<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
JANUARY 12, 1998
--------------------------------------
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
U.S. OFFICE PRODUCTS COMPANY
--------------------------------------
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
DELAWARE
--------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION)
0-25372
--------------------------------------
(COMMISSION FILE NO.)
52-1906050
--------------------------------------
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
1025 THOMAS JEFFERSON STREET, N.W., SUITE 600 EAST, WASHINGTON, D.C. 20007
--------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(202) 339-6700
--------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
<PAGE>
ITEM 5--OTHER EVENTS
INTRODUCTION
U.S. Office Products Company ("USOP" or the "Company") has prepared this
Current Report on Form 8-K to provide certain financial information (included
restated historical financial statements) in connection with the strategic
restructuring plan (the "Strategic Restructuring Plan") that USOP's Board of
Directors (the "USOP Board") adopted on January 12, 1998.
The principal elements of the Strategic Restructuring Plan are as follows:
(1) a self-tender offer by USOP (the "Tender Offer") to purchase 37,037,037
shares of USOP common stock at $27.00 per share and the incurrence of
significant additional debt to pay a substantial portion of the purchase price
of the shares in the Tender Offer; (2) after acceptance of shares in the Tender
Offer, the pro rata distribution to USOP stockholders of shares of four
companies (the "Spin-Off Companies") that will conduct USOP's current print
management, technology solutions, educational supplies and corporate travel
services businesses (the "Distributions"); and (3) following acceptance of
shares in the Tender Offer and the record date for the Distributions, the sale
to an affiliate of Clayton, Dubilier & Rice, Inc. ("Investor") of equity
interests in USOP (the "Equity Investment"). In these transactions, Investor
will not acquire any equity interest in the Spin-Off Companies. The Company
expects the Strategic Restructuring Plan to be completed in the second calendar
quarter of 1998. The transactions are subject to a number of conditions,
including financing, approval of USOP's shareholders and receipt of regulatory
approvals.
The financial information contained in this Current Report includes:
- - audited consolidated financial statements of the "Company", including the
related notes thereto, which have been restated to reflect (1) the results
of the companies to be spun off to shareholders in the strategic
restructuring plan as discontinued operations, and (2) the change in
accounting treatment of the 22 business combinations completed during the
nine months ended January 24, 1998, from the pooling-of-interests method of
accounting to the purchase method;
- - pro forma combined financial statements of the Company, including the related
notes thereto, which (1) give retroactive effect to the transactions
contemplated by the strategic restructuring plan (and certain other
transactions identified in the pro forma financial statements and the
related notes), and (2) have been prepared based on the assumptions and
conditions described in the pro forma financial statements and the related
notes; and
- - Management's discussion and analysis of the Company's financial position and
results of operations and selected historical and pro forma financial data.
1
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Introduction to Selected Financial Data................................................................... F-2
Selected Financial Data................................................................................... F-3
Management Discussion and Analysis of Financial Position and Results of Operations........................ F-5
Introduction to Pro Forma Financial Information........................................................... F-20
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited)....................................... F-22
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998 (unaudited)............. F-23
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997 (unaudited)............. F-24
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997
(unaudited).............................................................................................. F-25
Notes to Pro Forma Combined Financial Statements.......................................................... F-26
Report of Price Waterhouse LLP, Independent Accountants................................................... F-28
Report of Ernst & Young LLP, Independent Accountants...................................................... F-29
Report of BDO Seidman, LLP, Independent Accountants....................................................... F-30
Report of KPMG Peat Marwick LLP, Independent Accountants.................................................. F-31
Report of KPMG Peat Marwick LLP, Independent Accountants.................................................. F-32
Report of Rubin Koehmstedt and Nadler, Independent Accountants............................................ F-33
Report of Deloitte & Touche LLP, Independent Accountants.................................................. F-34
Report of Hertz, Herson & Company, LLP, Independent Accountants........................................... F-35
Report of Hertz, Herson & Company, LLP, Independent Accountants........................................... F-36
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and January 24, 1998 (unaudited).......... F-37
Consolidated Statement of Income for the fiscal years ended April 30, 1995 and 1996, April 26, 1997 and
the nine months ended January 25, 1997 (unaudited) and January 24, 1998 (unaudited)...................... F-38
Consolidated Statement of Stockholders' Equity for the fiscal years ended April 30, 1995 and 1996, April
26, 1997 and the nine months ended January 24, 1998 (unaudited).......................................... F-39
Consolidated Statement of Cash Flows for the fiscal years ended April 30, 1995 and 1996, April 26, 1997
and the nine months ended January 25, 1997 and January 24, 1998.......................................... F-41
Notes to Consolidated Financial Statements................................................................ F-43
</TABLE>
F-1
<PAGE>
INTRODUCTION TO SELECTED FINANCIAL DATA
The historical Statement of Income Data for the year ended April 30, 1995
and 1996 and the fiscal year ended April 26, 1997 and the Balance Sheet Data at
April 30, 1996 and April 26, 1997 have been derived from the Company's
consolidated financial statements that have been audited and are included
elsewhere in this Current Report. The historical Statement of Income Data for
the years ended April 30, 1993 and 1994 and the Balance Sheet Data at April 30,
1993, 1994, and 1995 have been derived from unaudited consolidated financial
statements which are not included elsewhere in this Current Report or
incorporated herein by reference. The Selected Financial Data for the nine
months ended January 25, 1997 and January 24, 1998 (except pro forma amounts)
have been derived from unaudited consolidated financial statements that appear
elsewhere in this Current Report. These unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, contain all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the financial position and results of operations for the periods presented.
The pro forma financial data gives effect, as applicable, to the
Distributions and the acquisitions completed by the Company after May 1, 1996 as
if all such transactions had been consummated on May 1, 1996. In addition, the
pro forma information is based on available information and certain assumptions
and adjustments.
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the pro
forma financial information, including the notes thereto, and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
appear elsewhere in this Current Report.
F-2
<PAGE>
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------------ -----------
PRO FORMA
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25,
1993 1994 1995 1996 1997 1997 (2) 1997
----------- ----------- ----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $ 486,763 $ 523,755 $ 658,494 $1,061,528 $2,115,954 $2,794,009 $1,498,320
Cost of revenues.................. 350,647 377,494 485,955 789,436 1,518,287 1,988,315 1,077,408
----------- ----------- ----------- --------- --------- ----------- -----------
Gross profit.................. 136,116 146,261 172,539 272,092 597,667 805,694 420,912
Selling, general and
administrative expenses......... 124,065 132,320 152,176 231,569 488,215 646,867 344,474
Amortization expense.............. 601 733 801 2,711 12,416 25,138 8,072
Non-recurring acquisition costs... 8,057 8,001 7,316
Restructuring costs............... 682 4,201 4,201
----------- ----------- ----------- --------- --------- ----------- -----------
Operating income.............. 11,450 13,208 19,562 29,073 84,834 129,488 61,050
Interest expense.................. 2,914 2,519 3,401 8,132 36,047 102,515 27,540
Interest income................... (327) (411) (675) (3,506) (6,857) (6,048)
Other income...................... (1,463) (1,315) (1,456) (684) (4,233) (7,150) (4,073)
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 10,326 12,415 18,292 25,131 59,877 34,123 43,631
Provision for income taxes........ 1,594 1,727 2,800 6,032 27,939 22,180 18,238
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before extraordinary items...... 8,732 10,688 15,492 19,099 31,938 $ 11,943 25,393
-----------
-----------
Income from discontinued
operations, net of income taxes
(3)............................. 2,824 10,953 15,675 15,778 26,800 20,411
----------- ----------- ----------- --------- --------- -----------
Income before extraordinary
items........................... 11,556 21,641 31,167 34,877 58,738 45,804
Extraordinary items, net of income
taxes (4)....................... 701 1,450 612
----------- ----------- ----------- --------- --------- -----------
Net income........................ $ 11,556 $ 21,641 $ 31,167 $ 34,176 $ 57,288 $ 45,192
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Weighted average common shares
outstanding
Basic......................... 44,260 44,260 45,562 67,545 90,026 127,822(5) 85,978
Diluted....................... 44,260 44,260 45,704 68,374 91,761 129,557(5) 87,824
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.09 $ 0.30
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.24 0.31 0.24
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.51 $ 0.64 $ 0.53
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.09 $ 0.29
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.23 0.29 0.23
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.50 $ 0.62 $ 0.51
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
<CAPTION>
PRO FORMA PRO FORMA
JANUARY 24, JANUARY 25, JANUARY 24,
1998 1997 (2) 1998 (2)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $1,930,113 $2,087,861 $2,070,655
Cost of revenues.................. 1,390,855 1,487,711 1,481,421
----------- ----------- -----------
Gross profit.................. 539,258 600,150 589,234
Selling, general and
administrative expenses......... 436,037 483,908 467,356
Amortization expense.............. 13,830 18,415 18,433
Non-recurring acquisition costs...
Restructuring costs...............
----------- ----------- -----------
Operating income.............. 89,391 97,827 103,445
Interest expense.................. 27,534 76,886 76,886
Interest income................... (1,545)
Other income...................... (6,369) (6,730) (6,711)
----------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 69,771 27,671 33,270
Provision for income taxes........ 32,535 17,986 21,626
----------- ----------- -----------
Income from continuing operations
before extraordinary items...... 37,236 $ 9,685 $ 11,644
----------- -----------
----------- -----------
Income from discontinued
operations, net of income taxes
(3)............................. 25,464
-----------
Income before extraordinary
items........................... 62,700
Extraordinary items, net of income
taxes (4).......................
-----------
Net income........................ $ 62,700
-----------
-----------
Weighted average common shares
outstanding
Basic......................... 114,758 127,822(5) 127,822(5)
Diluted....................... 117,185 129,668(5) 130,248(5)
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.08 $ 0.09
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.23
Extraordinary items...........
-----------
Net income.................... $ 0.55
-----------
-----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.07 $ 0.09
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.22
Extraordinary items...........
-----------
Net income.................... $ 0.54
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
JANUARY
APRIL 30, 24, 1998
------------------------------------------ APRIL 26, ---------
1993 1994 1995 1996 1997 ACTUAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 13,609 $ 51,344 $ 70,153 $ 274,124 $ 285,963 $ 134,038
Net assets of discontinued operations........................ 19,199 26,879 33,514 33,674 59,231 346,083
Total assets................................................. 130,666 172,656 259,904 805,978 1,706,991 2,469,442
Long-term debt, less current portion......................... 2,414 15,112 18,841 176,230 380,209 381,844
Stockholders' equity......................................... 27,986 77,735 128,512 394,746 921,148 1,472,922
<CAPTION>
PRO FORMA (6)
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 64,888
Net assets of discontinued operations........................
Total assets................................................. 2,020,064
Long-term debt, less current portion......................... 1,049,273
Stockholders' equity......................................... 351,839
</TABLE>
F-3
<PAGE>
- ------------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method (the "Purchased Companies") have been included from the dates of
their respective acquisitions. The pro forma financial data reflect purchase
acquisitions completed by the Company through March 9, 1998.
(2) Gives effect to the Strategic Restructuring Plan and the purchase
acquisitions completed by the Company since May 1, 1996 as if such
transactions had been made on May 1, 1996. The pro forma statement of income
data are not necessarily indicative of the operating results that would have
been achieved had these events actually then occurred and should not be
construed as representative of the Company's future operating results.
(3) The results of the companies included in the Distributions are reflected as
discontinued operations for all periods presented in the Company's
consolidated statement of income.
(4) Extraordinary items represent the losses associated with the early
terminations of credit facilities, net of the related income tax benefits.
(5) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 25,
1997 and January 24, 1998, see Note (l) of Notes to Pro Forma Combined
Financial Statements included elsewhere in this Current Report on Form 8-K.
(6) Gives effect to the Strategic Restructuring Plan and the purchase
acquisitions completed by the Company subsequent to January 24, 1998 as if
such transactions had been made on January 24, 1998. The pro forma balance
sheet data are not necessarily indicative of the financial position that
would have been achieved had these events actually then occurred and should
not be construed as representative of the Company's future financial
position.
F-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
THIS CURRENT REPORT ON FORM 8-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS CURRENT REPORT, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," AND "EXPECT" AND
SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE
EVENTS OR CIRCUMSTANCES. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED
BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW UNDER THE HEADING "FACTORS
AFFECTING THE COMPANY'S BUSINESS."
