable as such as against all other Persons other than Ordinary Course
Buyers, except to the extent that (a) the recording of an assignment or other
transfer of title to the Administrative Agent or the recording of applicable
documents in the United States Patent and Trademark Office or the United States
Copyright Office may be necessary for perfection or enforceability, and (b)
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law) or by an implied
covenant of good faith and fair dealing. As used in this Section 4.2.2(ii), the
following terms shall have the following meanings:
"Filings": the filing or recording of the Financing
Statements, the Mortgages, and this Agreement as set forth
in subsection 5.14 of the Credit Agreement, filings in the
United States Patent and Trademark Office and any filings
after the Effective Date in any other jurisdiction as may be
necessary under any Requirement of Law.
"Financing Statements": the financing statements
delivered to the Administrative Agent by each Grantor on the
Effective Date for filing in the jurisdictions listed on
Schedule 5.14 to the Credit Agreement (which Financing
Statements are in proper form for filing in such jurisdictions).
"Ordinary Course Buyers": with respect to goods only,
buyers in the ordinary course of business to the extent provided in
Section 9-307(1) of the Uniform Commercial Code as in effect from time
to time in the applicable jurisdiction.
"Permitted Liens": Liens permitted pursuant to the
Loan Documents, including without limitation, those liens permitted to
exist pursuant to subsection 8.3 of the Credit Agreement.
"Specified Assets": the following property and assets of
each Grantor:
(1) Equipment constituting Fixtures;
(2) Patents, Patent Licenses, Trademarks and Trademark
Licenses to the extent that (a) Liens thereon cannot be perfected by
the filing of financing statements under the Uniform Commercial Code or
by the filing and acceptance thereof in the United States Patent and
Trademark Office or (b) such Patents, Patent Licenses, Trademarks and
Trademark Licenses are not, individually or in the aggregate, material
to the business of the Borrower and its Subsidiaries taken as a whole;
(3) Copyrights and Copyright Licenses and Accounts or
Receivables arising therefrom to the extent that the Uniform Commercial
Code as in effect from time to time in the relevant jurisdiction is not
applicable to the creation or perfection of Liens thereon;
(4) uncertificated securities;
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(5) Collateral for which the perfection of Liens thereon
requires filings in or other actions under the laws of jurisdictions
outside of the United States of America, any State, territory or
dependency thereof or the District of Columbia;
(6) Contracts, Accounts or Receivables on which the United
States of America or any department, agency or instrumentality thereof
is the Obligor, and property or assets subject to any rights reserved
in favor of the United States government as required under law;
(7) goods included in Collateral received by any Person
for "sale or return" within the meaning of Section 2-326 of the
Uniform Commercial Code of the applicable jurisdiction, to the extent
of claims of creditors of such Person; and
(8) Proceeds of Accounts, Receivables or Inventory until
transferred to or deposited in the Collateral Proceeds Account.
4.2.3 Chief Executive Office. On the date hereof, such
Grantor's jurisdiction of organization and the location of such Grantor's chief
executive office or sole place of business are specified on Schedule 3.
4.2.4 Inventory and Equipment. On the date hereof, such
Grantor's Inventory and Equipment (other than mobile goods) are kept at the
locations listed on Schedule 4.
4.2.5 Farm Products. None of such Grantor's Collateral
constitutes, or is the Proceeds of, Farm Products.
4.2.6 Receivables. (i) The amounts represented by such
Grantor to the Administrative Agent or the other Secured Parties from time to
time as owing by each account debtor or by all account debtors in respect of
such Grantor's Receivables constituting Security Collateral will at such time be
the correct amount, in all material respects, actually owing by such account
debtor or debtors thereunder, except to the extent that appropriate reserves
therefor have been established on the books of such Grantor in accordance with
GAAP.
(ii) The places where such Grantor keeps its records
concerning such Grantor's Receivables constituting Security Collateral are
listed on Schedule 3 or such other location or locations of which such Grantor
shall have provided prior written notice to the Administrative Agent pursuant to
Section 5.2.5 hereof.
(iii) Unless otherwise indicated in writing to the
Administrative Agent, each Receivable constituting Security Collateral of such
Grantor arises out of a bona fide sale and delivery of goods or rendition of
services by such Grantor.
(iv) Such Grantor has not given any account debtor any
deduction in respect of the amount due under any such Account, except in the
ordinary course of business or as such Grantor may otherwise advise the
Administrative Agent in writing.
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4.2.7 Intellectual Property. Schedule 5 lists all
material United States Patents and Trademarks registered, or pending
registration, in the United States Patent and Trademark Office and owned by such
Grantor in its own name as of the date hereof, and all material Trademark
Licenses and Patent Licenses (including, without limitation, material Trademark
Licenses for registered Trademarks and material Patent Licenses for registered
Patents) owned by such Grantor on the date hereof. Except as set forth on
Schedule 5, on the date hereof:
(i) each patent, patent application, trademark
registration and trademark application of such Grantor set forth on Schedule 5
is subsisting, has not been adjudged invalid, unregisterable or unpatentable, as
the case may be, or unenforceable in any respect that would reasonably be
expected to have a Material Adverse Effect and to the best of such Grantor's
knowledge, is valid, registerable or patentable, as the case may be, and
enforceable; and
(ii) no claim has been made and is continuing or, to the
knowledge of such Grantor, threatened that the use by such Grantor of any item
of IP Collateral is invalid or unenforceable or that the use by such Grantor of
any IP Collateral does or may violate the rights of any Person, which would have
a Material Adverse Effect. To such Grantor's knowledge, there is currently no
infringement or unauthorized use of any item of IP Collateral contained on
Schedule 5 hereto which would have a Material Adverse Effect.
4.3 Representations and Warranties of Each Pledgor.
To induce the Administrative Agent and the Lenders to enter into the Credit
Agreement and to induce the Lenders to make their respective extensions of
credit to the Borrower thereunder, each Pledgor hereby represents and warrants
to the Administrative Agent and each other Secured Party that:
4.3.1 The shares of Pledged Stock pledged by such
Pledgor hereunder constitute (i) in the case of Pledged Stock constituting
Capital Stock of any Domestic Subsidiary, all the issued and outstanding shares
of all classes of the Capital Stock of each such Domestic Subsidiary owned by
such Pledgor and (ii) in the case of each Foreign Subsidiary and Foreign
Subsidiary Holdco such percentage (not more than 65%) as is specified on
Schedule 2 of all the issued and outstanding shares of all classes of the
Capital Stock of each such Foreign Subsidiary and Foreign Subsidiary Holdco.
owned by such Pledgor.
4.3.2 All the shares of the Pledged Stock pledged by such
Pledgor hereunder have been duly and validly issued and are fully paid and
nonassessable.
4.3.3 Each of the Intercompany Notes pledged by such
Pledgor hereunder constitutes the legal, valid and binding obligation of the
obligor with respect thereto, enforceable in accordance with its terms, subject
to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
4.3.4 Such Pledgor is the record and beneficial owner of,
and has good title to, the Pledged Securities pledged by it hereunder, free of
any and all Liens or options in favor
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of, or claims of, any other Person, except the security interest created by this
Agreement and Liens arising by operation of law or permitted by the Credit
Agreement.
4.3.5 Upon delivery to the Administrative Agent of the
certificates evidencing the Pledged Securities held by such Pledgor, together
with duly executed stock or bond powers or other instruments of transfer, the
security interest created by this Agreement in such Pledged Securities, assuming
the continuing possession of such Pledged Securities by the Administrative
Agent, will constitute a valid, perfected first priority security interest in
such Pledged Securities to the extent provided in and governed by the Code,
enforceable in accordance with its terms against all creditors of such Pledgor
and any persons purporting to purchase such Pledged Securities from such
Pledgor, except with respect to the first priority interests of Blue Star Group
in the Pledged Securities of Blue Star Group as to money owing from time to time
by the Borrower to the Blue Star Group, and except as enforceability may be
affected by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
SECTION 5. COVENANTS
5.1 Covenants of Each Guarantor. Each Guarantor
covenants and agrees with the Administrative Agent and the other Secured Parties
that, from and after the date of this Agreement until the earlier to occur of
the date upon which (i) the Loans, any Reimbursement Obligations, and all other
Obligations then due and owing shall have been paid in full in cash, no Letter
of Credit shall be outstanding and the Commitments shall have terminated and
(ii) all the Capital Stock of such Guarantor shall have been sold or otherwise
disposed of in accordance with the terms of the Credit Agreement, such Guarantor
shall take, or shall refrain from taking, as the case may be, each action that
is necessary to be taken or not taken, as the case may be, so that no Default or
Event of Default is caused by the failure to take such action or to refrain from
taking such action by such Guarantor or any of its Subsidiaries.
5.2 Covenants of Each Grantor. Each Grantor covenants
and agrees with the Administrative Agent and the other Secured Parties that,
from and after the date of this Agreement until the earlier to occur of the date
upon which (i) the Loans, any Reimbursement Obligations, and all other
Obligations then due and owing shall have been paid in full in cash, no Letter
of Credit shall be outstanding and the Commitments shall have terminated and
(ii) all the Capital Stock of such Grantor shall have been sold or otherwise
disposed of in accordance with the terms of the Credit Agreement,
5.2.1 Delivery of Instruments and Chattel Paper. If any
amount payable under or in connection with any of such Grantor's Collateral
shall be or become evidenced by any Instrument or Chattel Paper, except as
provided in the following sentence, such Grantor shall be entitled to retain
possession of all Collateral of such Grantor evidenced by any Instrument or
Chattel Paper, and shall hold all such Collateral in trust for the
Administrative Agent, for the ratable benefit of the Secured Parties. In the
event that an Event of Default shall have occurred and be continuing, upon the
request of the Administrative Agent, such
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Instrument or Chattel Paper shall be promptly delivered to the Administrative
Agent, duly indorsed in a manner satisfactory to the Administrative Agent, to be
held as Collateral pursuant to this Agreement. Such Grantor shall not permit any
other Person to possess any such Collateral at any time other than in connection
with any Permitted Receivables Securitization or any transaction permitted under
subsection 8.13 of the Credit Agreement.