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
historical financial statements and the pro forma combined financial statements
of the Company, including the related notes to each thereto, appearing elsewhere
in this Current Report. The discussion of the Company's pro forma results of
operations is based on the assumptions and conditions described in the Pro Forma
Combined Financial Statements and the Notes thereto. The Company's audited
consolidated financial statements have been restated to reflect (i) the results
of the businesses to be spun off to shareholders in the Company's recently
announced Strategic Restructuring Plan as discontinued operations; and (ii) the
change in accounting treatment of the 22 business combinations completed during
the nine months ended January 24, 1998, from the pooling-of-interests method to
the purchase method.
In January 1998, the Company's Board of Directors approved the Strategic
Restructuring Plan. The principal elements of the Strategic Restructuring Plan
are (1) the Tender Offer and the incurrence of debt to pay a portion of the
purchase price in the Tender Offer; (2) after acceptance of shares in the Tender
Offer, the Distributions; and (3) the Equity Investment following acceptance of
shares in the Tender Offer and the record date for the Distributions.
As a result of the Strategic Restructuring Plan, the Company's consolidated
financial statements reflect the results of those companies to be owned by the
Spin-Off Companies (and thus included in the Distributions) as discontinued
operations. Assuming completion of the transactions contemplated by the
Strategic Restructuring Plan, the Company's continuing operations will consist
of its North American Office Products Group (which includes office supply,
office furniture, and coffee, beverage, and vending service businesses), its
Mail Boxes Etc. subsidiary (acquired in late November 1997), its operations in
New Zealand and Australia, and its 49% interest in Dudley Stationery Limited, a
U.K. contract stationer ("Dudley"). The Company's North American Office Products
Group operates primarily in the United States; it includes three coffee and
beverage businesses located in Canada.
Except where specifically noted, the discussion of financial condition and
results of operations that appears below covers only the Company's continuing
operations, assuming completion of the transactions contemplated by the
Strategic Restructuring Plan. For additional information about the results of
discontinued operations, see Note 4 of the Company's Notes to Consolidated
Financial Statements.
The Company's continuing operations derived revenues primarily from the sale
of a wide variety of office supplies, office furniture, and other office
products (including coffee, beverage, and vending products and services) to
corporate, commercial and industrial customers. Cost of revenues represents the
purchase price for office supplies, office furniture and other office products
and includes occupancy and delivery costs and is reduced by rebates and
discounts on purchases.
The Company's financial condition and results of operations have changed
dramatically from the Company's inception in October 1994 to January 24, 1998 as
a result of the Company's aggressive acquisition program. The Company completed
165 business combinations (144 related to continuing
F-5
<PAGE>
operations and 21 related to discontinued operations) from its inception through
the end of fiscal 1997, 54 of which were accounted for under the
pooling-of-interests method (39 related to continuing operations and 15 related
to discontinued operations). During the nine months ended January 24, 1998, the
Company completed an additional 60 business combinations (40 related to
continuing operations and 20 related to discontinued operations). As a result of
the Board's adoption of the Strategic Restructuring Plan, all 60 business
combinations completed during the nine months ended January 24, 1998 are
accounted for under the purchase method. Prior to the adoption of the Strategic
Restructuring Plan, 22 of these 60 business combinations were accounted for
under the pooling-of-interests method (12 related to continuing operations and
10 related to discontinued operations). Following adoption of the Strategic
Restructuring Plan, the Company restated its historical consolidated financial
statements to account for these 22 business combinations under the purchase
method (including the Company's acquisition of Mail Boxes Etc.) The Company's
consolidated financial statements give retroactive effect to the business
combinations accounted for under the pooling-of-interests method during the
fiscal year ended April 26, 1997 and include the results of companies acquired
in business combinations accounted for under the purchase method from their
respective acquisition dates.
Due to the Company's growth through acquisitions, year-to-year comparisons
of the historical results of the Company's operations have been affected
primarily by the addition of acquired companies. In most instances, these dollar
increases in the various revenues and expense components of the Company's
results are due primarily to growth from acquisitions. Neither the magnitude nor
the source of such year-to-year changes is necessarily indicative of changes
that will occur in the future. As a result of the Strategic Restructuring Plan,
the Company expects to focus more on improving and expanding existing
operations, and less on acquisitions as a means of growth. In any event, the
Company expects that the impact of acquisitions on the future results of the
Company's continuing operations will decrease because the size of companies that
it expects to be available for acquisition will be smaller than in prior periods
and the Company's existing operations are larger than in prior years.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the fiscal years ended April 30, 1995 and 1996 and April 26, 1997 and for the
nine months ended January 25, 1997 and January 24, 1998, as well as for the
fiscal year ended April 26, 1997 and for the nine months ended January 25, 1997
and January 24, 1998 on a pro forma basis reflecting the Tender Offer, the
Distributions, the Equity Investment and the results of the companies acquired
between May 1, 1996 and March 9, 1998 in business combinations accounted for
under the purchase method as if such transactions had occurred on May 1, 1996.
F-6
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25, JANUARY 24, JANUARY 25,
1995 1996 1997 1997 1997 1998 1997
----------- ----------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............. 73.8 74.4 71.8 71.2 71.9 72.1 71.2
----- ----- ----- ----- ----- ----- -----
Gross profit 26.2 25.6 28.2 28.8 28.1 27.9 28.8
Selling, general and
administrative expenses.... 23.1 21.8 23.1 23.2 23.0 22.6 23.2
Amortization expense 0.1 0.3 0.6 0.9 0.5 0.7 0.9
Non-recurring acquisition
costs...................... 0.7 0.4 0.5
Restructuring charges........ 0.1 0.1 0.1
----- ----- ----- ----- ----- ----- -----
Operating income........... 3.0 2.7 4.0 4.6 4.1 4.6 4.7
Interest expense, net........ 0.4 0.4 1.4 3.6 1.5 1.3 3.7
Other income................. (0.2) (0.1) (0.2) (0.2) (0.3) (0.3) (0.3)
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 2.8 2.4 2.8 1.2 2.9 3.6 1.3
Provision for income taxes... 0.4 0.6 1.3 0.8 1.2 1.7 0.9
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before
extraordinary items........ 2.4 1.8 1.5 0.4% 1.7 1.9 0.4%
----- -----
----- -----
Discontinued operations, net
of income taxes............ 2.3 1.5 1.3 1.4 1.3
----- ----- ----- ----- -----
Income before extraordinary
items...................... 4.7 3.3 2.8 3.1 3.2
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes............... 0.1 0.1 0.1
----- ----- ----- ----- -----
Net income................... 4.7% 3.2% 2.7% 3.0% 3.2%
----- ----- ----- -----
----- ----- ----- ----- -----
-----
<CAPTION>
PRO FORMA
JANUARY 24,
1998
-------------
<S> <C>
Revenues..................... 100.0%
Cost of revenues............. 71.5
-----
Gross profit 28.5
Selling, general and
administrative expenses.... 22.6
Amortization expense 0.9
Non-recurring acquisition
costs......................
Restructuring charges........
-----
Operating income........... 5.0
Interest expense, net........ 3.7
Other income................. (0.3)
-----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 1.6
Provision for income taxes... 1.0
-----
Income from continuing
operations before
extraordinary items........ 0.6%
-----
-----
Discontinued operations, net
of income taxes............
Income before extraordinary
items......................
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes...............
Net income...................
</TABLE>
PRO FORMA RESULTS OF OPERATIONS
The Company's pro forma results of operations for the fiscal year ended
April 26, 1997 and the nine months ended January 25, 1997 and January 24, 1998
reflect significant decreases in net income and net income per share from the
amounts reported in the Company's historical consolidated financial statements.
The significant decreases can be attributed primarily to (i) substantially
higher amortization expenses as compared to prior periods (as a result of
reclassifying 12 business combinations as purchase acquisitions (including the
Company's acquisitions of Mail Boxes Etc.), rather than under the pooling-of-
interests method, as the Company had expected when it completed those
acquisitions); (ii) substantially higher interest expense, as a result of
increased borrowing that the Company expects to incur to help finance the cost
of the Tender Offer; and (iii) higher effective income tax rates, due to
increased non-deductible goodwill expense. The pro forma results do not purport
to represent the results the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or of the future results of the Company.
CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Consolidated revenues increased 28.8%, from $1,498.3 million for the nine
months ended January 25, 1997, to $1,930.1 million for the nine months ended
January 24, 1998. This increase was primarily due to
F-7
<PAGE>
acquisitions. Revenues for the nine months ended January 24, 1998 include
revenues from 111 companies acquired in business combinations accounted for
under the purchase method after the beginning of fiscal 1997 (the "Fiscal 1997
and 1998 Purchased Companies"). Revenues for the nine months ended January 25,
1997 include revenues from 54 of the Fiscal 1997 and 1998 Purchased Companies
for a portion of such period. This increase was partially offset by a reduction
in the increase in international revenues due to the devaluation of the New
Zealand and Australian dollars versus the USD. Because revenues generated in New
Zealand and Australia contributed approximately one-third of the Company's
consolidated revenues during this period, management estimates that currency
devaluation had the effect of reducing the Company's reported consolidated
revenues (in U.S. dollar terms) by approximately 3.8%.
International revenues increased 36.5%, from $488.8 million, or 32.6% of
consolidated revenues, for the nine months ended January 25, 1997, to $667.4
million, or 34.6% of consolidated revenues, for the nine months ended January
24, 1998. The increase in international revenues was primarily due to the
inclusion, in the revenues for the nine months ended January 24, 1998, of
revenues from 31 companies that were acquired in business combinations accounted
for under the purchase method after the beginning of fiscal 1997, the most
significant of which was Whitcoulls Group Limited, which the Company's
wholly-owned subsidiary Blue Star Group Limited acquired in July 1996. Revenues
from 14 of such companies were included in international revenues for a portion
of the nine months ended January 25, 1997. The growth in international revenues
was partially reduced by a decline in the exchange rates of the New Zealand and
Australian dollars against the USD. The following table details the declines in
the average exchange rates of the New Zealand and Australian dollars versus the
USD for the nine months ended January 24, 1998 and January 25, 1997:
<TABLE>
<CAPTION>
AVERAGE EXCHANGE RATES FOR
THE NINE MONTHS ENDED
----------------------------
JANUARY 24, JANUARY 25,
1998 1997 DECLINE
------------- ------------- -----------
<S> <C> <C> <C>
New Zealand dollar............................................................. $ .64 $ .70 $ (.06)
Australian dollar.............................................................. $ .72 $ .79 $ (.07)
</TABLE>
International revenues in New Zealand and Australia, calculated in their
local currencies, increased 49.4% for the nine months ended January 24, 1998, as
compared to the nine months ended January 25, 1997. This increase was due
primarily to the inclusion, in the revenues for the nine months ended January
24, 1998, of revenues from the acquired companies discussed above.
Gross profit increased 28.1%, from $420.9 million for the nine months ended
January 25, 1997, to $539.3 million for the nine months ended January 24, 1998.
Gross profit as a percentage of revenues decreased from 28.1% for the nine
months ended January 25, 1997 to 27.9% for the nine months ended January 24,
1998. The slight decrease in gross profit as a percentage of revenues was due
primarily to a shift in revenue mix, primarily as a result of acquisitions, to
revenues from traditionally lower margin products and services, partially offset
by improved purchasing and rebate programs negotiated with vendors.
Selling, general and administrative expenses increased 26.6%, from $344.5
million for the nine months ended January 25, 1997, to $436.0 million for the
nine months ended January 24, 1998 primarily due to the inclusion of the results
of the Fiscal 1997 and 1998 Purchased Companies. Selling, general and
administrative expenses as a percentage of revenues decreased from 23.0% for the
nine months ended January 25, 1997 to 22.6% for the nine months ended January
24, 1998. The decrease in selling, general and administrative expenses as a
percentage of revenues was due to several factors, including (i) a shift in
revenue mix, primarily as a result of acquisitions, to revenues from products
and services traditionally having lower selling, general and administrative
expenses; (ii) reductions in selling, general and administrative expenses by the
Company through the consolidation of certain redundant facilities and job
functions; and (iii) reductions in the costs of many general and administrative
expenses incurred by the Company
F-8
<PAGE>
through the negotiation of national or other large-scale contracts with the
providers of certain services affecting these general and administrative
expenses.