5.2.2 Maintenance of Insurance. (i) Such Grantor will
maintain, with financially sound and reputable companies, insurance policies (a)
insuring such Grantor's Inventory and Equipment against loss by fire, explosion,
theft and such other casualties as are usually insured against by similarly
sized and organized companies engaged in the same or a similar business and (b)
insuring such Grantor, the Administrative Agent and the other Secured Parties
against liability for personal injury and property damage relating to such
Inventory and Equipment, such policies to be in such amounts and covering at
least such risks as are usually insured against by companies engaged in the same
or a similar business.
(ii) All such insurance shall (a) provide that no
cancellation, material reduction in amount or material change in coverage
thereof shall be effective until at least 15 days after receipt by the
Administrative Agent of written notice thereof, (b) name the Administrative
Agent as an additional insured party or loss payee and (c) include deductibles
consistent with past practice or industry practice or otherwise consistent with
industry practice.
5.2.3 Payment of Obligations. Such Grantor will pay and
discharge or otherwise satisfy at or before maturity or before they become
delinquent, as the case may be, all material taxes, assessments and governmental
charges or levies imposed upon such Grantor's Collateral or in respect of income
or profits therefrom, as well as all material claims of any kind (including,
without limitation, material claims for labor, materials and supplies) against
or with respect to such Grantor's Collateral, except that no such tax,
assessment, charge or levy need be paid or satisfied if the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and reserves in conformity with GAAP with respect thereto have been provided on
the books of such Grantor.
5.2.4 Maintenance of Perfected Security Interest;
Further Documentation. (i) Such Grantor shall maintain the security interest
created by this Agreement in such Grantor's Collateral as a perfected security
interest having at least the priority described in Section 4.2.2 and shall
defend such security interest against the claims and demands of all Persons
whomsoever.
(ii) Such Grantor will furnish to the Administrative
Agent from time to time statements and schedules further identifying and
describing such Grantor's Collateral and such other reports in connection with
such Grantor's Collateral as the Administrative Agent may reasonably request in
writing, all in reasonable detail.
(iii) At any time and from time to time, upon the written
request of the Administrative Agent, and at the sole expense of such Grantor,
such Grantor will promptly and duly execute and deliver such further instruments
and documents and take such further actions as the Administrative Agent may
reasonably request for the purpose of obtaining or preserving the full benefits
of this Agreement and of the rights and powers herein granted by such Grantor,
including, without limitation, the filing of any financing or continuation
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statements under the Uniform Commercial Code (or other similar laws) in effect
in any jurisdiction with respect to the security interests created hereby.
5.2.5 Changes in Locations, Name, etc. Such Grantor will
not, except upon (x) not fewer than 10 days' prior written notice to the
Administrative Agent with respect only to clause (iii) below and (y) delivery to
the Administrative Agent, if applicable, and in no event more than 45 days after
such additional location is established, of a written supplement to Schedule 4
showing any additional location at which such Grantor's Inventory or Equipment
shall be kept:
(i) permit any of such Grantor's Inventory or Equipment to
be kept at a location other than the location(s) applicable to such
Grantor listed on Schedule 4 (other than (A) Inventory or Equipment
being conveyed, sold, leased, assigned, transferred or otherwise
disposed of as permitted by the Credit Agreement and (B) mobile goods);
(ii) change the location of its chief executive office or
sole place of business from that referred to in Section 4.2.3; or
(iii) change its name, identity or corporate structure to
such an extent that any financing statement filed by the Administrative
Agent in connection with this Agreement would become seriously
misleading;
provided that, prior to taking any such action, or promptly after receiving a
written request therefor from the Administrative Agent, such Grantor shall
deliver to the Administrative Agent all additional executed financing statements
and other documents reasonably requested by the Administrative Agent to maintain
the validity, perfection and priority of the security interests provided for
herein.
5.2.6 Notices. Such Grantor will advise the
Administrative Agent promptly, in reasonable detail, of:
(i) any Lien (other than security interests created
hereby or Liens permitted under the Credit Agreement) on any of such Grantor's
Collateral which would adversely affect the ability of the Administrative Agent
to exercise any of its remedies hereunder; and
(ii) of the occurrence of any other event which would
reasonably be expected to have a material adverse effect on the aggregate value
of such Grantor's Collateral or on the security interests created hereby.
5.2.7 Pledged Securities. In the case of each Grantor
which is an Issuer, such Issuer agrees that (i) it will be bound by the terms of
this Agreement relating to the Pledged Securities issued by it and will comply
with such terms insofar as such terms are applicable to it, (ii) it will notify
the Administrative Agent promptly in writing of the occurrence of any of the
events described in Section 5.3.1 with respect to the Pledged Securities issued
by it and (iii) the terms of Sections 6.3(c) and 6.7 shall apply to it, mutatis
mutandis, with respect to all actions that may be required of it pursuant to
Section 6.3(c) or 6.7 with respect to the Pledged Securities issued by it.
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5.2.8 Receivables. (i) Other than in the ordinary
course of business or as expressly permitted by the Loan Documents, such Grantor
will not (a) grant any extension of the time of payment of any of such Grantor's
Receivables, (b) compromise or settle any such Receivable for less than the full
amount thereof, (c) release, wholly or partially, any Person liable for the
payment of any Receivable or (d) allow any credit or discount whatsoever on any
such Receivable unless such extensions, compromises, settlements, releases,
credits or discounts would not reasonably be expected to materially adversely
affect the value of the Receivables constituting Collateral taken as a whole.
(ii) Such Grantor will deliver to the Administrative
Agent a copy of each material demand, notice or document received by it that
questions or calls into doubt the validity or enforceability of more than 10% of
the aggregate amount of the then outstanding Receivables.
5.2.9 Maintenance of Records. Such Grantor will keep and
maintain at its own cost and expense reasonably satisfactory and complete
records of its Collateral, including, without limitation, a record of all
payments received and all credits granted with respect to such Collateral, and
shall mark such records to evidence this Agreement and the Liens and the
security interests created hereby.
5.2.10 Acquisition of Intellectual Property. (i) Such
Grantor agrees that, should it obtain an ownership interest in any (x)
registration of material Copyright, Patent or Trademark or (y) any exclusive
rights under a material Copyright License, Patent License or Trademark License
which is not now a part of the Collateral, (A) the provisions of Section 3 shall
automatically apply thereto, (B) any such Copyright, Copyright License, Patent,
Patent License, Trademark or Trademark License shall automatically become part
of the Collateral, and (C) with respect to any ownership interest in any such
Copyright, Copyright License, Patent, Patent License, Trademark or Trademark
License that such Grantor should obtain, it shall give notice thereof to the
Administrative Agent in writing, in reasonable detail, at its address set forth
in the Credit Agreement within 90 days after the end of the calendar year in
which it obtains such ownership interest. Such Grantor authorizes the
Administrative Agent to modify this Agreement by amending Schedule 5 (and will
cooperate reasonably with the Administrative Agent in effecting any such
amendment) to include on Schedule 5 any Copyright, Copyright License, Patent,
Patent License, Trademark or Trademark License of which it receives notice under
this Section, or to prepare and file with the United States Patent and Trademark
Office or the United States Copyright Office a supplement to this Agreement to
include any Copyright, Patent or Trademark of which it receives notice under
this Section.
5.2.11 Protection of Trade Secrets. Such Grantor shall
take all steps that it deems commercially reasonable to preserve and protect the
secrecy of all material Trade Secrets of such Grantor.
5.2.12 Contracts. Such Grantor will perform and comply
in all material respects with such Grantor's obligations under its Contracts.
5.3 Covenants of Each Pledgor. Each Pledgor covenants
and agrees with the Administrative Agent and the other Secured Parties that,
from and after the date of this Agreement until the earlier to occur of the date
upon which (i) the Loans, any Reimbursement
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Obligations, and all other Obligations then due and owing shall have been paid
in full in cash, no Letter of Credit shall be outstanding and the Commitments
shall have terminated and (ii) all the Capital Stock of such Pledgor shall have
been sold or otherwise disposed of in accordance with the terms of the Credit
Agreement.
5.3.1 If such Pledgor shall become entitled to receive or
shall receive any certificate (including, without limitation, any certificate
representing a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital or any certificate issued in
connection with any reorganization), option or similar rights in respect of the
Capital Stock of any Issuer, whether in addition to, in substitution of, as a
conversion of, or in exchange for, any shares of the Pledged Stock, or otherwise
in respect thereof, such Pledgor shall, except as otherwise permitted by
subsection 8.9(m) of the Credit Agreement, accept the same as the agent of the
Administrative Agent and the other Secured Parties, hold the same in trust for
the Administrative Agent and the other Secured Parties and deliver the same
forthwith to the Administrative Agent in the exact form received, duly indorsed
by such Pledgor to the Administrative Agent, if required, together with an
undated stock power covering such certificate duly executed in blank by such
Pledgor, to be held by the Administrative Agent, subject to the terms hereof, as
additional collateral security for the Obligations (provided that in no event
shall there be pledged, nor shall any Pledgor be required to pledge, more than
65% of any series of the outstanding Capital Stock of any Foreign Subsidiary or
Foreign Subsidiary Holdco pursuant to this Agreement). Any sums paid upon or in
respect of the Pledged Securities upon the liquidation or dissolution of any
Issuer (except any liquidation or dissolution of any Subsidiary of the Borrower
in accordance with the Credit Agreement) shall be paid over to the
Administrative Agent to be held by it hereunder as additional collateral
security for the Obligations, and in case any distribution of capital shall be
made on or in respect of the Pledged Securities or any property shall be
distributed upon or with respect to the Pledged Securities pursuant to the
recapitalization or reclassification of the capital of any Issuer or pursuant to
the reorganization thereof, the property so distributed shall, unless otherwise
subject to a perfected security interest in favor of the Administrative Agent,
be delivered to the Administrative Agent to be held by it hereunder as
additional collateral security for the Obligations. If any sums of money or
property so paid or distributed in respect of the Pledged Securities shall be
received by such Pledgor, such Pledgor shall, until such money or property is
paid or delivered to the Administrative Agent, hold such money or property in
trust for the Secured Parties, segregated from other funds of such Pledgor, as
additional collateral security for the Obligations.
5.3.2 Without the prior written consent of the
Administrative Agent, such Pledgor will not (except as permitted by the Credit
Agreement) (i) vote to enable, or take any other action to permit, any Issuer to
issue any stock or other equity securities of any nature or to issue any other
securities convertible into or granting the right to purchase or exchange for
any stock or other equity securities of any nature of any Issuer, (ii) sell,
assign, transfer, exchange, or otherwise dispose of, or grant any option with
respect to, the Pledged Securities or Proceeds thereof, (iii) create, incur or
permit to exist any Lien or option in favor of, or any material adverse claim of
any Person with respect to, any of the Pledged Securities or Proceeds thereof,
or any interest therein, except for the security interests created by this
Agreement or Liens arising by operation of law or (iv) enter into any agreement
or undertaking restricting the right or ability of such Pledgor or the
Administrative Agent to sell, assign or transfer any of the Pledged Securities
or Proceeds thereof.
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5.3.3 Such Pledgor shall maintain the security interest
created by this Agreement in such Pledgor's Pledged Collateral as a perfected
security interest having at least the priority described in Section 4.3.5 and
shall defend such security interest against the claims and demands of all
Persons whomsoever. At any time and from time to time, upon the written request
of the Administrative Agent, and at the sole expense of such Pledgor, such
Pledgor will promptly and duly execute and deliver such further instruments and
documents and take such further actions as the Administrative Agent may
reasonably request for the purpose of obtaining or preserving the full benefits
of this Agreement and of the rights and powers herein granted by such Pledgor.
SECTION 6. REMEDIAL PROVISIONS
6.1 Certain Matters Relating to Receivables. (a) At any
time and from time to time after the occurrence and during the continuance of an
Event of Default, the Administrative Agent shall have the right to make test
verifications of the Receivables in any reasonable manner and through any
reasonable medium that it reasonably considers advisable, and the relevant
Grantor shall furnish all such assistance and information as the Administrative
Agent may reasonably require in connection with such test verifications. At any
time and from time to time after the occurrence and during the continuance of an
Event of Default, upon the Administrative Agent's reasonable request and at the
expense of the relevant Grantor, such Grantor shall cause independent public
accountants or others reasonably satisfactory to the Administrative Agent to
furnish to the Administrative Agent reports showing reconciliations, aging and
test verifications of, and trial balances for, the Receivables.
(b) The Administrative Agent hereby authorizes each
Grantor to collect such Grantor's Receivables and the Administrative Agent may
curtail or terminate said authority at any time after the occurrence and during
the continuance of an Event of Default. If required by the Administrative Agent
at any time after the occurrence and during the continuance of an Event of
Default, any Proceeds constituting payments of Receivables, when collected by
such Grantor, (i) shall be forthwith (and, in any event, within two Business
Days of receipt by such Grantor) deposited in, or otherwise transferred by such
Grantor to, the Collateral Proceeds Account established by such Grantor
maintained under the sole dominion and control of the Administrative Agent,
subject to withdrawal by the Administrative Agent for the account of the Secured
Parties only as provided in Section 6.5, and (ii) until so turned over, shall be
held by such Grantor in trust for the Administrative Agent and the other Secured
Parties, segregated from other funds of such Grantor. All Proceeds constituting
collections of Receivables while held by the Collateral Account Bank (or by any
Grantor in trust for the benefit of the Administrative Agent and the other
Secured Parties) shall continue to be collateral security for all of the
Obligations and shall not constitute payment thereof until applied as
hereinafter provided. At any time when an Event of Default has occurred and is
continuing, at the Administrative Agent's election, the Administrative Agent may
apply all or any part of the funds on deposit in the Collateral Proceeds Account
established by the relevant Grantor to the payment of the Obligations of such
Grantor then due and owing, such application to be made as set forth in Section
6.5 hereof.
(c) At any time and from time to time after the occurrence
and during the continuance of an Event of Default, and if the Administrative
Agent has terminated a
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Grantor's right to collect Accounts pursuant to clause (b) above, at the
Administrative Agent's request, each Grantor shall deliver to the Administrative
Agent copies or, if required by the Administrative Agent for the enforcement
thereof or foreclosure thereon, originals of all documents held by such Grantor
evidencing, and relating to, the agreements and transactions which gave rise to
such Grantor's Receivables, including, without limitation, all statements
relating to such Grantor's Receivables and all orders, invoices and shipping
receipts.
(d) General Fund Account. So long as no Event of Default
has occurred and is continuing, the Administrative Agent shall instruct the
Collateral Account Bank to promptly remit any funds on deposit in each Grantor's
Collateral Proceeds Account to such Grantor's General Fund Account. In the event
that an Event of Default has occurred and is continuing, the Administrative
Agent and the Grantors agree that the Administrative Agent, at its option, may
require that each Collateral Proceeds Account be established at The Chase
Manhattan Bank. Each Grantor shall have the right, at any time and from time to
time, to withdraw such of its own funds from its own General Fund Account, and
to maintain such balances in its General Fund Account, as it shall deem to be
necessary or desirable.
6.2 Communications with Obligors; Grantors Remain Liable.
(a) The Administrative Agent in its own name or in the name of others may at any
time and from time to time after the occurrence and during the continuance of an
Event of Default communicate with obligors under the Receivables and parties to
the Contracts (in each case, to the extent constituting Collateral) to verify
with them to the Administrative Agent's satisfaction the existence, amount and
terms of any Receivables or Contracts.
(b) Upon the request of the Administrative Agent at any
time after the occurrence and during the continuance of an Event of Default,
each Grantor shall notify obligors on such Grantor's Receivables and parties to
such Grantor's Contracts (in each case, to the extent constituting Collateral)
that such Receivables and such Contracts have been assigned to the
Administrative Agent, for the ratable benefit of the Secured Parties, and that
payments in respect thereof shall be made directly to the Administrative Agent.
(c) Anything herein to the contrary notwithstanding, each
Grantor shall remain liable under each of such Grantor's Receivables and
Contracts to observe and perform all the conditions and obligations to be
observed and performed by it thereunder, all in accordance with the terms of any
agreement giving rise thereto. Neither the Administrative Agent nor any Secured
Party shall have any obligation or liability under any Receivable or Contract
(or any agreement giving rise thereto) by reason of or arising out of this
Agreement or the receipt by the Administrative Agent or any other Secured Party
of any payment relating thereto, nor shall the Administrative Agent or any other
Secured Party be obligated in any manner to perform any of the obligations of
any Grantor under or pursuant to any Receivable or Contract (or any agreement
giving rise thereto) to make any payment, to make any inquiry as to the nature
or the sufficiency of any payment received by it or as to the sufficiency of any
performance by any party thereunder, to present or file any claim, to take any
action to enforce any performance or to collect the payment of any amounts which
may have been assigned to it or to which it may be entitled at any time or
times.
6.3 Pledged Stock. (a) Unless an Event of Default shall
have occurred and be continuing and the Administrative Agent shall have given
notice to the relevant Pledgor of
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the Administrative Agent's intent to exercise its corresponding rights pursuant
to Section 6.3(b), each Pledgor shall be permitted to receive all cash dividends
and distributions paid in respect of the Pledged Stock and all payments made in
respect of the Pledged Notes, to the extent permitted in the Credit Agreement,
and to exercise all voting and corporate rights with respect to the Pledged
Securities; provided, however, that no vote shall be cast or corporate right
exercised or such other action taken (other than in connection with a
transaction expressly permitted by the Credit Agreement) which would be
inconsistent with or result in any violation of any provision of the Credit
Agreement, this Agreement or any other Loan Document.
(b) If an Event of Default shall occur and be continuing
and the Administrative Agent shall give notice of its intent to exercise such
rights to the relevant Pledgor or Pledgors, (i) the Administrative Agent shall
have the right to receive any and all cash dividends, payments or other Proceeds
paid in respect of the Pledged Securities and make application thereof to the
Obligations in such order as is provided in Section 6.5 and (ii) any or all of
the Pledged Securities shall be registered in the name of the Administrative
Agent or its nominee, and the Administrative Agent or its nominee may thereafter
exercise (x) all voting, corporate and other rights pertaining to such Pledged
Securities at any meeting of shareholders of the relevant Issuer or Issuers or
otherwise and (y) any and all rights of conversion, exchange, subscription and
any other rights, privileges or options pertaining to such Pledged Securities as
if it were the absolute owner thereof (including, without limitation, the right
to exchange at its discretion any and all of the Pledged Securities upon the
merger, consolidation, reorganization, recapitalization or other fundamental
change in the corporate structure of any Issuer, or upon the exercise by the
relevant Pledgor or the Administrative Agent of any right, privilege or option
pertaining to such Pledged Securities, and in connection therewith, the right to
deposit and deliver any and all of the Pledged Securities with any committee,
depositary, transfer agent, registrar or other designated agency upon such terms
and conditions as the Administrative Agent may reasonably determine), all
without liability (other than for its gross negligence or willful misconduct)
except to account for property actually received by it, but the Administrative
Agent shall have no duty to any Pledgor to exercise any such right, privilege or
option and shall not be responsible for any failure to do so or delay in so
doing, provided that the Administrative Agent shall not exercise any voting or
other consensual rights pertaining to the Pledged Securities in any way that
would constitute an exercise of the remedies described in Section 6.6 other than
in accordance with Section 6.6.
(c) Each Pledgor hereby authorizes and instructs each
Issuer of any Pledged Securities pledged by such Pledgor hereunder to (i) comply
with any instruction received by it from the Administrative Agent in writing
that (x) states that an Event of Default has occurred and is continuing and (y)
is otherwise in accordance with the terms of this Agreement, without any other
or further instructions from such Pledgor, and each Pledgor agrees that each
Issuer shall be fully protected in so complying and (ii) to the extent so
provided in this Section 6.3, pay any dividends or other payments with respect
to the Pledged Securities directly to the Administrative Agent.