Amortization expense increased 71.3%, from $8.1 million for the nine months
ended January 25, 1997, to $13.8 million for the nine months ended January 24,
1998. This increase is due exclusively to the increase in the number of purchase
acquisitions, including the 12 acquisitions that were originally planned to be
accounted for under the pooling-of-interests method but were restated as
purchase acquisitions as a result of the Strategic Restructuring Plan, included
in the results for the nine months ended January 24, 1998 versus the nine months
ended January 25, 1997.
The Company incurred non-recurring acquisition costs of approximately $7.3
million during the nine months ended January 25, 1997, in conjunction with
business combinations that were accounted for under the pooling-of-interests
method. These non-recurring acquisition costs included accounting, legal and
investment banking fees, real estate and environmental assessments and
appraisals, various regulatory fees and recognition of transaction related
obligations. Generally accepted accounting principles require the Company to
expense all acquisition costs (both those paid by the Company and those paid by
the sellers of the acquired companies) related to business combinations
accounted for under the pooling-of-interests method. In accordance with
generally accepted accounting principles, the Company will be unable to utilize
the pooling-of-interests method to account for acquisitions for a period of up
to 6-9 months following the completion of the Strategic Restructuring Plan.
During this period, the Company will not reflect any non-recurring acquisition
costs in its results of operations, as all costs incurred of this nature would
be related to acquisitions accounted for under the purchase method and would,
therefore, be capitalized as a portion of the purchase consideration.
Interest expense, net of interest income, increased 20.9% from $21.5 million
for the nine months ended January 25, 1997, to $26.0 million for the nine months
ended January 24, 1998. This was due primarily to a reduction in interest income
during the nine months ended January 24, 1998. The Company earned interest
income on the proceeds from the issuance of an aggregate of $230.0 million of
convertible subordinated notes in May and June of 1996 (the first quarter of
fiscal 1997). These proceeds were subsequently used to fund a portion of the
cash consideration used in business combinations. Interest expense has remained
relatively consistent, as steadily increasing borrowings and a declining cash
position have been offset by the repayment of debt from the proceeds of a stock
offering in January 1997 and declining interest rates.
Other income increased 56.4%, from $4.1 million for the nine months ended
January 25, 1997, to $6.4 million for the nine months ended January 24, 1998.
Other income for the nine months ended January 24, 1998 of $6.4 million
consisted primarily of a $4.7 million marketing fee, a gain on the sale of an
investment and the Company's 49% share of the net income of the Company's 49%
equity investment in Dudley. The Company acquired its 49% interest in Dudley in
November 1996. Other income for the nine months ended January 25, 1997 of $4.1
million consisted primarily of a foreign currency gain of $3.4 million. Although
management is pursuing additional opportunities to generate other income from
arrangements with third parties that desire access to the Company's distribution
network and customer base, management can not predict whether or when such
opportunities will be realized, or what amount of other income might be
available to the Company.
F-9
<PAGE>
YEAR ENDED APRIL 26, 1997 COMPARED TO THE YEAR ENDED APRIL 30, 1996
Consolidated revenues increased 99.3%, from $1,061.5 million in fiscal 1996,
to $2,116.0 million in fiscal 1997. This increase was primarily due to the
inclusion in fiscal 1997 revenues of revenues from the 91 companies related to
continuing operations that were acquired in business combinations accounted for
under the purchase method during fiscal 1997 (the "Fiscal 1997 Purchased
Companies") from their respective dates of acquisition and revenues from the 31
companies related to continuing operations that were acquired in business
combinations accounted for under the purchase method during fiscal 1996 (the
"Fiscal 1996 Purchased Companies") for the entire year. Revenues in fiscal 1996
include revenues from the Fiscal 1996 Purchased Companies from their respective
dates of acquisition.
International revenues increased from $84.8 million, or 8.0% of consolidated
revenues, in fiscal 1996, to $708.4 million, or 33.5% of consolidated revenues
in fiscal 1997. International revenues consisted primarily of revenues from New
Zealand and Australia, with the balance from Canada. The increase in
international revenues was primarily due to the inclusion, in the revenues for
fiscal 1997, of revenues from 15 companies that were acquired in business
combinations accounted for under the purchase method during fiscal 1997. Fiscal
1996 international revenues include the results of two companies for the entire
year and the results of two companies acquired in fiscal 1996 in business
combinations accounted for under the purchase method.
Gross profit increased 119.7%, from $272.1 million, or 25.6% of revenues, in
fiscal 1996, to $597.7 million, or 28.2% of revenues, in fiscal 1997. The
increase in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix resulting in a higher proportion of revenues in
traditionally higher margin products and services, primarily as a result of the
increase in products sold in New Zealand and Australia and as a result of
improved purchasing and rebate programs negotiated with vendors.
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. The Company expects to incur similar
costs in the future as the Company continues to review its operations. On a
regional level, the Company is implementing regional consolidation and
integration plans for its office supply, office coffee and beverage services and
office furniture divisions through which the Company has established and expects
to continue to establish district fulfillment centers ("DFCs"). The DFCs are
intended to enable certain operational activities, such as inventory management,
purchasing, accounting and human resources, to be shared among hubs and spokes
located within the same geographic area. This regional approach is intended to
permit the elimination of duplicative facilities and costs and promote
integration of the operations within each region.
F-10
<PAGE>
Interest expense, net of interest income, increased 531.0%, from $4.6
million in fiscal 1996, to $29.2 million in fiscal 1997. This increase was due
primarily to the increase in the Company's borrowings through the issuance of an
aggregate of $373.75 million of 5 1/2% Convertible Subordinated Notes (the
"Notes") during the fourth quarter of fiscal 1996 and the first quarter of
fiscal 1997 and an increase in the outstanding balance under the Company's
credit facility. The proceeds from the issuance of the Notes and the additional
borrowings under the credit facility were used primarily to fund the cash
portion of the consideration in certain business combinations accounted for
under the purchase method and to refinance indebtedness assumed in business
combinations.
Other income increased 518.9%, from $684,000 in fiscal 1996, to $4.2 million
in fiscal 1997. Fiscal 1997 other income consists primarily of foreign currency
gains and equity in the net income of the Company's 49% investment in Dudley,
the largest independent office products dealer in the United Kingdom. The
Company anticipates that foreign currency transaction gains and losses will be
immaterial in the future and that the income from its equity investment will
increase as the fiscal 1997 amount represented earnings from November 14, 1996,
the date of the Company's investment, through April 26, 1997.
Provision for income taxes increased from $6.0 million in fiscal 1996 to
$27.9 million in fiscal 1997, reflecting effective income tax rates of 24.0% and
46.7%, respectively. The low effective income tax rate in fiscal 1996, compared
to the federal statutory rate of 35.0%, was primarily due to the fact that
several of the companies included in the results for such year, which were
acquired in business combinations accounted for under the pooling-of-interests
method, were not subject to federal income taxes on a corporate level as they
had elected to be treated as subchapter S corporations prior to being acquired
by the Company. In fiscal 1997, this effect was offset by the increase in
nondeductible expenses, including amortization of goodwill and non-recurring
acquisition costs.
Income from discontinued operations increased 69.9% from $15.8 million in
fiscal 1996 to $26.8 million in fiscal 1997. See Note 4 of the Company's Notes
to Consolidated Financial Statements.
During fiscal 1997, the Company incurred extraordinary items totaling $1.5
million, which represent the aggregate expenses, net of the expected tax
benefit, associated with the early termination of the Company's $50 million
credit facility with First Bank National Association and the early termination
of credit facilities at two companies acquired in transactions accounted for
under the pooling-of-interests method during fiscal 1997.
YEAR ENDED APRIL 30, 1996 COMPARED TO THE YEAR ENDED APRIL 30, 1995
Consolidated revenues increased 61.2%, from $658.5 million in fiscal 1995,
to $1,061.5 million in fiscal 1996. This increase was primarily due to the
inclusion in the revenues for fiscal 1996 of revenues from the Fiscal 1996
Purchased Companies from their respective dates of acquisition and revenues from
five companies that were acquired in business combinations accounted for under
the purchase method during fiscal 1995 (the "Fiscal 1995 Purchased Companies")
for the entire year. Revenues in fiscal 1995 include revenues from the Fiscal
1995 Purchased Companies from their respective dates of acquisition.
International revenues increased from $35.7 million, or 5.4% of consolidated
revenues, in fiscal 1995, to $84.8 million, or 8.0% of consolidated revenues, in
fiscal 1996. This increase was primarily due to the inclusion in the revenues
for fiscal 1996 of revenues from two companies for the entire year and two
companies that were acquired in business combinations accounted for under the
purchase method during fiscal 1996.
Gross profit increased 57.7%, from $172.5 million, or 26.2% of revenues, in
fiscal 1995, to $272.1 million, or 25.6% of revenues, in fiscal 1996. The
decrease in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix, primarily resulting from acquisitions, to revenues in
traditionally lower gross margin products and services.
Selling, general and administrative expenses increased 52.2%, from $152.2
million, or 23.1% of revenues, in fiscal 1995, to $231.6 million, or 21.8% of
revenues, in fiscal 1996. The decrease in selling,
F-11
<PAGE>
general and administrative expenses as a percentage of revenues was due
primarily to a shift in revenue mix, primarily resulting from acquisitions, to
revenues in products and services traditionally lower in selling, general and
administrative expenses.
Amortization expense increased 238.5%, from $801,000 in fiscal 1995 to $2.7
million in fiscal 1996. This increase is due exclusively to the increase in the
number of purchase acquisitions included in the results for fiscal 1996 versus
fiscal 1995.
The Company incurred non-recurring acquisition costs of approximately $8.1
million in fiscal 1996, in conjunction with 14 business combinations accounted
for under the pooling-of-interests method. The non-recurring acquisition costs
in fiscal 1996 included a charge of approximately $4.7 million related to one
business combination which included the payment of significant
transaction-related compensation obligations. During fiscal 1996, the Company
also recorded restructuring charges of $682,000 related to the discontinuation
of the printing division at one subsidiary.
Interest expense, net of interest income, increased 69.7% from $2.7 million,
in fiscal 1995, to $4.6 million in fiscal 1996. This increase was due primarily
to the increase in the Company's borrowings through the issuance of $143.75
million of Notes during the fourth quarter of fiscal 1996 and an increase in the
outstanding balance on the Company's credit facility. The proceeds from the
issuance of the Notes and the additional borrowings from the credit facility
were used to fund the cash portion of the consideration in business combinations
and to refinance indebtedness assumed in such business combinations.
Provision for income taxes increased from $2.8 million in fiscal 1995 to
$6.0 million in fiscal 1996 reflecting effective income tax rates of 15.3% and
24.0%, respectively. The low effective income tax rates in fiscal 1995 and 1996,
compared to the federal statutory rate of 35.0%, are primarily due to the fact
that several companies included in the results for fiscal 1995 and 1996, which
were acquired in business combinations accounted for under the
pooling-of-interests method, were not subject to federal income taxes on a
corporate level as they had elected to be treated as subchapter S corporations
prior to being acquired by the Company.
Income from discontinued operations increased from $15.7 million in fiscal
1995 to $15.8 million in fiscal 1996.
During fiscal 1996, the Company incurred an extraordinary item of $701,000,
which represented the aggregate expenses, net of the expected tax benefit,
associated with the early termination of a credit facility at a company acquired
in a business combination accounted for under the pooling-of-interests method.
Basic and diluted income from continuing operations per share decreased $.06
from fiscal 1995 to fiscal 1996. These decreases are primarily the result of the
fact that U.S. Office Products began operations in February 1995 and the
majority of the results included prior to that date represented the results of
companies acquired in business combinations accounted for under the
pooling-of-interests method, many of which were subchapter S corporations. This
resulted in an effective income tax rate of 15.3% in fiscal 1995 versus 24.0% in
fiscal 1996. In addition, the Company incurred $8.1 million in non-recurring
acquisition costs and $682,000 in restructuring costs during fiscal 1996
compared to no such costs in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
On a pro forma basis, at January 24, 1998, the Company had working capital
of $64.9 million, long-term debt of $1.0 billion and capitalization of $1.4
billion. Such pro forma amounts give effect to the Strategic Restructuring Plan
and purchase acquisitions completed subsequent to January 24, 1998 as if such
transactions had occurred on January 24, 1998.