6.4 Proceeds to be Turned Over To Administrative Agent.
In addition to the rights of the Administrative Agent and the other Secured
Parties specified in Section 6.1 with respect to payments of Receivables, if an
Event of Default shall occur and be continuing, and the Administrative Agent
shall have instructed any Grantor to do so, all Proceeds received
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by such Grantor consisting of cash, checks and other Cash Equivalents shall be
held by such Grantor in trust for the Administrative Agent and the other Secured
Parties, segregated from other funds of such Grantor, and shall, forthwith upon
receipt by such Grantor, be turned over to the Administrative Agent in the exact
form received by such Grantor (duly indorsed by such Grantor to the
Administrative Agent, if required). All Proceeds received by the Administrative
Agent hereunder shall be held by the Administrative Agent in the relevant
Collateral Proceeds Account maintained under its sole dominion and control. All
Proceeds while held by the Administrative Agent in such Collateral Proceeds
Account (or by such Grantor in trust for the Administrative Agent and the other
Secured Parties) shall continue to be held as collateral security for all the
Obligations and shall not constitute payment thereof until applied as provided
in Section 6.5.
6.5 Application of Proceeds. It is agreed that if an
Event of Default shall occur and be continuing, any and all Proceeds of the
relevant Granting Party's Security Collateral received by the Administrative
Agent (whether from the relevant Granting Party or otherwise) shall be held by
the Administrative Agent for the benefit of the Secured Parties as collateral
security for the Obligations of the relevant Granting Party (whether matured or
unmatured), and/or then or at any time thereafter may, in the sole discretion of
the Administrative Agent, be applied by the Administrative Agent against the
Obligations of the relevant Granting Party then due and owing in the following
order of priority:
FIRST, to the payment of all reasonable costs and expenses
incurred by the Administrative Agent in connection with this Agreement,
the Credit Agreement, any other Loan Document or any of the Obligations
of the relevant Granting Party, including, without limitation, all
court costs and the reasonable fees and expenses of its agents and
legal counsel, and any other reasonable costs or expenses incurred in
connection with the exercise by the Administrative Agent of any right
or remedy under this Agreement, the Credit Agreement, or any other Loan
Document;
SECOND, to the ratable satisfaction of all other
Obligations of the relevant Granting Party; and
THIRD, to the relevant Granting Party or its successors or
assigns, or to whomsoever may be lawfully entitled to receive the same.
6.6 Code and Other Remedies. If an Event of Default
shall occur and be continuing, the Administrative Agent, on behalf of the
Secured Parties, may exercise, in addition to all other rights and remedies
granted to them in this Agreement and in any other instrument or agreement
securing, evidencing or relating to the Obligations, all rights and remedies of
a secured party under the Code or any other applicable law. Without limiting the
generality of the foregoing, to the extent permitted by applicable law, the
Administrative Agent, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below) to or upon any Granting Party or any other
Person (all and each of which demands, defenses, advertisements and notices are
hereby waived), may in such circumstances forthwith (subject to the terms of any
documentation governing any Permitted Receivables Securitization) collect,
receive, appropriate and realize upon the Security Collateral, or any part
thereof, and/or may forthwith sell, lease, assign, give option or options to
purchase, or otherwise dispose of and deliver the
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Security Collateral or any part thereof (or contract to do any of the
foregoing), in one or more parcels at public or private sale or sales, at any
exchange, broker's board or office of the Administrative Agent or any other
Secured Party or elsewhere upon such terms and conditions as it may deem
advisable and at such prices as it may deem best, for cash or on credit or for
future delivery without assumption of any credit risk. The Administrative Agent
or any other Secured Party shall have the right to the extent permitted by law,
upon any such sale or sales, to purchase the whole or any part of the Security
Collateral so sold, free of any right or equity of redemption in any Granting
Party, which right or equity is hereby waived and released. Each Granting Party
further agrees, at the Administrative Agent's request (subject to the terms of
any documentation governing any Permitted Receivables Securitization), to
assemble the Security Collateral and make it available to the Administrative
Agent at places which the Administrative Agent shall reasonably select, whether
at such Granting Party's premises or elsewhere. The Administrative Agent shall
apply the net proceeds of any action taken by it pursuant to this Section 6.6,
after deducting all reasonable costs and expenses of every kind incurred in
connection therewith or incidental to the care or safekeeping of any of the
Security Collateral or in any way relating to the Security Collateral or the
rights of the Administrative Agent and the other Secured Parties hereunder,
including, without limitation, reasonable attorneys' fees and disbursements, to
the payment in whole or in part of the Obligations of the relevant Granting
Party, in the order of priority specified in Section 6.5 above, and only after
such application and after the payment by the Administrative Agent of any other
amount required by any provision of law, including, without limitation, Section
9-504(1)(c) of the Code, need the Administrative Agent account for the surplus,
if any, to any Granting Party. To the extent permitted by applicable law, each
Granting Party waives all claims, damages and demands it may acquire against the
Administrative Agent or any other Secured Party arising out of the exercise by
them of any rights hereunder, except to the extent arising as a result of the
gross negligence or willful misconduct of the Administrative Agent or such other
Secured Party. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable and
proper if given at least 10 days before such sale or other disposition.
6.7 Registration Rights. (a) If the Administrative
Agent shall determine to exercise its right to sell any or all of the Pledged
Stock pursuant to Section 6.6, and if in the reasonable opinion of the
Administrative Agent it is necessary or reasonably advisable to have the Pledged
Stock, or that portion thereof to be sold, registered under the provisions of
the Securities Act, the relevant Pledgor will use its reasonable best efforts to
cause the Issuer thereof to (i) execute and deliver, and use its best efforts to
cause the directors and officers of such Issuer to execute and deliver, all such
instruments and documents, and do or cause to be done all such other acts as may
be, in the reasonable opinion of the Administrative Agent, necessary or
advisable to register such Pledged Stock, or that portion thereof to be sold,
under the provisions of the Securities Act, (ii) use its reasonable best efforts
to cause the registration statement relating thereto to become effective and to
remain effective for a period of not more than one year from the date of the
first public offering of such Pledged Stock, or that portion thereof to be sold,
and (iii) make all amendments thereto and/or to the related prospectus which, in
the reasonable opinion of the Administrative Agent, are necessary or advisable,
all in conformity with the requirements of the Securities Act and the rules and
regulations of the Securities and Exchange Commission applicable thereto. Such
Pledgor agrees to cause such Issuer to comply with the provisions of the
securities or "Blue Sky" laws of any and all States and the District of Columbia
which the Administrative Agent shall reasonably designate and to
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make available to its security holders, as soon as practicable, an earnings
statement (which need not be audited) which will satisfy the provisions of
Section 11(a) of the Securities Act.
(b) Such Pledgor recognizes that the Administrative Agent
may be unable to effect a public sale of any or all such Pledged Stock, by
reason of certain prohibitions contained in the Securities Act and applicable
state securities laws or otherwise, and may be compelled to resort to one or
more private sales thereof to a restricted group of purchasers which will be
obliged to agree, among other things, to acquire such securities for their own
account for investment and not with a view to the distribution or resale
thereof. Such Pledgor acknowledges and agrees that any such private sale may
result in prices and other terms less favorable than if such sale were a public
sale and, notwithstanding such circumstances, agrees that any such private sale
shall be deemed to have been made in a commercially reasonable manner. The
Administrative Agent shall be under no obligation to delay a sale of any of the
Pledged Stock for the period of time necessary to permit the Issuer thereof to
register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if such Issuer would agree to do so.
(c) Such Pledgor agrees to use its reasonable best
efforts to do or cause to be done all such other acts as may be necessary to
make such sale or sales of all or any portion of such Pledged Stock pursuant to
this Section 6.7 valid and binding and in compliance with any and all other
applicable Requirements of Law. Such Pledgor further agrees that a breach of any
of the covenants contained in this Section 6.7 will cause irreparable injury to
the Administrative Agent and the other Secured Parties, that the Administrative
Agent and the other Secured Parties have no adequate remedy at law in respect of
such breach and, as a consequence, that each and every covenant contained in
this Section 6.7 shall be specifically enforceable against such Pledgor, and to
the extent permitted by applicable law, such Pledgor hereby waives and agrees
not to assert any defenses against an action for specific performance of such
covenants except for a defense that no Event of Default has occurred and is
continuing under the Credit Agreement.
6.8 Waiver; Deficiency. Each Granting Party (other than
the Borrower) waives and agrees not to assert any rights or privileges which it
may acquire under Section 9-112 of the Code, to the extent permitted by
applicable law. Each Granting Party shall remain liable for any deficiency if
the proceeds of any sale or other disposition of the Security Collateral are
insufficient to pay Obligations of such Granting Party and the fees and
disbursements of any attorneys employed by the Administrative Agent or any other
Secured Party to collect such deficiency.