The Company anticipates that after the Strategic Restructuring Plan is
completed, its cash on hand, cash flow from operations and borrowings available
from its expected refinancing of its exisiting bank credit facility (the "Credit
Facility") will be sufficient to meet its liquidity requirements for its
operations and for its additional debt service obligations for the remainder of
the calendar year.
F-12
<PAGE>
The Credit Facility provides the Company with a $500 million line of credit,
bearing interest, at the Company's option, at the bank's base rate plus an
applicable margin of up to 1.25%, or a eurodollar rate plus an applicable margin
of up to 2.5%. At March 9, 1998, the Company had approximately $357.4 million
outstanding under the Credit Facility, at an annual interest rate of
approximately 6.5%, and $142.6 million available under the Credit Facility for
acquisition and working capital purposes. Because certain elements of the
Strategic Restructuring Plan would violate covenants in the Credit Facility,
that facility will either have to be modified with the lenders' consent or
refinanced. The Company currently expects to finance the aggregate cost of
purchasing shares in the Tender Offer (approximately $1 billion) with the
proceeds of the Equity Investment, additional senior secured bank debt, and the
net proceeds from the issuance of subordinated debt securities. The Company is
currently engaged in discussions with potential lenders and investment banks
regarding financing for the Tender Offer and refinancing of the Credit Facility.
The Company expects that it will be able to obtain the necessary financing on
acceptable terms. However, to date, no commitments have been obtained and there
can be no assurance that financing for the Tender Offer will be obtained on
acceptable terms. In connection with the completion of the Strategic
Restructuring Plan, the Company expects to incur approximately $800 million of
additional indebtedness. The Company also expects to incur significant
transaction (including financing) costs and expenses. If the Company were unable
to refinance its Credit Facility, the Company would be forced to pursue
alternative strategies to complete the Strategic Restructuring Plan.
During the nine months ended January 24, 1998, the New Zealand and
Australian dollars weakened against the USD. The New Zealand exchange rate
declined from $0.69 USD at April 27, 1997 to $0.58 USD at January 24, 1998. The
Australian exchange rate declined from $.78 USD at April 27, 1997 to $.66 USD at
January 24, 1998. This resulted in a reduction in stockholders' equity, through
a cumulative translation adjustment, of approximately $105.5 million, reflecting
the impact of the declining exchange rate on the Company's investments in its
New Zealand and Australian subsidiaries.
Subsequent to April 26, 1997 and through March 9, 1998, the Company
completed 64 (43 related to continuing operations and 21 related to discontinued
operations) business combinations for an aggregate purchase price of $770.2
million, consisting of approximately $186.3 million of cash and 27.8 million
shares of the Company's common stock with an aggregate market value on the dates
of acquisition of approximately $583.9 million.
During the nine months ended January 24, 1998, net cash provided by
operating activities was $36.8 million. Net cash used in investing activities
was $99.5 million, including $33.6 million used for acquisitions, $28.2 million
used for additions to property and equipment and $40.8 million paid to Dudley to
satisfy the remaining commitment related to the Company's 49% equity investment
in Dudley. Net borrowings increased $62.6 million during the nine months ended
January 24, 1998, primarily to fund the purchase prices of acquisitions, to
repay higher-cost debt assumed in acquisitions and to fund the remaining equity
investment in Dudley. Discontinued operations used $3.8 million of cash during
the nine months ended January 24, 1998.
During the nine months ended January 25, 1997, net cash used in operating
activities was $9.2 million which resulted primarily from a decrease in accounts
payable due to the Company's aggressive policy of taking negotiated cash
discounts. Net cash used in investing activities was $390.5 million, including
$323.8 million used for acquisitions, $15.9 million used for additions to
property and equipment and $41.3 million paid to Dudley as the initial payment
related to the Company 49% equity investment in Dudley. Net borrowings increased
$244.7 million during the nine months ended January 25, 1997, primarily to fund
the purchase prices of acquisitions, to repay higher-cost debt assumed in
acquisitions and to fund the initial equity investment in Dudley. The Company
also received $41.9 million in cash as a result of the sale of common stock
during the period. Discontinued operations used $3.2 million of cash during the
nine months ended January 25, 1997.
F-13
<PAGE>
During fiscal 1997, net cash provided by operating activities was $15.8
million. Net cash provided by operating activities was impacted by the Company's
aggressive cash payment policies related to bringing current the accounts
payable balances at all acquired companies and earning all available cash
discounts offered by vendors for paying balances on reduced payment terms. Net
cash used in investing activities was $424.0 million, including $345.3 million
for acquisitions, $34.0 million for additions to property and equipment and
$41.3 million to make an equity investment in Dudley. Net cash provided by
financing activities was $277.4 million. The Company received net proceeds from
the sale of shares of its common stock of $318.9 million and approximately
$225.4 million from the issuance of the Notes. These net proceeds were used
primarily to fund acquisitions and repay higher interest rate debt assumed in
acquisitions. Net cash used in discontinued operations was $8.2 million.
During fiscal 1996, net cash provided by operating activities was $19.2
million. Net cash used in investing activities was $120.1 million, including
$89.2 million used for acquisitions and $17.9 million used for additions to
property and equipment. Net cash provided by financing activities was $257.8
million. The Company received net proceeds from the sale of shares of its common
stock of $180.2 million and net proceeds from the issuance of the Notes of
approximately $139.0 million. These net proceeds were used primarily to fund
acquisitions, including the repayment of higher interest rate debt assumed in
business combinations. Net cash provided by discontinud operations was $1.7
million.
During fiscal 1995, net cash provided by operating activities was $7.7
million. Net cash used in investing activities was $26.2 million, including
$16.0 million used for acquisitions and $11.0 million used for additions to
property and equipment. Net cash provided by financing activities was $22.3
million, representing net proceeds from the initial public offering, partially
offset by the payment of $11.3 million to the stockholders of four of the
companies acquired simultaneously with the completion of the Company's initial
public offering and the payment of dividends to certain of the companies
acquired in business combinations accounted for under the pooling-of-interests
method of $7.7 million. Net cash provided by discontinued operations was $3.5
million.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
seasonality of the core office products business, however, is expected to be
impacted by the seasonality of the Company's other operations, which have
expanded through acquisitions. For example, the revenues and profitability of
the Company's operations in New Zealand and Australia have generally been higher
in the Company's third quarter. As the Company's mix of businesses evolves
through future acquisitions, these seasonal fluctuations may continue to change.
Therefore, results for any quarter are not necessarily indicative of the results
that the Company may achieve for any subsequent fiscal quarter or for a full
fiscal year.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold, general economic conditions and the retroactive restatement in
accordance with generally accepted accounting principles of the Company's
consolidated financial statements for acquisitions accounted for under the
pooling-of-interests method. Moreover, the operating margins of companies
acquired by the Company may differ substantially from those of the Company,
which could contribute to the further fluctuation in its quarterly operating
results. Therefore, results for any quarter are not necessarily indicative of
the results that the Company may achieve for any subsequent fiscal quarter or
for a full fiscal year.
The following tables set forth certain unaudited consolidated quarterly
financial data for the fiscal years ended April 30, 1996 and April 26, 1997 and
the fiscal year ending April 25, 1998 (in thousands,
F-14
<PAGE>
except for per share amounts). 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 1996 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit....................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................... 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items.............................. 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations......... 3,387 5,550 7,727 (886) 15,778
Net income......................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.24
Net income..................................... 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.23
Net income..................................... 0.08 0.15 0.20 0.07 0.50
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
Gross profit....................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................... 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items.............................. 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations................ 9,475 8,933 2,003 6,389 26,800
Net income......................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.31
Net income..................................... 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.29
Net income..................................... 0.20 0.20 0.12 0.12 0.62
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 614,814 $ 649,340 $ 665,959 $ 1,930,113
Gross profit....................................... 170,782 179,256 189,220 539,258
Operating income................................... 23,802 28,300 37,289 89,391
Income from continuing operations before
extraordinary items.............................. 9,035 12,770 15,431 37,236
Income from discontinued operations................ 10,951 11,428 3,085 25,464
Net income......................................... 19,986 24,198 18,516 62,700
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.09 0.12 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.03 0.23
Net income..................................... 0.19 0.22 0.15 0.55
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.02 0.22
Net income..................................... 0.18 0.21 0.14 0.54
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1995, 1996 or 1997 or during the nine months
ended January 24, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. SFAS No. 128 requires restatement of all prior
period EPS data presented. The Company has adopted SFAS No. 128 during the nine
months ended January 24, 1998 and has restated all prior period EPS data.
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company intends to adopt SFAS
No. 130 in the fiscal year ending April 24, 1999.
FACTORS AFFECTING THE COMPANY'S BUSINESS
A number of factors, including those discussed below, may affect the
Company's future operating results. Where indicated, the following discussion
addresses factors that management believes will be applicable to the Company's
business upon completion of the Strategic Restructuring Plan.
U.S. Office Products' aggressive acquisition program has produced a
significant increase in sales, employees, facilities and distribution systems.
While the Company's decentralized management strategy,
F-16
<PAGE>
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. 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.
U.S. Office Products has historically depended upon both acquisitions and
organic growth to increase its earnings. Management expects that in the future,
the Company will continue to pursue an aggressive acquisition program, although
it is expected that future growth will be driven more significantly by expansion
and improvement of existing operations. See "--Introduction." There can be no
assurance that U.S. Office Products will be successful in completing future
acquisitions or in implementing its internal growth strategies. In addition,
acquired companies may not achieve future sales and profitability levels that
justify the prices that the Company paid to acquire them. Acquisitions also may
involve a number of special risks that could have a material adverse effect on
future operations and financial performance, including diversion of management's
attention; unanticipated declines in revenues or profitability following
acquisition; 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.
As a result of the Tender Offer and the Distributions, U.S. Office Products
will be precluded from completing business combinations under the
pooling-of-interests accounting method for a period up to 6-9 months. Any
business combinations that U.S. Office Products completes during this period
will have to be accounted for under the purchase method. Under the purchase
method of accounting, U.S. Office Products will have to record goodwill for each
such acquisition, in an amount equal to any excess of the purchase price paid
for the acquired company over the fair market value of the acquired company's
net assets. Under the pooling-of-interests method, no goodwill is recorded in
connection with the acquisition of a pooled company, and there is no
corresponding expense associated with the amortization of such goodwill.
Approximately $917.0 million, or 45.4% of the Company's pro forma total
assets as of January 24, 1998, represents intangible assets, the substantial
majority of which is goodwill. This amount will increase to the extent that U.S.
Office Products acquires additional companies under the purchase method of
accounting. The Company amortizes goodwill on a straight-line method over a
period of up to 40 years. The amount amortized in a particular fiscal period is
a non-cash expense that reduces the Company's net income. As a result of the
accounting for the acquisition of Mail Boxes Etc. ("MBE") under the purchase
method (rather than the pooling-of-interests method that had been intended at
the time of the acquisition), the Company's amortization charge will increase by
approximately $6.5 million annually. The substantial majority of goodwill also
is not a deductible expense for U.S. federal income tax purposes. The Company
expects that its effective tax rate will be higher than the federal statutory
rate, because its net earnings will be reduced by a significant amount of
non-deductible goodwill charges.
The Company is currently reviewing the year 2000 compliance of software that
it uses in its business. The Company's Trinity system, which it is currently
installing throughout its North American Office Products Group operations as the
core operations system, is year 2000 compliant. However, the Company's operating
subsidiaries are, in some cases, using billing or other software that is not
year 2000 compliant. Based upon information that the Company has collected from
its operating subsidiaries, it expects to be able to achieve year 2000
compliance in 1999 and does not expect that the cost of making necessary
adaptations will be material to the Company. If the Company cannot make the
necessary adaptations on a timely basis, or if the costs are greater than
expected, the Company's business could be adversely affected.
F-17
<PAGE>
Management intends to continue to focus significant attention and resources
on international operations and expects foreign revenues to continue to
represent a significant portion of the Company's total revenues. The factors
described in this section that apply to U.S. Office Products' domestic
operations also may affect the Company's foreign operations. In addition, the
Company's foreign operations are subject to a number of other risks, including
currency exchange rates, new and different legal, regulatory and competitive
requirements, difficulties in staffing and managing foreign operations, and
risks specific to different business lines that the Company may enter.
U.S. Office Products expects to incur substantial additional borrowings in
connection with the Tender Offer. See Note 1 of the Company's Notes to
Consolidated Financial Statement and "--Liquidity and Capital Resources." This
substantial increase in U.S. Office Products' leverage could have material
consequences to U.S. Office Products and the holders of common stock, including,
but not limited to, the following: (i) U.S. Office Products' ability to obtain
additional financing in the future for acquisitions, working capital, capital
expenditures, and general corporate or other purposes may be impaired, (ii) a
substantial portion of U.S. Office Products' cash flow will be required for debt
service and, as a result, will not be available for other purposes; and (iii)
U.S. Office Products' level of indebtedness could make it more vulnerable to
economic downturns, limit its ability to withstand competitive pressures and
reduce its flexibility in responding to changing business and economic
conditions. In addition, it is expected that the Company's financing agreements
will contain covenants that may restrict its ability to take certain actions
(such as buying or selling assets, paying dividends, making capital
expenditures, or engaging in other transactions). If U.S. Office Products is
unable to service its indebtedness, it will be forced to pursue one or more
alternative strategies, such as selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. The Company's management
does not have experience operating a business with a substantial amount of
leverage.
U.S. Office Products operates in a highly competitive environment. It
generally competes with a large number of smaller, independent companies, many
of which are well-established in their markets. In addition, in North America,
the North American Office Products Group competes with five large office
products companies, each of which has significant financial resources. No
assurances can be give that competition will not have an adverse effect on the
Company's business.
U.S. Office Products acquired MBE in November 1997. Various factors may
affect MBE's business, including recent changes in MBE's senior management, the
reliance of MBE franchisees on United Parcel Service for ground shipping
services, the limited control that MBE has over its franchisees, the impact of
government regulation of MBE as a franchisor, the historically litigious nature
of franchise relationships and the growing competition from the United States
Postal Service.
As part of the Strategic Restructuring Plan, it is expected that Investor
will acquire shares of U.S. Office Products common stock representing 24.9% of
the outstanding shares of the Company's common stock after giving effect to the
issuance of such shares. Investor also will purchase various warrants that give
it the right to acquire additional shares of common stock in the future. Under
the Investment Agreement that Investor and the Company signed on January 12,
1998 (the "Investment Agreement"), Investor will have, among other things, the
right (subject to certain conditions) to nominate three of the nine members of
the U.S. Office Products Board of Directors, including the Chairman of the
Board, and certain Board decisions will be subject to super-majority voting
provisions that, in certain circumstances, may require the concurrence of at
least one director nominated by Investor. Matters subject to super-majority
Board approval include (i) the issuance of new shares in excess of certain
amounts specified in the Investment Agreement, (ii) certain business
combinations, (iii) a disposition by the Company of all or substantially all of
its assets, (iv) a major recapitalization, dissolution, or liquidation of the
Company, or (v) an amendment of the Company's Charter or By-Laws that is
inconsistent with the terms of the Investment Agreement. Investor's significant
ownership of U.S. Office Products common stock may permit Investor to influence
significantly matters requiring the approval of the Company's stockholders. The
super-majority Board voting requirements may give Investor the ability to block
the approval of certain actions requiring
F-18
<PAGE>
the super-majority vote of the Board. Together, this ownership position and the
Board voting requirements may have the effect of discouraging (or possibly
preventing) a future change in control of U.S. Office Products. In addition, the
super-majority Board voting requirement may have the effect of limiting the
Company's future use of equity to acquire businesses, raise capital, or provide
employees with long-term incentives.
The Distributions involve complex tax considerations. The Company will
receive an opinion from its counsel that for U.S. federal income tax purposes,
the Distributions should qualify as tax-free spin-offs under Section 355 of the
Code and should not be taxable under Section 355(e) of the Code. If the
Distributions qualify as tax-free spin-offs under Section 355, and are not
taxable under Section 355(e), no gain or loss for U.S. federal income tax
purposes will be attributed to the Company or those persons who hold U.S. Office
Products common stock on the record date of the Distributions (except with
respect to cash received in lieu of fractional shares) because of the
Distributions. The opinion of counsel will be based on certain assumptions and
the accuracy of factual representations made by the Company and the Spin-Off
Companies. Neither the Company nor the Spin-Off Companies are aware of any
present facts or circumstances that would cause the such representations and
assumptions to be untrue. However, the opinion of counsel is not binding on
either the Internal Revenue Service (the "IRS") or the courts. The Company will
not seek a ruling from the IRS with respect to the U.S. federal income tax
consequences of the Distributions. The IRS could take the position that some or
all of the Distributions do not qualify as tax-free spin-offs or that some or
all of the Distributions are taxable under Section 355(e). If any of the
Distributions fail to qualify under Section 355 of the Code as tax-free
spin-offs, both the Company and those persons who hold U.S. Office Products
common stock on the record date of the Distributions will be subject to U.S.
federal income tax liabilities as a result of those Distributions. If any of the
Distributions are taxable under Section 355(e) of the Code, the Company (but not
those persons who hold U.S. Office Products common stock) will be subject to
U.S. federal income tax liabilities as a result of those Distributions.
In connection with the Distributions, the Company will enter into an
agreement with the Spin-Off Companies to allocate responsibility for the tax
liabilities to U.S. Office Products if the Distributions fail to qualify as
tax-free spin-offs. This agreement is expected to provide that if any Spin-Off
Company does (or fails to do) something that materially contributes to any of
the Distributions being deemed taxable, the Spin-Off Companies will jointly and
severally indemnify U.S. Office Products for losses resulting from the
additional tax liabilities. If any of the Distributions are found to be taxable,
but if neither the actions nor the inactions of the Company and the Spin-Off
Companies has caused such a result, the Company and the Spin-Off Companies will
share the resulting tax liabilities on a pro rata basis, based on the value of
each company's common stock after the Distributions. There can be no assurance
that the Company, if it needs to seek indemnification from the Spin-Off
Companies, will be successful in recovering the full amount of the losses caused
by the Distributions being deemed to be taxable transactions.
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, which includes the Distributions, pursuant to which
one or more people acquire capital stock of the Company that represents 50% or
more of the voting power or 50% or more of the value of the Company's capital
stock. These limitations may restrict the Company's ability to undertake
transactions involving issuances of capital stock of the Company that management
otherwise believes would be beneficial.
F-19
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to (i) the Tender
Offer, (ii) the Distributions, and (iii) the Equity Investment contemplated by
the Strategic Restructuring Plan, and (iv) to all acquisitions completed through
March 9, 1998. The unaudited pro forma combined financial statements do not give
effect to the allocation of corporate overhead to the Spin-Off Companies.
The pro forma combined balance sheet gives effect to the Tender Offer, the
Distributions, the Equity Investment and the businesses acquired by the Company
after January 24, 1998 in business combinations accounted for under the purchase
method (the "Post January 24, 1998 Purchase Acquisitions"), as if all such
transactions had occurred as of the Company's most recent balance sheet date,
January 24, 1998.
The pro forma combined statement of income for the fiscal year ended April
26, 1997 gives effect to (i) the Tender Offer; (ii) the Distributions, (iii) the
Equity Investment; (iv) the business combinations accounted for under the
purchase method during fiscal 1997 (the "Fiscal 1997 Purchase Acquisition"); (v)
the business combinations accounted for under the purchase method during fiscal
1998 (the "Fiscal 1998 Purchase Acquisitions"); and (vi) the sales by the
Company of 5.5% Convertible Subordinated Notes due 2003 in May and June 1996 in
the principal amount of $230.0 million (the "2003 Notes"), as if all such
transactions had occurred on May 1, 1996. The pro forma combined statement of
income for the year ended April 26, 1997 is comprised of (i) the audited
financial information of the Company for the fiscal year ended April 26, 1997;
(ii) the unaudited financial information of the Fiscal 1997 Purchase
Acquisitions for the period from May 1, 1996 through their respective dates of
acquisition and (iii) the unaudited financial information of the Fiscal 1998
Purchase Acquisitions for the period from May 1, 1996 through April 26, 1997.
The pro forma combined statement of income for the nine months ended January
24, 1998 gives effect to (i) the Tender Offer; (ii) the Distributions; (iii) the
Equity Investment; and (iv) the Fiscal 1998 Purchase Acquisitions, as if all
such transactions had occurred on April 27, 1997. The pro forma combined
statement of income for the nine months ended January 24, 1998 is comprised of
(i) the unaudited financial information of the Company for the nine months ended
January 24, 1998; and (ii) the unaudited financial information of the Fiscal
1998 Purchase Acquisitions for the period from April 27, 1997 through their
respective acquisition dates, except for the financial information of the Post
January 24, 1998 Purchase Acquisitions which is included through January 24,
1998.
The pro forma combined statement of income for the nine months ended January
25, 1997 gives effect to (i) the Tender Offer, (ii) the Distributions; (iii) the
Equity Investment; (iv) the Fiscal 1997 Purchase Acquisitions; (v) the Fiscal
1998 Purchase Acquisitions; and (vi) the sales by the Company of the 2003 Notes,
as if all such transactions had occurred on May 1, 1996. The pro forma combined
statement of income for the nine months ended January 25, 1997 is comprised of
(i) the unaudited financial information of the Company for the nine months ended
January 25, 1997; (ii) the unaudited financial information of the Fiscal 1997
Purchase Acquisitions for the period from May 1, 1996 through the earlier of
January 25, 1997 or their respective dates of acquisitions; and (iii) the
unaudited financial information of the Fiscal 1998 Purchase Acquisitions for the
period from May 1, 1996 through January 25, 1997.
The historical financial statements of the Company give retroactive effect
to the results of the 25 companies (related to continuing operations) acquired
by the Company during the fiscal year ended April 26, 1997 which were acquired
in business combinations accounted for under the pooling-of-interests method of
accounting. The results of the companies included in the Spin-Off Companies have
been reflected as discontinued operations in the Company's historical statement
of income.
F-20
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or the future results of the Company. The pro
forma combined financial statements should be read in conjunction with the
Company's audited consolidated financial statements.