SECTION 7. THE ADMINISTRATIVE AGENT
7.1 Administrative Agent's Appointment as Attorney-in-
Fact, etc. (a) Each Granting Party hereby irrevocably constitutes and appoints
the Administrative Agent and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of such Granting Party and in the
name of such Granting Party or in its own name, for the purpose of carrying out
the terms of this Agreement, to take any and all appropriate action and to
execute any and all documents and instruments which may be reasonably necessary
or desirable to accomplish the purposes of
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this Agreement to the extent permitted by applicable law. Without limiting the
generality of the foregoing, at any time when an Event of Default has occurred
and is continuing (in each case to the extent permitted by applicable law), (x)
each Pledgor hereby gives the Administrative Agent the power and right, on
behalf of such Pledgor, without notice or assent by such Pledgor, to execute, in
connection with any sale provided for in Section 6.6 or 6.7, any indorsements,
assignments or other instruments of conveyance or transfer with respect to such
Pledgor's Pledged Collateral and (y) each Grantor hereby gives the
Administrative Agent the power and right, on behalf of such Grantor, without
notice to or assent by such Grantor, to do any or all of the following:
(i) subject to the terms of any documentation governing
any Permitted Receivables Securitization, in the name of such Grantor
or its own name, or otherwise, take possession of and indorse and
collect any checks, drafts, notes, acceptances or other instruments for
the payment of moneys due under any Receivable of such Grantor that
constitutes Collateral or with respect to any other Collateral of such
Grantor and file any claim or take any other action or institute any
proceeding in any court of law or equity or otherwise deemed
appropriate by the Administrative Agent for the purpose of collecting
any and all such moneys due under any Receivable of such Grantor that
constitutes Collateral or with respect to any other Collateral of such
Grantor whenever payable;
(ii) in the case of any Copyright, Patent or Trademark
constituting Collateral of such Grantor, execute and deliver any and
all agreements, instruments, documents and papers as the Administrative
Agent may reasonably request to evidence the Administrative Agent's and
the other Secured Parties' security interest in such Copyright, Patent
or Trademark and the goodwill and general intangibles of such Grantor
relating thereto or represented thereby;
(iii) pay or discharge taxes and Liens levied or placed on
the Collateral of such Grantor, other than Liens permitted under this
Agreement or the other Loan Documents, effect any repairs or any
insurance called for by the terms of this Agreement and pay all or any
part of the premiums therefor and the costs thereof; and
(iv) subject to the terms of any documentation governing
any Permitted Receivables Securitization, (1) direct any party liable
for any payment under any of the Collateral of such Grantor to make
payment of any and all moneys due or to become due thereunder directly
to the Administrative Agent or as the Administrative Agent shall
direct; (2) ask or demand for, collect, and receive payment of and
receipt for, any and all moneys, claims and other amounts due or to
become due at any time in respect of or arising out of any Collateral
of such Grantor; (3) sign and indorse any invoices, freight or express
bills, bills of lading, storage or warehouse receipts, drafts against
debtors, assignments, verifications, notices and other documents in
connection with any of the Collateral of such Grantor; (4) commence and
prosecute any suits, actions or proceedings at law or in equity in any
court of competent jurisdiction to collect the Collateral of such
Grantor or any portion thereof and to enforce any other right in
respect of any Collateral of such Grantor; (5) defend any suit, action
or proceeding brought against such Grantor with respect to any
Collateral of such Grantor; (6) settle, compromise or adjust any such
suit, action or proceeding described in clause (5) above and, in
connection therewith, to give such discharges or releases as the
Administrative
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Agent may deem appropriate; (7) subject to any existing reserved rights
or licenses, assign any Copyright, Patent or Trademark constituting
Collateral of such Grantor (along with the goodwill of the business to
which any such Copyright, Patent or Trademark pertains), for such term
or terms, on such conditions, and in such manner, as the Administrative
Agent shall in its sole discretion determine; and (8) generally, sell,
transfer, pledge and make any agreement with respect to or otherwise
deal with any of the Collateral of such Grantor as fully and completely
as though the Administrative Agent were the absolute owner thereof for
all purposes, and do, at the Administrative Agent's option and such
Grantor's expense, at any time, or from time to time, all acts and
things which the Administrative Agent deems necessary to protect,
preserve or realize upon the Collateral of such Grantor and the
Administrative Agent's and the other Secured Parties' security
interests therein and to effect the intent of this Agreement, all as
fully and effectively as such Grantor might do.
Anything in this Section 7.1(a) to the contrary notwithstanding, the
Administrative Agent agrees that it will not exercise any rights under the power
of attorney provided for in this Section 7.1(a) unless an Event of Default shall
have occurred and be continuing.
(b) If any Granting Party fails to perform or comply with
any of its agreements contained herein and such failure shall continue
unremedied for 7 days, the Administrative Agent, at its option, but without any
obligation so to do, may perform or comply, or otherwise cause performance or
compliance, with such agreement.
(c) The reasonable expenses of the Administrative Agent
incurred in connection with actions undertaken as provided in this Section 7.1,
together with interest thereon at a rate per annum equal to 1.75% above the rate
applicable to ABR Loans which are Tranche B Term Loans, from the date of payment
by the Administrative Agent to the date reimbursed by the relevant Granting
Party, shall be payable by such Granting Party to the Administrative Agent on
demand.
(d) Each Granting Party hereby ratifies all that said
attorneys shall lawfully do or cause to be done by virtue hereof. All powers,
authorizations and agencies contained in this Agreement are coupled with an
interest and are irrevocable as to the relevant Granting Party until this
Agreement is terminated as to such Granting Party, and the security interests in
the Security Collateral of such Granting Party created hereby are released.
7.2 Duty of Administrative Agent. The Administrative
Agent's sole duty with respect to the custody, safekeeping and physical
preservation of the Security Collateral in its possession, under Section 9-207
of the Code or otherwise, shall be to deal with it in the same manner as the
Administrative Agent deals with similar property for its own account. Neither
the Administrative Agent, any other Secured Party nor any of their respective
officers, directors, employees or agents shall be liable for failure to demand,
collect or realize upon any of the Security Collateral or for any delay in doing
so or shall be under any obligation to sell or otherwise dispose of any Security
Collateral upon the request of any Granting Party or any other Person or (except
as provided in the first sentence of this Section 7.2) to take any other action
whatsoever with regard to the Security Collateral or any part thereof. The
powers conferred on the Administrative Agent and the other Secured Parties
hereunder are solely to protect the Administrative Agent's and the other Secured
Parties' interests in the Security
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Collateral and shall not impose any duty upon the Administrative Agent or any
other Secured Party to exercise any such powers. The Administrative Agent and
the other Secured Parties shall be accountable only for amounts that they
actually receive as a result of the exercise of such powers, and neither they
nor any of their officers, directors, employees or agents shall be responsible
to any Granting Party for any act or failure to act hereunder, except for their
own gross negligence or willful misconduct.
7.3 Execution of Financing Statements. Pursuant to
Section 9-402 of the Code and any other applicable law, each Granting Party
authorizes the Administrative Agent to file or record financing statements and
other filing or recording documents or instruments with respect to such Granting
Party's Security Collateral without the signature of such Granting Party in such
form and in such offices as the Administrative Agent reasonably determines
appropriate to perfect the security interests of the Administrative Agent under
this Agreement. A photographic or other reproduction of this Agreement shall be
sufficient as a financing statement or other filing or recording document or
instrument for filing or recording in any jurisdiction.
7.4 Authority of Administrative Agent. Each Granting
Party acknowledges that the rights and responsibilities of the Administrative
Agent under this Agreement with respect to any action taken by the
Administrative Agent or the exercise or non-exercise by the Administrative Agent
of any option, voting right, request, judgment or other right or remedy provided
for herein or resulting or arising out of this Agreement or any amendment,
supplement or other modification of this Agreement shall, as between the
Administrative Agent and the Secured Parties, be governed by the Credit
Agreement and by such other agreements with respect thereto as may exist from
time to time among them, but, as between the Administrative Agent and the
Granting Parties, the Administrative Agent shall be conclusively presumed to be
acting as agent for the Secured Parties with full and valid authority so to act
or refrain from acting, and no Granting Party shall be under any obligation, or
entitlement, to make any inquiry respecting such authority.
7.5 Right Of Inspection. Upon reasonable written advance
notice to any Grantor and at reasonable intervals, or at any time and from time
to time after the occurrence and during the continuation of an Event of Default,
the Administrative Agent shall have reasonable access during normal business
hours to all the books, correspondence and records of such Granting Party, and
the Administrative Agent and its representatives may examine the same, and to
the extent reasonable, make extracts therefrom and photocopies thereof, and such
Granting Party agrees to render to the Administrative Agent, at such Granting
Party's reasonable cost and expense, such clerical and other assistance as may
be reasonably requested with regard thereto. The Administrative Agent and its
representatives shall also have the right, upon reasonable advance written
notice to such Granting Party, to enter during normal business hours into and
upon any premises owned, leased or operated by such Granting Party where any of
such Granting Party's Inventory or Equipment is located for the purpose of
inspecting the same, observing its use or otherwise protecting its interests
therein.
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SECTION 8. MISCELLANEOUS
8.1 Amendments in Writing. Except as otherwise provided
in subsection 12.1 of the Credit Agreement, none of the terms or provisions of
this Agreement may be waived, amended, supplemented or otherwise modified except
by a written instrument executed by each affected Granted Party and the
Administrative Agent, provided, that any provision of this Agreement imposing
obligations on any Granting Party may be waived by a written instrument executed
by the Administrative Agent.
8.2 Notices. All notices, requests and demands to or
upon the Administrative Agent or any Granting Party hereunder shall be effected
in the manner provided for in subsection 12.2 of the Credit Agreement; provided
that any such notice, request or demand to or upon any Guarantor shall be
addressed to such Guarantor at its notice address set forth on Schedule 1,
unless and until such Guarantor shall change such address by notice to the
Administrative Agent given in accordance with subsection 12.2 of the Credit
Agreement.
8.3 No Waiver by Course of Conduct; Cumulative Remedies.
Neither the Administrative Agent nor any other Secured Party shall by any act
(except by a written instrument pursuant to Section 8.1), delay, indulgence,
omission or otherwise be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default. No failure to exercise,
nor any delay in exercising, on the part of the Administrative Agent or any
other Secured Party, any right, power or privilege hereunder shall operate as a
waiver thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the Administrative Agent or
any other Secured Party or any Granting Party of any right or remedy hereunder
on any one occasion shall not be construed as a bar to any right or remedy which
the Administrative Agent or such other Secured Party or such Granting Party
would otherwise have on any future occasion. The rights and remedies herein
provided are cumulative, may be exercised singly or concurrently and are not
exclusive of any other rights or remedies provided by law.
8.4 Enforcement Expenses; Indemnification. (a) Each
Guarantor agrees to pay or reimburse each Secured Party and the Administrative
Agent for all their respective reasonable costs and expenses incurred in
collecting against such Guarantor under the guarantee contained in Section 2 or
otherwise enforcing or preserving any rights under this Agreement against such
Guarantor and the other Loan Documents to which such Guarantor is a party,
including, without limitation, the reasonable fees and disbursements of one firm
of counsel and local counsel to the Secured Parties and the Administrative
Agent.
(b) Each Guarantor agrees to pay, and to save the
Administrative Agent and the Secured Parties harmless from, (x) any and all
liabilities with respect to, or resulting from any delay in paying, any and all
stamp, excise, sales or other similar taxes which may be payable or determined
to be payable with respect to any of the Security Collateral and (y) any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever with respect
to the execution, delivery, enforcement, performance and administration of this
Agreement (collectively, the "Indemnified Liabilities"), in each case to the
extent the Borrower would be required to do so
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pursuant to Section 11.5 of the Credit Agreement, and in any event excluding any
taxes or other indemnified liabilities arising from gross negligence or willful
misconduct of the Administrative Agent or any Secured Party or any of their
respective agents, officers, directors and successors.