F-21
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST
JANUARY 24, PRO FORMA ADJUSTMENTS
U.S. OFFICE 1998 -------------------------------------------------
PRODUCTS PURCHASE PURCHASE TENDER EQUITY PRO FORMA
COMPANY ACQUISITIONS ACCOUNTING OFFER SPIN-OFFS INVESTMENT COMBINED
----------- --------------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 45,258 $ 108 $ (22,754)(a) $ 977,388(b) $ $ 270,000(e) $
(1,000,000 (b) (270,000)(e)
Accounts receivable,
net................... 324,976 5,077 330,053
Inventory, net.......... 239,043 2,035 241,078
Short-term receivable
from discountinued
operations............ 26,918 (26,918)(c)
Prepaid and other
current assets........ 103,624 94 103,718
----------- --------------- ----------- ---------- ----------- ----------- -----------
Total current
assets............ 739,819 7,314 (22,754) (22,612) (26,918) 674,849
Property and equipment,
net..................... 217,228 6,144 223,372
Intangible assets, net.... 903,722 13,255(a) 916,977
Other assets.............. 174,549 317 30,000(f) 204,866
Long-term receivable from
discontinued
operations.............. 88,041 (88,041)(c)
Net assets of discontinued
operations.............. 346,083 (80,932)(c)
(265,151)(d)
----------- --------------- ----------- ---------- ----------- ----------- -----------
Total assets........ $2,469,442 $ 13,775 $ (9,499) $ (22,612) $(461,042) $ 30,000 $2,020,064
----------- --------------- ----------- ---------- ----------- ----------- -----------
----------- --------------- ----------- ---------- ----------- ----------- -----------
LIABILITES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt......... $ 332,636 $ 640 $ (640)(a) $ $ $ $ 332,636
Accounts payable........ 164,229 2,438 166,667
Accrued compensation.... 41,262 41,262
Other accrued
liabilities........... 67,654 1,742 69,396
----------- --------------- ----------- ---------- ----------- ----------- -----------
Total current
liabilities....... 605,781 4,820 (640) 609,961
Long-term debt............ 381,844 3,817 (3,817)(a) 977,388(b) (114,959)(c) (270,000)(e) 1,049,273
75,000(f)
Deferred income taxes..... 2,845 2,845
Other long-term
liabilities and minority
interests............... 6,050 96 6,146
----------- --------------- ----------- ---------- ----------- ----------- -----------
Total liabilities... 996,520 8,733 (4,457) 977,388 (114,959) (195,000) 1,668,225
Stockholders' equity:
Common stock............ 133 133
Paid-in capital......... 1,405,883 (999,963 (b) (80,932)(c) 269,968(e) 329,805
(265,151)(d)
Cumulative translation
adjustment............ (113,022) (113,022)
Retained earnings....... 179,928 (45,000)(f) 134,928
Treasury stock.......... (37 (b) 32(e) (5)
Equity of purchased
companies............. 5,042 (5,042) (a)
----------- --------------- ----------- ---------- ----------- ----------- -----------
Total stockholders'
equity............ 1,472,922 5,042 (5,042) (1,000,000) (346,083) 225,000 351,839
----------- --------------- ----------- ---------- ----------- ----------- -----------
Total liabilities
and stockholders'
equity............ $2,469,442 $ 13,775 $ (9,499) $ (22,612) $(461,042) $ 30,000 $2,020,064
----------- --------------- ----------- ---------- ----------- ----------- -----------
----------- --------------- ----------- ---------- ----------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-22
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1998
PRODUCTS PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS COMBINED
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 1,930,113 $ 140,542 $ $ 2,070,655
Cost of revenues.................................. 1,390,855 90,566 1,481,421
------------ ----------- ------------- ------------
Gross profit.................................... 539,258 49,976 589,234
Selling, general and administrative expenses...... 436,037 33,676 (2,357 (g) 467,356
Amortization expense.............................. 13,830 4,603(h) 18,433
------------ ----------- ------------- ------------
Operating income................................ 89,391 16,300 (2,246) 103,445
Other (income) expense:
Interest expense................................ 27,534 506 48,846(j) 76,886
Interest income................................. (1,545) (169) 1,714(j)
Other........................................... (6,369) (342) (6,711)
------------ ----------- ------------- ------------
Income from continuing operations before provision
for income taxes................................ 69,771 16,305 (52,806) 33,270
Provision for income taxes........................ 32,535 2,161 (13,070 (k) 21,626
------------ ----------- ------------- ------------
Income from continuing operations................. $ 37,236 $ 14,144 $ (39,736) $ 11,644
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Weighted average shares outstanding:
Basic........................................... 114,758 127,822(l)
Diluted......................................... 117,185 130,248(l)
Income per share from continuing operations:
Basic........................................... $ 0.32 $ 0.09
Diluted......................................... $ 0.32 $ 0.09
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-23
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 1,498,320 $ 363,229 $ 226,312 $ $ 2,087,861
Cost of revenues....................... 1,077,408 259,958 150,345 1,487,711
------------ ----------- ----------- ----------- ------------
Gross profit....................... 420,912 103,271 75,967 600,150
Selling, general and administrative
expenses............................. 344,474 93,201 53,931 (7,698)(g) 483,908
Amortization expense................... 8,072 10,343(h) 18,415
Non-recurring acquisition costs........ 7,316 (7,316)(i)
------------ ----------- ----------- ----------- ------------
Operating income................... 61,050 10,070 22,036 4,671 97,827
Other (income) expense:
Interest expense..................... 27,540 3,109 1,855 44,382(j) 76,886
Interest income...................... (6,048) (186) (1,017) 7,251(j)
Other................................ (4,073) (2,156) (501) (6,730)
------------ ----------- ----------- ----------- ------------
Income from continuing operations
before provision for income taxes and
extraordinary items.................. 43,631 9,303 21,699 (46,962) 27,671
Provision for income taxes............. 18,238 3,007 7,341 (10,600)(k) 17,986
------------ ----------- ----------- ----------- ------------
Income from continuing operations
before extraordinary items........... $ 25,393 $ 6,296 $ 14,358 $ (36,362) $ 9,685
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
Weighted average shares outstanding:
Basic................................ 85,978 127,822(l)
Diluted.............................. 87,824 129,668(l)
Income per share from continuing
operations before extraordinary
items:
Basic................................ $ 0.30 $ 0.08
Diluted.............................. $ 0.29 $ 0.07
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-24
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 2,115,954 $ 374,886 $ 303,169 $ $ 2,794,009
Cost of revenues........................... 1,518,287 268,618 201,410 1,988,315
------------ ------------ ------------ ------------ ------------
Gross profit........................... 597,667 106,268 101,759 805,694
Selling, general and administrative
expenses................................. 488,215 95,913 70,996 (8,257)(g) 646,867
Amortization expense....................... 12,416 12,722(h) 25,138
Non-recurring acquisition costs............ 8,001 (8,001)(i)
Restructuring costs........................ 4,201 4,201
------------ ------------ ------------ ------------ ------------
Operating income....................... 84,834 10,355 30,763 3,536 129,488
Other (income) expense:
Interest expense......................... 36,047 3,170 2,552 60,746(j) 102,515
Interest income.......................... (6,857) (212) (1,448) 8,517(j)
Other.................................... (4,233) (2,164) (753) (7,150)
------------ ------------ ------------ ------------ ------------
Income from continuing operations before
provision for income taxes and
extraordinary items...................... 59,877 9,561 30,412 (65,727) 34,123
Provision for income taxes................. 27,939 3,056 9,933 (18,748)(k) 22,180
------------ ------------ ------------ ------------ ------------
Income from continuing operations before
extraordinary items...................... $ 31,938 $ 6,505 $ 20,479 $ (46,979) $ 11,943
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
------------
Weighted average shares outstanding:
Basic.................................... 90,026 127,822(l)
Diluted.................................. 91,761 129,557(l)
Income per share from continuing operations
before extraordinary items:
Basic.................................... $ 0.35 $ 0.09
Diluted.................................. $ 0.35 $ 0.09
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-25
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments and repayment of
certain short-term and long-term debt associated with the Post January
24, 1998 Purchase Acquisitions. The portion of the consideration assigned
to goodwill ($13,255) in transactions accounted for under the purchase
method represents the excess of the cost over the fair market value of
the net assets acquired. The Company amortizes goodwill over a period of
40 years. The recoverability of the unamortized goodwill will be assessed
on an ongoing basis by comparing anticipated undiscounted future cash
flows from operations to net book value.
(b) Adjustment to reflect the Tender Offer, including an increase in
borrowings of $977,388 to finance the Tender Offer and the repurchase of
37,037 shares of common stock by the Company for $1,000,000.
(c) Adjustment to reflect the repayment of $114,959 and the forgiveness of
the remaining $80,932 of debt payable to U.S. Office Products by the
companies included in the Spin-Off Companies, as U.S. Office Products
agreed to allocate a total of $130,000 of debt to the companies included
in the Spin-Off Companies at the date of the Distributions.
(d) Adjustment to remove the remaining net assets of the companies included
in the Spin-Off Companies.
(e) Adjustment to reflect the Equity Investment of $270,000.
(f) Adjustment to reflect the estimated transaction fees and expenses
(including financing costs) associated with the Tender Offer, the
Distributions and the Equity Investment of $75,000. These fees and
expenses have not been reflected in the unaudited pro forma combined
statements of income because they are either capitalizable or are of a
non-recurring nature and are directly related to the restructuring
transactions.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(g) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations
of executive compensation agreements resulting from certain acquisitions.
(h) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1997
Purchase Acquisitions and the Fiscal 1998 Purchase Acquisitions for the
periods prior to the respective dates of acquisition. The Company has
recorded goodwill amortization in the historical financial statements
from the respective dates of acquisition forward. The goodwill is being
amortized over an estimated life of 40 years.
(i) Adjustment to reflect the reduction in non-recurring acquisition costs
related to pooling-of-interests business combinations of $8,001 and
$7,316 for the fiscal year ended April 26, 1997 and the nine months ended
January 25, 1997, respectively.
(j) Adjustment to reflect the increase in interest expense resulting from
the increase in debt as a result of the Tender Offer, partially offset by
the proceeds from the Equity Investment. In
F-26
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
addition, the adjustment reflects additional interest expense resulting
from the 2003 Notes being outstanding for the entire period presented.
(k) Adjustment to calculate the provision for income taxes on the combined
pro forma results at effective income tax rates of approximately 65%. The
difference between the effective tax rate of 65% and the statutory tax
rate of 35% relates primarily to state income taxes and non-deductible
goodwill amortization expense.
(l) Basic pro forma earnings per share is calculated based upon 127,822
weighted average shares of common stock outstanding for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997. The amounts are comprised of 133,042 shares outstanding for each of
the periods, 37,037 shares repurchased as a result of the Tender Offer
and 31,817 shares issued as a result of the Equity Investment. The
weighted average shares outstanding used to calculate diluted pro forma
earnings per share is based upon the basic weighted average shares
outstanding plus 1,735, 2,426 and 1,846 common stock equivalents
considered to be outstanding related to stock options for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997, respectively.
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
U.S. Office Products Company
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the consolidated statements of
income, of stockholders' equity and of cash flows financial statments 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 26, 1997
and April 30, 1996, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended April 26, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of certain wholly-owned subsidiaries, which statements
reflect net income of $7.4 million and $10.4 million included in the Company's
income from discontinued operations, net of income taxes, for fiscal years ended
April 30, 1996 and 1995, respectively. Those statements were audited by other
auditors whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for those
wholly-owned subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for the
opinion expressed above.
As described in Note 4, as a result of the Strategic Restructuring Plan, the
Company has restated its financial statements to account for certain business
combinations as purchase transactions.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
June 6, 1997, except as to the second paragraph
of the Common Stock section of Note 15, which
is as of November 6, 1997 and Note 4, which is
as of January 13, 1998
F-28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the balance sheets of School Specialty, Inc. (formerly known
as EDA Corporation) (the Company) as of December 31, 1995 and 1994, and the
related statements of operations, changes in shareholders' deficit and cash
flows for the years then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
F-29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheets of the Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for three years ended December 31, 1995,
1994, and 1993 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for three years ended December 31, 1995, 1994, and 1993 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 8, 1996
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hano Document Printers, Inc.:
We have audited the balance sheet of Hano Document Printers, Inc. as of
December 31, 1995 and the related statements of income, stockholders' equity,
and cash flows for the year then ended, which are not included herein. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SFI Corp. and Hano Document Printers, Inc.:
We have audited the combined balance sheet of SFI Corp. and Hano Document
Printers, Inc. (collectively referred to as the "Companies") as of December 31,
1994, and the related statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1994, which are
not included herein. These combined financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of SFI Corp. and Hano
Document Printers, Inc. as of December 31, 1994 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Fortran Corp.
Newington, Virginia
We have audited the accompanying balance sheet of Fortran Corp. as of March
31, 1996, and 1995 and the related statements of earnings, changes in
stockholders' equity, and cash flows for the years ended March 31, 1996, 1995,
and 1994 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to and above present
fairly, in all material respects, the financial position of Fortran Corp. as of
March 31, 1996, and 1995 and the results of its operations and its cash flows
for three years ended March 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
RUBIN, KOEHMSTEDT AND NADLER
Springfield, Virginia
June 7, 1996, except for Note 9,
as to which the date is
October 24, 1996
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MTA, Inc.
Seattle, Washington
We have audited the consolidated balance sheet of MTA, Inc. (the Company) as
of December 31, 1995 and the related statements of income and retained earnings
and of cash flows for the period from January 25, 1995 (date of incorporation)
to December 31, 1995 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTA, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the period from January 25, 1995 (date of incorporation) to December 31, 1995,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
September 23, 1996
F-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheets of United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc., as at December 31, 1995 and 1994, and the
related combined statements of income and retained earnings and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As referred to in Note A on "Principles of Combination," the companies,
whose financial statements are combined, are related through common ownership
and control. In addition, each has pledged certain assets and guaranteed
long-term indebtedness of the other as described in the notes to financial
statements. In view of their close operating and financial relationship, the
preparation of combined financial statements was considered appropriate. The
combined statements, however, do not refer to a legal entity and neither of the
companies guarantees trade obligations of the other.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of United
Envelope Co., Inc. and its affiliate as at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
F-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Huxley Envelope Corporation
We have audited the balance sheets of Huxley Envelope Corporation as of
December 31, 1995 and 1994, and the related statements of income and retained
earnings (accumulated deficit) and cash flows for the years then ended (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Huxley Envelope Corporation
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 4, 1996
F-36
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 183,483 $ 44,026 $ 45,258
Accounts receivable, less allowance for doubtful accounts of $3,586,
$7,337 and $9,110, respectively....................................... 159,448 283,751 324,976
Inventory............................................................... 103,768 225,998 239,043
Short-term receivable from discontinued operations...................... 51,977 26,918
Prepaid expenses and other current assets............................... 47,994 74,580 103,624
---------- ------------ ------------
Total current assets................................................ 494,693 680,332 739,819
Property and equipment, net............................................... 77,529 182,633 217,228
Intangible assets, net.................................................... 135,140 611,474 903,722
Other assets.............................................................. 64,942 113,407 174,549
Long-term receivable from discontinued operations......................... 59,914 88,041
Net assets of discontinued operations..................................... 33,674 59,231 346,083
---------- ------------ ------------
Total assets........................................................ $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt......................................................... $ 94,174 $ 144,125 $ 332,636
Accounts payable........................................................ 87,546 153,915 164,229
Accrued compensation.................................................... 16,775 32,515 41,262
Other accrued liabilities............................................... 22,074 63,814 67,654
---------- ------------ ------------
Total current liabilities........................................... 220,569 394,369 605,781
Long-term debt............................................................ 176,230 380,209 381,844
Deferred income taxes..................................................... 6,186 2,458 2,845
Other long-term liabilities and minority interests........................ 8,247 8,807 6,050
---------- ------------ ------------
Total liabilities................................................... 411,232 785,843 996,520
---------- ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, none
outstanding
Common stock, $.001 par value, 500,000,000 shares authorized,
79,464,423, 104,479,004 and 133,041,979 shares issued and outstanding,
respectively.......................................................... 79 104 133
Additional paid-in capital.............................................. 313,278 809,399 1,405,883
Cumulative translation adjustment....................................... 770 (5,583) (113,022)
Retained earnings....................................................... 80,619 117,228 179,928
---------- ------------ ------------
Total stockholders' equity.......................................... 394,746 921,148 1,472,922
---------- ------------ ------------
Total liabilities and stockholders' equity.......................... $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ 658,494 $1,061,528 $2,115,954 $1,498,320 $1,930,113
Cost of revenues..................................... 485,955 789,436 1,518,287 1,077,408 1,390,855
----------- --------- --------- ----------- -----------
Gross profit..................................... 172,539 272,092 597,667 420,912 539,258
Selling, general and administrative expenses......... 152,176 231,569 488,215 344,474 436,037
Amortization expense................................. 801 2,711 12,416 8,072 13,830
Non-recurring acquisition costs...................... 8,057 8,001 7,316
Restructuring costs.................................. 682 4,201
----------- --------- --------- ----------- -----------
Operating income................................. 19,562 29,073 84,834 61,050 89,391
Interest expense..................................... 3,401 8,132 36,047 27,540 27,534
Interest income...................................... (675) (3,506) (6,857) (6,048) (1,545)
Other income......................................... (1,456) (684) (4,233) (4,073) (6,369)
----------- --------- --------- ----------- -----------
Income from continuing operations before provision
for income taxes and extraordinary items........... 18,292 25,131 59,877 43,631 69,771
Provision for income taxes........................... 2,800 6,032 27,939 18,238 32,535
----------- --------- --------- ----------- -----------
Income from continuing operations before
extraordinary items................................ 15,492 19,099 31,938 25,393 37,236
Income from discontinued operations, net of income
taxes.............................................. 15,675 15,778 26,800 20,411 25,464
----------- --------- --------- ----------- -----------
Income before extraordinary items.................... 31,167 34,877 58,738 45,804 62,700
Extraordinary items--losses on early terminations of
credit facilities, net of income taxes............. 701 1,450 612
----------- --------- --------- ----------- -----------
Net income........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.30 $ 0.32
Income from discontinued operations.............. 0.34 0.24 0.31 0.24 0.23
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net income....................................... $ 0.68 $ 0.51 $ 0.64 $ 0.53 $ 0.55
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Diluted:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.29 $ 0.32
Income from discontinued operations.............. 0.34 0.23 0.29 0.23 0.22
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net Income....................................... 0.68 $ 0.50 $ 0.62 $ 0.51 $ 0.54
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Unaudited pro forma income from continuing operations
before extraordinary items (see Note 11)........... $ 29,962
---------
---------
Unaudited pro forma basic income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
Unaudited pro forma diluted income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------ PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
---------- ------ ---------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994............... 38,443,262 $ 38 $26,483 $ (340) $ 58,733 $ (7,562) $77,352
Transactions of Combined Companies
upon formation of Company:
Issuance of common stock............ 5,817,000 6 (5) 1
Capital contribution................ 1,500 1,500
Distributions to stockholders....... (11,300) (11,300)
Adjustments to stockholders'
equity............................ (12,597) 5,035 7,562
Cash dividends...................... (222) (222)
Issuance of common stock, net of
associated expenses in conjunction
with:
Initial public offering............. 5,606,250 6 32,684 32,690
Acquisition......................... 1,312,500 1 8,749 8,750
Transactions of Pooled Companies:
Exercise of warrants and stock
options........................... 20,345 201 201
Cash dividends...................... (16,086) (16,086)
Adjustment to conform the year-ends of
Pooled Companies.................... 2,235 2,235
Cumulative translation adjustments.... 207 207
Net income............................ 31,167 31,167
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1995............... 51,199,357 51 57,015 (133) 69,562 126,495
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offerings.................... 14,352,068 14 174,723 174,737
Acquisitions........................ 11,120,163 11 68,607 68,618
Exercise of stock options, including
tax benefits...................... 95,025 1,023 1,023
Transactions of Pooled Companies:
Issuances of common stock for cash
and repayment of debt............. 872,249 1 8,297 8,298
Capital contributions............... 500 500
Exercise of warrants and stock
options........................... 978,923 1 1,752 1,753
Cash and stock dividends............ 846,638 1 1,361 (32,017) (30,655)
Adjustment to conform the year-ends of
Pooled Companies.................... 8,898 8,898
Cumulative translation adjustments.... 903 903
Net income............................ 34,176 34,176
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1996............... 79,464,423 79 313,278 770 80,619 394,746
</TABLE>
(Continued)
F-39
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
-------------------------- PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
------------- ----------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996.......... 79,464,423 $ 79 $ 313,278 $ 770 $ 80,619 $ 394,746
Issuances of common stock, net of
associated expenses in
conjunction with:
Public offering................ 13,023,497 13 275,699 275,712
Direct equity investment....... 1,875,000 2 38,111 38,113
Acquisitions................... 8,685,450 9 166,071 166,080
Exercise of stock options,
including tax benefits....... 197,742 2,843 2,843
Employee stock purchase plan... 229,998 3,145 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment
of acquisition expenses...... 409,631 6,859 6,859
Capital contributions.......... 12,342 1,857 1,857
Exercise of warrants and stock
options...................... 478,616 1 1,979 1,980
Retirement of common stock..... 102,305 (443) (34) (477)
Cash dividends paid and
declared..................... (20,931) (20,931)
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.......... 104,479,004 104 809,399 (5,583) 117,228 921,148
Unaudited data:
Issuance of common stock, net of
associated expenses in
conjunction with:
Acquisitions..................... 27,792,099 28 585,509 585,537
Repayment of debt................ 28,179 570 570
Exercise of stock options,
including tax benefits......... 609,494 1 7,600 7,601
Employee stock purchase plan..... 169,723 2,805 2,805
Share adjustments at Pooled
Companies........................ (36,520)
Cumulative translation
adjustments...................... (107,439) (107,439)
Net income......................... 62,700 62,700
------------- ----- ------------ ----------- ---------- ----------- ------------
Balance at January 24, 1998
(unaudited)...................... 133,041,979 $ 133 $ 1,405,883 $ (113,022) $ 179,928 $1,472,922
------------- ----- ------------ ----------- ---------- ----------- ------------
------------- ----- ------------ ----------- ---------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-40
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Income from discontinued operations....................... (15,675) (15,778) (26,800) (20,411) (25,464)
Depreciation and amortization............................. 6,521 10,999 36,102 23,233 41,787
Non-recurring acquisition costs........................... 8,057 8,001 7,316
Unrealized foreign currency gain.......................... (3,420) (3,420)
Deferred income taxes..................................... (367) (196) (1,035) 3,600 73
Extraordinary losses...................................... 701 1,450 612
Equity in net income of affiliate......................... (782) (265) (878)
Gain on sale of investment................................ (1,059)
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in business
combinations):
Accounts receivable..................................... (18,911) 969 (26,237) (32,154) (29,940)
Inventories............................................. (6,130) 1,861 (3,400) (6,718) (14,417)
Prepaid expenses and other current assets............... (1,417) (23,780) (6,059) (1,539) (3,909)
Accounts payable........................................ 7,349 2,802 (26,692) (22,922) 2,245
Accrued liabilities..................................... 5,204 (565) 7,396 (1,771) 5,699
----------- --------- --------- ----------- -----------
Net cash provided by (used in) operating activities... 7,741 19,246 15,812 (9,247) 36,837
----------- --------- --------- ----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received............. (15,993) (89,223) (345,319) (323,813) (33,642)
Payments of acquisition and restructuring costs............. (7,283) (5,343) (4,094) (5,771)
Additions to property and equipment, net of disposals....... (11,049) (17,868) (34,036) (15,891) (28,200)
Investment in affiliate..................................... (41,270) (41,270) (40,773)
Proceeds from sale of investment............................ 5,729
Other....................................................... 867 (5,687) 2,013 (5,476) 3,190
----------- --------- --------- ----------- -----------
Net cash used in investing activities................. (26,175) (120,061) (423,955) (390,544) (99,467)
----------- --------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock...................... 32,811 180,230 318,899 41,868 8,239
Proceeds from issuance of long-term debt.................... 6,553 139,040 225,387 224,080 457
Payments of long-term debt.................................. (3,643) (13,143) (174,788) (163,112) (10,647)
Net advances to discontinued operations..................... (111,891) (76,021) (99,213)
Proceeds from (payments of) short-term debt, net............ 3,433 (39,077) 24,132 259,705 172,000
Payments to terminate credit facility....................... (261) (261)
Payments of dividends at Pooled Companies................... (7,700) (8,287) (6,158) (6,122)
Capital contributed by stockholders of Pooled Companies..... 400 1,814 1,814
Adjustment to conform fiscal year-ends of certain Pooled
Companies................................................. 601 (1,397) 286 286
Capital contributed by Combined Company stockholder......... 1,500
Payments to stockholders of Combined Companies.............. (11,300)
----------- --------- --------- ----------- -----------
Net cash provided by financing activities............. 22,255 257,766 277,420 282,237 70,836
----------- --------- --------- ----------- -----------
Effect of exchange rates on cash and cash equivalents......... (180) (121) (511) (345) (3,159)
----------- --------- --------- ----------- -----------
Cash provided by (used in) discontinued operations............ 3,549 1,707 (8,223) (3,170) (3,815)
----------- --------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.......... 7,190 158,537 (139,457) (121,069) 1,232
Cash and cash equivalents at beginning of period.............. 17,756 24,946 183,483 183,483 44,026
----------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period.................... $ 24,946 $ 183,483 $ 44,026 $ 62,414 $ 45,258
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 7,731 $ 3,426 $ 36,536 $ 28,980 $ 26,962
Income taxes paid......................................... 7,044 7,814 22,734 18,852 24,017
</TABLE>
F-41
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company issued common stock, notes payable and cash in connection with
certain business combinations accounted for under the purchase method during
fiscal 1995, 1996 and 1997 and the nine months ended January 25, 1997 and
January 24, 1998. The fair values of the assets and liabilities of the acquired
companies at the dates of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable............................................. $ 15,350 $ 70,640 $ 99,747 $ 88,202 $ 27,284
Inventories..................................................... 10,331 49,602 115,995 119,584 18,970
Prepaid expenses and other current assets....................... 956 8,412 20,874 13,559 15,806
Property and equipment.......................................... 3,248 30,442 94,112 107,202 52,695
Intangible assets............................................... 21,079 119,493 490,011 432,219 371,606
Other assets.................................................... (1,149) 51,698 7,748 5,174 34,759
Short-term debt................................................. (8,253) (95,971) (20,612) (12,819) (8,755)
Accounts payable................................................ (9,180) (44,034) (99,753) (89,338) (20,058)
Accrued liabilities............................................. (3,297) (19,719) (52,464) (81,506) (13,870)
Long-term debt.................................................. (905) (11,635) (153,448) (115,017) (20,320)
Other long-term liabilities and minority interest............... (437) (7,751) (1,296) (8,262) (357)
----------- ----------- ----------- ----------- -----------
Net assets acquired..................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
The acquisitions were funded as follows:
Common stock.................................................... $ 8,750 $ 61,167 $ 155,595 $ 135,185 $ 424,118
Debt............................................................ 3,000 787
Cash............................................................ 15,993 89,223 345,319 323,813 33,642
----------- ----------- ----------- ----------- -----------
Total....................................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Noncash transactions:
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited) the Company issued 291,671, 384,630 and 28,179 shares of common
stock, respectively, to repay $2,470, $6,359 and $570 of indebtedness,
respectively.