(c) The agreements in this Section 8.4 shall survive
repayment of the Obligations and all other amounts payable under the Credit
Agreement and the other Loan Documents.
8.5 Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the Granting Parties, the
Administrative Agent and the Secured Parties and their respective successors and
assigns; provided that no Granting Party may assign, transfer or delegate any of
its rights or obligations under this Agreement without the prior written consent
of the Administrative Agent.
8.6 Set-Off. Each Guarantor hereby irrevocably
authorizes the Administrative Agent and each other Secured Party at any time and
from time to time without notice to such Guarantor, any other Guarantor, the
Borrower or Blue Star Group, any such notice being expressly waived by each
Guarantor, by the Borrower and by the Blue Star Group, to the extent permitted
by applicable law, upon the occurrence and during the continuance of an Event of
Default under Section 10.2(a) and Section 10.3(a) of the Credit Agreement and
any amount remaining unpaid after it becomes due and payable by such Guarantor
hereunder, to set-off and appropriate and apply against any such amount any and
all deposits (general or special, time or demand, provisional or final), in any
currency, and any other credits, indebtedness or claims, in any currency, in
each case whether direct or indirect, absolute or contingent, matured or
unmatured, at any time held or owing by the Administrative Agent or such other
Secured Party to or for the credit or the account of such Guarantor, or any part
thereof in such amounts as the Administrative Agent or such other Secured Party
may elect. The Administrative Agent and each other Secured Party shall notify
such Guarantor promptly of any such set-off and the application made by the
Administrative Agent or such other Secured Party of the proceeds thereof;
provided that the failure to give such notice shall not affect the validity of
such set-off and application. The rights of the Administrative Agent and each
other Secured Party under this Section 8.6 are in addition to other rights and
remedies (including, without limitation, other rights of set-off) which the
Administrative Agent or such other Secured Party may have.
8.7 Counterparts. This Agreement may be executed by one
or more of the parties to this Agreement on any number of separate counterparts,
and all of said counterparts taken together shall be deemed to constitute one
and the same instrument.
8.8 Severability. Any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction; provided that,
with respect to any Pledged Collateral of any Foreign Subsidiary Holdco, all
rights, powers and remedies provided in this Agreement may be exercised only to
the extent that they do not violate any provision of any law, rule or regulation
of any Governmental Authority applicable to any such
33
<PAGE>
Pledged Collateral or affecting the legality, validity or enforceability of any
of the provisions of this Agreement against any such Foreign Subsidiary Holdco
(such laws, rules or regulations, "Applicable Law") and are intended to be
limited to the extent necessary so that they will not render this Agreement
invalid, unenforceable or not entitled to be recorded, registered or filed under
the provisions of any Applicable Law.
8.9 Section Headings. The Section headings used in this
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
8.10 Integration. This Agreement and the other Loan
Documents represent the entire agreement of the Granting Parties, the
Administrative Agent and the other Secured Parties with respect to the subject
matter hereof, and there are no promises, undertakings, representations or
warranties by the Granting Parties, the Administrative Agent or any other
Secured Party relative to subject matter hereof not expressly set forth or
referred to herein or in the other Loan Documents.
8.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
8.12 Submission To Jurisdiction; Waivers. Each party
hereto hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal
action or proceeding relating to this Agreement and the other Loan
Documents to which it is a party, or for recognition and enforcement of
any judgement in respect thereof, to the non-exclusive general
jurisdiction of the courts of the State of New York, the courts of the
United States of America for the Southern District of New York, and
appellate courts from any thereof;
(b) consents that any such action or proceeding may be
brought in such courts and waives any objection that it may now or
hereafter have to the venue of any such action or proceeding in any
such court or that such action or proceeding was brought in an
inconvenient forum and agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to such party at its address referred to in Section 8.2 or at
such other address of which the Administrative Agent (in the case of
any other party hereto) or the Borrower (in the case of the
Administrative Agent) shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law or shall
limit the right to sue in any other jurisdiction; and
34
<PAGE>
(e) waives, to the maximum extent not prohibited by law,
any right it may have to claim or recover in any legal action or
proceeding referred to in this Section any punitive damages.
8.13 Acknowledgements. Each Guarantor hereby
acknowledges that
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Agreement and the other Loan Documents
to which it is a party;
(b) neither the Administrative Agent nor any other Secured
Party has any fiduciary relationship with or duty to any Guarantor
arising out of or in connection with this Agreement or any of the other
Loan Documents, and the relationship between the Guarantors, on the one
hand, and the Administrative Agent and the Secured Parties, on the
other hand, in connection herewith or therewith is solely that of
debtor and creditor; and
(c) no joint venture is created hereby or by the other
Loan Documents or otherwise exists by virtue of the transactions
contemplated hereby and thereby among the Secured Parties or among the
Guarantors and the Secured Parties.
8.14 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.
8.15 Additional Granting Parties. Each new Subsidiary of
the Borrower that is required to become a party to this Agreement pursuant to
Section 7.10 of the Credit Agreement shall become a Granting Party for all
purposes of this Agreement upon execution and delivery by such Subsidiary of an
Assumption Agreement in the form of Annex 1 hereto.
8.16 Releases. (a) At such time as the Loans, the
Reimbursement Obligations and the other Obligations then due and owing shall
have been paid in full in cash, the Commitments have been terminated and no
Letters of Credit shall be outstanding, all Security Collateral shall be
released from the Liens created hereby, and this Agreement and all obligations
(other than those expressly stated to survive such termination) of the
Administrative Agent and each Granting Party hereunder shall terminate, all
without delivery of any instrument or performance of any act by any party, and
all rights to the Security Collateral shall revert to the Granting Parties. At
the request and sole expense of any Granting Party following any such
termination, the Administrative Agent shall deliver to such Granting Party any
Security Collateral held by the Administrative Agent hereunder, and execute and
deliver to such Granting Party such documents (including, without limitation,
Uniform Commercial Code termination statements) as such Granting Party shall
reasonably request to evidence such termination.
(b) In connection with the sale or other disposition of
all of the Capital Stock of any Guarantor or the sale or other disposition of
Security Collateral permitted under the Credit Agreement (including, without
limitation, any Permitted Receivables Securitization and any contribution or
other transfer of any Blue Star Intercompany Notes to any BSIN
35
<PAGE>
Subsidiary) and the release of such Guarantor from its Guarantee or the release
of the Security Collateral subject to such sale or other disposition, the
Administrative Agent shall execute and deliver to the relevant Granting Party
(at the sole cost and expense of such Granting Party) all releases or other
documents (including, without limitation, Uniform Commercial Code termination
statements) necessary or reasonably desirable for the release of the Liens
created hereby on such Security Collateral and, if applicable, such Guarantee as
such Granting Party may reasonably request.
36
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused
this Guarantee and Collateral Agreement to be duly executed and delivered as of
the date first above written.
U.S. OFFICE PRODUCTS COMPANY
By: /s/ MARK DIRECTOR
------------------------------
Name: Mark Director
Title Executive Vice President
ACTION WHOLESALE SERVICE, INC.
By: /s/ ROBERT A. KNOLL
------------------------------
Name: Robert A. Knoll
Title President
AFFORDABLE INTERIOR SYSTEMS, INC.
By: /s/ ARTHUR MAXWELL
------------------------------
Name: Arthur Maxwell
Title President
AMERICAN LOOSE LEAF/BUSINESS
PRODUCTS, INC.
By: /s/ JERRY HOLSCHEN
------------------------------
Name: Jerry Holschen
Title President
ANDREWS OFFICE SUPPLY & EQUIPMENT
CO.
By: /s/ J. DANIEL MAHONEY
------------------------------
Name: J. Daniel Mahoney
Title President
BINDERY SYSTEMS, INC.
By: /s/ STUART N. JOHNSON
------------------------------
Name: Stuart N. Johnson
Title President
37
<PAGE>
BOB BRINES OFFICE SUPPLY CO.
By: /s/ ROBERT W. BRINES
------------------------------
Name: Robert W. Brines
Title President
BUSINESSWORKS, INC.
By: /s/ JACK HUGULEY
------------------------------
Name: Jack Huguley
Title President
CARITHERS-WALLACE-CONTENAY, LLC
By: /s/ ARNOLD V. MALM
------------------------------
Name: Arnold V. Malm
Title President
CAROLINA OFFICE EQUIPMENT COMPANY,
INC.
By: /s/ WILLIAM G. ROBBINS II
------------------------------
Name: William G. Robbins II
Title President
CENTRAL TEXAS OFFICE PRODUCTS, INC.
By: /s/ WARREN B. TERRY, JR.
------------------------------
Name: Warren B. Terry, Jr.
Title: President
COPENHAVER HOLDINGS, LLC
By: /s/ JOHN M. FRISK
------------------------------
Name: John M. Frisk
Title President
COURTLAND-CAIN, INC.
By: /s/ ARNOLD V. MALM
------------------------------
Name: Arnold V. Malm
Title President
38
<PAGE>
DAMERON-PIERSON COMPANY, LIMITED
By: /s/ JACK L. BECKER JR.
------------------------------
Name: Jack L. Becker Jr.
Title President
DULWORTH OFFICE FURNITURE CO.
By: /s/ JACK B. DULWORTH
------------------------------
Name: Jack B. Dulworth
Title President
EXPERT OFFICE SERVICES, INC.
By: /s/ JAY MUTSCHLER
------------------------------
Name: Jay Mutschler
Title President
FORT SMITH OFFICE SUPPLY, INC.
By: /s/ PATRICK T. CULLEN
------------------------------
Name: Patrick T. Cullen
Title President
FORTY-FIFTEEN PAPIN REDEVELOPMENT
CORP.
By: /s/ MICHAEL J. BARNELL
------------------------------
Name: Michael J. Barnell
Title President
GENERAL OFFICE PRODUCTS COMPANY
By: /s/ TOM REASER
------------------------------
Name: Tom Reaser
Title President
GLOBAL MAILBOX EXPRESS, LLC
By: /s/ MICHAEL J. GURMALLY
------------------------------
Name: Michael J. Gurmally
Title Managing Director
39
<PAGE>
THE HH WEST COMPANY
By: /s/ CRAIG A. COOPER
------------------------------
Name: Craig A. Cooper
Title President
J.H. WHITLEY CO. INC.
By: /s/ JOHN H. WHITLEY
------------------------------
Name: John H. Whitley
Title President
THE J. THAYER COMPANY, LLC
By: /s/ JOHN A. THAYER
------------------------------
Name: John A. Thayer
Title President
KENTWOOD OFFICE FURNITURE, INC.
By: /s/ ARTHUR A. HASSE
------------------------------
Name: Arthur A. Hasse
Title President
LANDMARK INDUSTRIES, INC.
By: /s/ LEONARD R. GANZ
------------------------------
Name: Leonard R. Ganz
Title President
LANIER ACQUISITION CORP.
By: /s/ MARK D. DIRECTOR
------------------------------
Name: Mark D. Director
Title President
MAILBOXES, ETC.
By: /s/ MARK DIRECTOR
------------------------------
Name: Mark Director
Title Vice President
40
<PAGE>
MAIL BOXES, ETC. USA, INC.
By: /s/ MARK DIRECTOR
------------------------------
Name: Mark Director
Title Vice President
MCWHORTER'S, INC.
By: /s/ STEPHEN D. FLAX
------------------------------
Name: Stephen D. Flax
Title President
MILE HIGH OFFICE SUPPLY, LLC
By: /s/ VASS SIRPOLAIDIS
------------------------------
Name: Vass Sirpolaidis
Title President
MILLS MORRIS BUSINESS PRODUCTS, INC.
By: /s/ DON NICKLESON
------------------------------
Name: Don Nickleson
Title President
MODERN FOOD SYSTEMS, INC.
By: /s/ ELLIOTT NELSON
------------------------------
Name: Elliott Nelson
Title President
MODERN VENDING, INC.
By: /s/ ELLIOTT NELSON
------------------------------
Name: Elliott Nelson
Title President
MORRIS OFFICE MACHINES, INC.
By: /s/ LARRY CRAWFORD
------------------------------
Name: Larry Crawford
Title President
41
<PAGE>
NATIONAL OFFICE SUPPLY, INC.
By: /s/ WILLIAM J. COSTIGAN JR.
------------------------------
Name: William J. Costigan, Jr.
Title President
NEW MEXICO OFFICE SOLUTIONS, INC.
By: /s/ SANFORD A. GRODIN
------------------------------
Name: Sanford A. Grodin
Title President
THE OFFICE FURNITURE STORE, INC.
By: /s/ JOHN M. PERIN
------------------------------
Name: John M. Perin
Title President
THE OFFICE WORKS, INC.
By: /s/ RANDY M. WIRTH
------------------------------
Name: Randy M. Wirth
Title Assistant Secretary
PEAR COMMERCIAL INTERIORS
By: /s/ KATHEY E. PEAR
------------------------------
Name: Kathey E. Pear
Title President
PRICE MODERN, INC.
By: /s/ MILFORD A. MERCHANT
------------------------------
Name: Milford A. Merchant
Title President
RADAR BUSINESS SYSTEMS, INC.
By: /s/ EARLIS JOHNSON JR.
------------------------------
Name: Earlis Johnson Jr.
Title President
42
<PAGE>
RAINEN BUSINESS INTERIORS, INC.
By: /s/ MICHAEL J. RAINEN
------------------------------
Name: Michael J. Rainen
Title President
SAGOT OFFICE INTERIORS, INC.
By: /s/ ROBERT SAGOT
------------------------------
Name: Robert Sagot
Title President
SLETTEN VENDING SERVICE, INC.
By: /s/ STEVEN J. SLETTEN
------------------------------
Name: Steven J. Sletten
Title President
STURGIS ACQUISITION CORP.
By: /s/ SANFORD A. GRODIN
------------------------------
Name: Sanford A. Grodin
Title President
SWEITZER'S OFFSET SERVICES, INC.
By: /s/ MICHAEL S. SWEITZER
------------------------------
Name: Michael S. Sweitzer
Title President
THE SYSTEMS HOUSE, INC.
By: /s/ ANNE T. SMITH
------------------------------
Name: Anne T. Smith
Title President
U.S. OFFICE FURNITURE, INC.
U.S. OFFICE FURNITURE RENTALS, INC.
By: /s/ JAN TAKACS
------------------------------
Name: Jan Takacs
Title Vice President Operations
43
<PAGE>
U.S. OFFICE PRODUCTS-
GREAT LAKES, INC.
By: /s/ DAVID C. GEZON
------------------------------
Name: David C. Gezon
Title President
USOP MERCHANDISING COMPANY
By: /s/ KEVIN J. THIMJON
------------------------------
Name: Kevin J. Thimjon
Title President
U.S.OFFICE PRODUCTS - MIDWEST LLC
By: /s/ WENDY PIKE
------------------------------
Name: Wendy Pike
Title President
U.S. OFFICE PRODUCTS OF
NORTHERN WISCONSIN, INC.
By: /s/ ROGER KANE
------------------------------
Name: Roger Kane
Title President
U.S. OFFICE PRODUCTS OF
SOUTHERN CALIFORNIA, INC.
By: /s/ RICHARD D. CORWIN
------------------------------
Name: Richard D. Corwin
Title President
VEND-RITE SERVICE CORPORATION
By: /s/ ALAN J. PLOTKIN
------------------------------
Name: Alan J. Plotkin
Title Vice President
44
<PAGE>
WHITTINGTON, INC.
By: /s/ DON NICKLESON
------------------------------
Name: Don Nickleson
Title President
Acknowledged and Agreed to as
of the date hereof by:
THE CHASE MANHATTAN BANK, as
Administrative Agent
By: _______________________________
Name:
Title:
<PAGE>
Exhibit 21.1
SUBSIDIARIES
OF
U.S. OFFICE PRODUCTS COMPANY
U.S. SUBSIDIARIES:
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF NAME(S) UNDER WHICH
ORGANIZATION SUBSIDIARY DOES BUSINESS
<S> <C> <C>
Action Wholesale Service, Inc. Michigan Name Brand Pen Company, Inc.
Affordable Interior Systems, Inc. Massachusetts
American Loose Leaf/Business Missouri ALLCO Advertising Specialists
Products, Inc. American Loose Leaf Business Products
Columbia Office Supply
Craftsman Office Supply
Fisher's Office Products
Gruener Office Supply
L&M Office Supply
DeMarco Office Supply
Viquesneys
Office Extra
Forty-Fifteen Papin Missouri
Redevelopment Corporation
Andrews Office Supply & District of Coffee Butler Service, Inc.
Equipment Co. Columbia
Expert Office Services Inc. Maryland Alperstein Brothers
Bel Air Office Supply
Information Management Products
Office Experts
Office Supply Express
Reston Office Supply
Towson Stationers
Bob Brines Office Supply Co. Michigan
BusinessWorks, Inc. Delaware Ohio BusinessWorks, Inc.
Carithers-Wallace-Courtenay. Delaware
LLC
Courtland-Cain, Inc. Georgia
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Carolina Office Equipment North Carolina COECO
Company Becton Office Products
Coffee Butler
ROSCO
Raleigh Office Supply Company
Bowen Office Equipment Company
Central Texas Office Products, Texas All Pro Vending Company
Inc. G&L-VBJ Office Products
IQ-2000
South Texas Office Products
USOP of Dallas/Fort Worth
Office Furniture Distributors
U.S. Office Products
Copenhaver Holdings, LLC Delaware Skippers
Brasan
Coffee Master
Excel
Halsey's Office & Art Supply
International Interiors
Majordomo Services
Mark's Office Furniture
Office Connection
Office Innovations
Office Supply of Feather Sound
Park Avenue Office Services
Pittman Office Products
Prossaire
Prudential of Florida
The North Howard Company
The Smith-Wilson Company
U.S. Office Products
United Office Products
Dameron-Pierson Company, Louisiana Ferris Office Furnishings
Limited Tab Systems
Dulworth Office Furniture Kentucky
Company
Fort Smith Office Supply, Inc. Arkansas
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
General Office Products Minnesota C&G Acquisition
Company Sharp Pencil Holdings
Thomas & Grayston Company
Town & Country Business Products
The Lincoln's Office Supply Corp.
Kentwood Office Furniture, Inc. Michigan
Landmark Industries, Inc. Delaware Landmark Stationers
Furniture Consultants of Connecticut
Kramer CT
FCI
Furniture Consultants
Lanier Acquisition Corp. Delaware
Mail Boxes Etc. California
Mail Boxes Etc. USA, Inc. California
Global Mailbox California
Express, Inc.
McWhorter's, Inc. California Accessto Computers Supplies
Accessto Computers
Cal Bennett's
Cal Bennetts
Poor Richard's Almanac
Paper Tree Stationers
Mile High Office Supply, LLC Delaware Arizona Office Products
Pear Commercial Interiors, Colorado
Inc.
Mills Morris Business Products, Tennessee Arrow Business Products, Inc.
Inc. Mills Morris Office Furniture, Inc.
Office Furniture USA -- Memphis
Mills Morris Business Interiors
Today's Office, Inc.
Whittington, Inc. Mississippi Middleton Office Supply
Mills Morris Business Products
Modern Food Systems, Inc. Indiana Deli on the Park
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
Modern Vending, Inc. Indiana Aqua Pure Water Systems
Modern Vending Co., Inc.
Jolly Hobbs Coffee Service
Pour-More Beverage Systems, Inc.
Morris Office Machines, Inc. Mississippi
National Office Supply, Inc. Ohio Costigan's
Costigan's Office Supply
Shamrock Office Products
New Mexico Office Solutions, New Mexico New Mexico Discount Office Supply,
Inc. Inc.
Price-Modern, Inc. Maryland Price-Modern of Virginia
Price-Modern of Norfolk
Coffee Butler Service, Inc.
J.H. Whitley Co., Inc. Virginia J.H. Whitley Office Products
Radar Business Systems, Inc. Tennessee
Rainen Business Interiors, Inc. Missouri Baird & Son
Budget Bee Discount Office Furniture
Mid Continent Office Distributors
Office Care
Rainen U.S. Office Furniture
CCR Office Products
Sletton Vending Service, Inc. Wisconsin
Sturgis Acquisition Corp. Delaware G.W. Sturgis of El Paso
Sturgis & Company
Carter Vending Company
Office Coffee
U.S. Office Products
Sweitzer's Offset Services, Inc. Indiana Noblesville Office Supply Company
The H.H. West Company Delaware Lynch Office Equipment & Supply
Reco, Inc.
Hamco of Milwaukee, Inc.
Warmke Office Equipment
The J. Thayer Company, LLC Delaware AAA Coffee Service of Oregon
AAA Coffee Service of Washington
HBI Office Interiors
Portland Supply & Printing
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
Bindery Systems, Inc. Oregon AAA Coffee of Oregon
AAA Coffee Service of Washington
The Office Furniture Store, Inc. Ohio
The Ofice Works, Inc. Pennsylvania Swift & Barnes Office Supply and
Furniture Supply Company
CK Coffee
Way Office Products
The Systems House, Inc. Illinois
U.S. Office Furniture Rentals, Delaware
Inc.
U.S. Office Furniture, Inc. Delaware
U.S. Office Products -- Midwest, Delaware
LLC
U.S. Office Products Company Delaware
U.S. Office Products Southern California
California
U.S. Office Products of Northern Delaware
Wisconsin, Inc.
U.S. Office Products Company-- Delaware C.W. Mills Paper Company
Great Lakes, Inc. Muncie Office Supply
PDH Office Products
Pence, Dickens & Heeter
DBI Business Interiors
Davids Innovative Office Products
Davids Office Supply & Furniture
Franklin Office Products
Office Products Center
Professional Office Furniture
Professional Office Supply
Frey Office Supply
Gorney Winzever
USOP Merchandising Company Delaware
Vend-Rite Service Corporation Pennsylvania Vend-Rite Food Service Corporation
</TABLE>
CANADIAN SUBSIDIARIES:
1203803 Ontario Limited
Take A Break Services, Inc.
1186203 Ontario Limited
Arbuckle Foods, Inc.
452007 British Columbia, Ltd.
Marsed Holdings, Inc.
CCR Leasing, Inc.
1243231 Ontario Limited
Duocentre Management Services, Ltd.
West Coast Coffee Service Ltd.
Safari Coffee Specialty Roaster Ltd.
5
<PAGE>
NEW ZEALAND SUBSIDIARIES:
Blue Star Group Limited
Blue Star Business Solutions Limited
Blue Star Integrated Services Ltd
Blue Star Investments Limited
Blue Star Office Automation Limited
Blue Star Office Technology Limited
Wang New Zealand Limited
Blue Star Print Group Limited
Blue Star Graphics Limited
Blue Star Properties (No. 2) Limited
Blue Star Properties Limited
Blue Star Properties (Crawford Street) Limited
Blue Star Properties (Grey Street) Limited
Blue Star Properties (Karamu Road) Limited
Blue Star Properties (Spey Street) Limited
U-Bix Business Machines Limited
BSG Finance Limited
Croxley Stationery Limited
Armidale Industries Limited
GPO Properties (Masterton) Limited
Hart Candy Communications Limited
Lullingstone Investments Limited
McCollam Printers Limited(1)
New Zealand Office Products Limited
Blue Star Office Products (Hawkes Bay) Limited
Office Efficiency Centre Limited
PC Direct Limited
- ----------------------
(1) 1/3 of the shares in McCollam Printers Limited are held by each of Blue
Star Group Limited, Blue Star Investments Limited, and Blue Star
Office Technology Limited.
6
<PAGE>
Orbit Software Limited
WGL Retail Holdings Limited
Blue Star Consumer Retailing Limited
Bennetts Government Bookshop Limited
Angus & Robertson Bookworld Pty Limited (Australia)
Reader's Cafe Pty Limited
AUSTRALIAN SUBSIDIARIES:
Blue Star Group Pty Limited
Angus & Robertson Bookworld Holdings Limited
Paperwealth Limited
Commonwealth Paper Company Pty Limited
Empire Office Supplies Pty Limited
Dixon Office Warehouse Pty Limited
Blue Star Business Solutions Australia Pty Ltd
Blue Star Corporate Pty Limited
Link Printing Pty Limited
The Craftsmen Press Pty Limited
Craftsman Publishing Pty Ltd
Filing Efficiency Pty Ltd
Australian Associated Packaging Pty Ltd
Molliglade Pty Limited
Toramont Pty Limited
Bookland Pty Limited
Australian Toner Cartridge Co Pty Limited
7
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (333-01574, 333-12789 and 333-24581); Form S-3
(333-10383 and 333-14025); Form S-4 (333-13133); and Post-Effective Amendment
No. 1 to Form S-4 on Form S-8 (333-36463) of our report dated June 24, 1998
with respect to the financial statements of U.S. Office Products Company for
the year ended April 25, 1998, which report appears in this Annual Report on
Form 10-K of U.S. Office Products Company.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
July 20, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements on Form S-8 (333-01574, 333-12789) and (333-12789, and 333-24581);
Form S-3 (333-10383 and 333-14025); Form S-4 (333-13133); and Post-Effective
Amendment No. 1 to Form S-4 on Form S-8 (333-36463) of our report dated
February 8, 1996 relating to the financial statements of The Re-Print
Corporation for the year ended December 31, 1995 which report appears in this
Annual Report on Form 10-K of U.S. Office Products Company.
/s/ BDO Seidman, LLP BDO SEIDMAN, LLP
- --------------------
Atlanta, Georgia
July 20, 1998
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
U.S. Office Products Company:
We consent to the incorporation by reference in the registration statements
on Form S-8 (333-01574, 333-12789 and 333-2458); Form S-3 (333-10383 and
333-14025); Form S-4 (333-13133) and Post Effective Amendment No. 1 to Form
S-4 on Form S-8 )333-36463) of U.S. Office Products Company of our report
dated August 28, 1996 with respect to 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 report
appears in the April 25, 1998 annual report on Form 10-K of U.S. Office
Products Company.
/s/ KPMG Peat Marwick LLP
- --------------------------
Norfolk, Virginia
July 20, 1998
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (333-01574, 333-12789, and 333-24581); Form S-3
(333-10383 and 333-14025); S-4 (333-13133); and Post-Effective Amendment
No. 1 to Form S-4 on Form S-8 (333-36463) of our report dated June 7, 1996,
except for Note 9, as to which the date is October 24, 1996, relating to the
financial statements of Fortran Corp., which report appears in this Annual
report on Form 10-K of U.S. Office Products Company.
/s/ Rubin, Koehmsted & Nadler, PLC
- --------------------------------------
Gary A. Koehmstedt, CPA
RUBIN, KOEHMSTEDT & NADLER, PLC
Springfield, Virginia
July 20, 1998
<PAGE>
Exhibit 23.5
Independent Auditors' Consent
We consent to the incorporation by reference in the Registration
Statements on Form S-8 (333-01574, 333-12789 and 333-24581); Form S-3
(333-10383 and 333-14025); Form S-4 (333-13133); and Post-Effective Amendment
No. 1 to Form S-4 on Form S-8 (333-36463) of our report dated September 23,
1996, with respect to the financial statements of MTA, Inc. as of December
31, 1995, and the related consolidated financial statements of income and
retained earnings and cash flows for the period from January 25, 1995 (date
of incorporation) to December 31, 1995 (not presented separately herein),
appearing in this Annual Report on Form 10-K of U.S. Office Products Company.
/s/ Deloitte & Touche LLP
- ---------------------------------
DELOITTE & TOUCHE LLP
July 20, 1998
<PAGE>
Exhibit 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statements on Form S-8 (333-01574,333-12789 and 333-24581); Form S-3
(333-10383 and 333-14025); Form S-4 (333-13133); and Post-Effective Amendment
No. 1 to Form S-4 on Form S-8 (333-36463) of our reports dated March 6, 1996
and March 4, 1996 with respect to the financial statements of United Envelope
Co., Inc. and its affiliate, Rex Envelope Co., Inc., and Huxley Envelope
Corporation, respectively, for the year ended December 31, 1995, which
reports appear in this Annual Report on Form 10-K of U.S. Office Products
Company.
/s/ Hertz, Herson & Company, LLP
- --------------------------------
HERTZ, HERSON & COMPANY, LLP
New York, New York
July 20, 1998
<PAGE>
Exhibit 23.7
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (Nos. 333-01574, 333-12789 and 333-24581); Form S-3 (Nos.
333-10383 and 333-14025); Form S-4 (No. 333-13133); and Post Effective
Amendment No. 1 to Form S-4 on Form S-8 (No. 333-36463) of our report dated
February 2, 1996, with respect to the financial statements of School
Specialty, Inc. for the year ended December 31, 1995 (not presented
separately herein), which report appears in this Annual Report on Form 10-K
of U.S. Office Products Company.
/s/ Ernst & Young LLP
- ---------------------
Milwaukee, Wisconsin ERNST & YOUNG LLP
July 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME INCLUDED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-25-1998
<PERIOD-START> APR-27-1997
<PERIOD-END> APR-25-1998
<CASH> 52,021
<SECURITIES> 0
<RECEIVABLES> 319,166
<ALLOWANCES> (8,639)
<INVENTORY> 228,671
<CURRENT-ASSETS> 708,369
<PP&E> 310,004
<DEPRECIATION> (81,289)
<TOTAL-ASSETS> 2,541,427
<CURRENT-LIABILITIES> 655,369
<BONDS> 382,174
0
0
<COMMON> 33
<OTHER-SE> 1,486,098
<TOTAL-LIABILITY-AND-EQUITY> 2,541,427
<SALES> 2,611,740
<TOTAL-REVENUES> 2,611,740
<CGS> 1,884,892
<TOTAL-COSTS> 617,588<F1>
<OTHER-EXPENSES> (8,999)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,837
<INCOME-PRETAX> 80,422
<INCOME-TAX> 36,946
<INCOME-CONTINUING> 43,476
<DISCONTINUED> 23,712
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,188
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.20
<FN>
<F1>INCLUDES $6,187 OF RESTRUCTURING COSTS.
</FN>
</TABLE>