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited), the Company recorded additional paid-in capital of
approximately $426, $1,250 and $2,168, respectively, related to the tax
benefit on stock options exercised.
- - During fiscal 1996, one Pooled Company converted $1,385 of debt to common
stock.
- - During fiscal 1996, one Pooled Company paid a dividend of $9,851 through the
issuance of 846,638 shares of common stock
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--BUSINESS ORGANIZATION
U.S. Office Products Company ("U.S. Office Products" and the "Company") was
founded in October 1994. The Company is a supplier of a broad range of office
and educational products and business services to corporate, commercial,
industrial and educational customers. The Company operates throughout the United
States, as well as in New Zealand, Australia and Canada and, through a 49% owned
affiliate, in the United Kingdom.
NOTE 2--FORMATION OF COMPANY
Concurrent with the closing of its initial public offering in February 1995,
the Company acquired four companies (the "Combined Companies") for a combination
of its common stock and cash and acquired two companies in business combinations
accounted for under the purchase method. Because of the substantial ongoing
interest of the stockholders of the Combined Companies in U.S. Office Products,
the assets and liabilities of the Combined Companies were combined on a
historical cost basis. The capital stock of the Combined Companies is included
in additional paid-in capital.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products,
the Combined Companies and the companies acquired in business combinations
accounted for under the purchase method (the "Purchased Companies") from their
respective acquisition dates and give retroactive effect to the results of the
companies acquired in business combinations accounted for under the
pooling-of-interests method (the "Pooled Companies") for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DEFINITION OF FISCAL YEAR
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1997," "fiscal 1996" and "fiscal
1995" refer to the Company's fiscal years ended April 26, 1997 and April 30,
1996 and 1995, respectively. On August 20, 1996, the Company's Board of
Directors approved a change in the Company's fiscal year-end, effective for the
1997 fiscal year, from April 30 to the last Saturday in April.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Investments in less than 50% owned entities
are accounted for under the equity method. All significant intercompany
transactions and accounts are eliminated in consolidation.
F-43
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Substantially all goodwill is amortized
on a straight line basis over estimated useful lives of 25 to 40 years.
Management periodically evaluates the recoverability of goodwill, which would be
adjusted for a permanent decline in value, if any, by comparing anticipated
undiscounted future cash flows from operations to net book value.
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's wholly-owned foreign subsidiary has entered into forward
foreign currency exchange contracts (the "Exchange Contracts") with
counterparties to hedge the exposure of foreign currency fluctuations to the
extent permissible by hedge accounting requirements. At April 26, 1997, the
Exchange Contracts, in the notional amount of $3,319, hedge certain foreign
currency denominated assets. The Exchange Contracts generally have maturity
dates of 60 days or less. Discounts or premiums on the Exchange Contracts are
amortized over the life of the contracts.
F-44
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's wholly-owned foreign subsidiary also entered into interest
rate swap agreements (the "Swap Agreements") with counterparties to convert the
interest rates associated with certain outstanding debt from variable rates to
fixed rates. The notional amount of the Swap Agreements was $43,000 at April 30,
1996. During fiscal 1997, the Swap Agreements were terminated resulting in a
loss of $117.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using the following methods and assumptions:
- - The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value;
- - The fair values of the 5 1/2% Convertible Subordinated Notes due 2001 and the
5 1/2% Convertible Subordinated Notes due 2003 are based on quoted market
prices;
- - The carrying amounts of the Company's debt, other than the 5 1/2% Convertible
Subordinated Notes due 2001 and the 5 1/2% Convertible Subordinated Notes
due 2003, approximate fair value, estimated by discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar types
of borrowing arrangements.
INCOME TAXES
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Certain
companies acquired in pooling-of-interests transactions elected to be taxed as
Subchapter S corporations, and accordingly, no federal income taxes were
recorded by those companies for periods prior to their acquisition by U.S.
Office Products.
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.
F-45
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, investment banking fees,
recognition of transaction related obligations and various other acquisition
related costs.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation 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."
NET INCOME PER SHARE
Net income per share is calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The adoption of SFAS 121 did not have a material effect on the Company's
consolidated operating results or financial position.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
during fiscal 1997. Under the provisions of SFAS 123, companies can elect to
account for stock-based compensation plans using a fair-value based method or
continue measuring compensation expense for those plans using the intrinsic
value method prescribed in APB Opinion No. 25. The Company has elected to
continue using the intrinsic value method to account for stock-based
compensation plans. Pro forma disclosures of net income and net income per
share, as if the fair value-based method of accounting defined in SFAS 123 has
been applied, are presented in Note 15.
F-46
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of January 24, 1998 and the results
of operations and of cash flows for the nine months ended January 25, 1997 and
January 24, 1998, as presented in the accompanying unaudited consolidated
financial data.
NOTE 4--STRATEGIC RESTRUCTURING PLAN
In January 1998, the Company's Board of Directors (the "Board") approved a
comprehensive restructuring plan (the "Strategic Restructuring Plan"). The
principal elements of the Strategic Restructuring Plan are (i) a self-tender
offer by the Company (the "Tender Offer") to purchase 37,037 shares of Company
common stock at $27.00 per share and the incurrence of significant additional
debt to pay a portion of the purchase price of the shares in the Tender Offer;
(ii) after acceptance of shares in the Tender Offer, the pro rata distribution
to U.S. Office Products stockholders of shares of four companies (the "Spin-Off
Companies") that will conduct the Company's current print management, corporate
travel services, educational supplies and technology solutions businesses (the
"Distributions"); and (iii) following acceptance of shares in the Tender Offer
and the record date for the Distributions, the sale to an affiliate of an
investment fund managed by Clayton, Dubilier & Rice, Inc. ("Investor") of equity
interests in U.S. Office Products. In these transactions, Investor will not
acquire any equity interest in the Spin-Off Companies. The Distributions are
expected to be tax-free to both the Company and its stockholders (except for any
cash in lieu of fractional shares received by stockholders). The Company expects
the Strategic Restructuring Plan to be completed in the second calendar quarter
of 1998. The transactions are subject to a number of conditions, including
financing, approval of the Company's stockholders and receipt of regulatory
approvals.
DISCONTINUED OPERATIONS
As a result of the Strategic Restructuring Plan, the Spin-Off Companies are
reflected as discontinued operations for all periods presented in the Company's
consolidated financial statements. The income from discontinued operations
included in the consolidated statement of income represents the sum of the
results of the Company's Print Management, Corporate Travel Services,
Educational Supplies and Technology Solutions divisions for the periods
presented and is summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FISCAL 1995:
Revenues..................................... $ 139,732 $ 34,569 $ 119,510 $ 88,999 $ 382,810
Operating income............................. 5,571 2,905 4,479 8,199 21,154
Income before provision for income taxes..... 3,982 2,992 1,558 8,097 16,629
Provision for income taxes................... 317 18 218 401 954
Income from discontinued operations,
net of income taxes........................ 3,665 2,974 1,340 7,696 15,675
</TABLE>
F-47
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FISCAL 1996:
Revenues..................................... $ 314,999 $ 45,267 $ 150,343 $ 114,293 $ 624,902
Operating income............................. 12,455 3,068 2,484 9,252 27,259
Income (loss) before provision for (benefit
from) income taxes......................... 6,933 2,863 (3,194) 10,631 17,233
Provision for (benefit from) income taxes.... (33) 565 173 750 1,455
Income (loss) from discontinued operations,
net of income taxes........................ 6,966 2,298 (3,367) 9,881 15,778
FISCAL 1997:
Revenues..................................... $ 334,220 $ 57,677 $ 191,746 $ 136,278 $ 719,921
Operating income............................. 16,426 5,668 10,295 11,198 43,587
Income before provision for income taxes..... 11,224 5,450 6,375 10,914 33,963
Provision for (benefit from) income taxes.... 3,651 1,353 (2,034) 4,193 7,163
Income from discontinued operations,
net of income taxes........................ 7,573 4,097 8,409 6,721 26,800
NINE MONTHS ENDED JANUARY 25, 1997
(UNAUDITED):
Revenues..................................... $ 244,764 $ 41,527 $ 159,977 $ 101,295 $ 547,563
Operating Income............................. 14,750 3,105 10,839 8,448 37,142
Income before provision for income taxes..... 10,259 3,031 7,878 8,182 29,350
Provision for income taxes................... 2,249 551 4,085 2,054 8,939
Income from discontinued operations net of
income taxes............................... 8,010 2,480 3,793 6,128 20,411
NINE MONTHS ENDED JANUARY 24, 1998
(UNAUDITED):
Revenues..................................... $ 257,777 $ 80,707 $ 247,880 $ 142,512 $ 728,876
Operating Income............................. 14,028 5,719 21,349 11,630 52,726
Income before provision for income taxes..... 12,577 5,522 16,916 11,644 46,659
Provision for income taxes................... 5,629 2,794 7,734 5,038 21,195
Income from discontinued operations net of
income taxes............................... 6,948 2,728 9,182 6,606 25,464
</TABLE>
F-48
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
The results of the Spin-Off Companies include allocations of interest
expense, at U.S. Office Products' weighted average interest rates, and do not
include any allocations of corporate overhead from U.S. Office Products during
the periods presented.
The net assets of the discontinued operations included in the Company's
consolidated balance sheet represent the sum of the net assests of the Company's
Print Management, Corporate Travel Services, Educational Supplies and Technology
Solutions divisions for the periods presented and are summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
APRIL 30, 1996:
Current assets............................... $ 78,071 $ 6,103 $ 38,557 $ 25,640 $ 148,371
Property, plant and equipment, net........... 32,703 7,948 7,647 1,756 50,054
Intangible assets, net....................... 879 5,456 7,142 13,477
Other assets................................. 6,029 539 777 875 8,220
Current liabilities.......................... (56,532) (7,402) (42,670) (22,344) (128,948)
Long-term liabilities........................ (34,065) (6,869) (15,766) (800) (57,500)
------------ ---------- ------------ ----------- ------------
Net assets of discontinued operations...... $ 27,085 $ 5,775 $ (4,313) $ 5,127 $ 33,674
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
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........................ (31,399) (5,218) (35,052) (3,218) (74,887)
------------ ---------- ------------ ----------- ------------
Net assets of discontinued operations...... $ 26,185 $ 5,477 $ 16,606 $ 10,963 $ 59,231
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
JANUARY 24, 1998 (UNAUDITED):
Current assets............................... $ 85,326 $ 22,609 $ 86,676 $ 64,618 $ 259,229
Property, plant and equipment, net........... 31,063 19,406 20,489 5,074 76,032
Intangible assets, net....................... 5,369 85,525 94,651 63,891 249,436
Other assets................................. 5,099 1,002 2,595 508 9,204
Current liabilities.......................... (58,449) (20,236) (35,529) (31,252) (145,466)
Long-term liabilities........................ (10,530) (15,957) (63,307) (12,558) (102,352)
------------ ---------- ------------ ----------- ------------
Net assets of discontinued operations...... $ 57,878 $ 92,349 $ 105,575 $ 90,281 $ 346,083
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
</TABLE>
The short-term and long-term receivables from discontinued operations
reflected in the unaudited January 24, 1998 Consolidated Balance Sheet are
expected to be recovered from the Spin-Off Companies in connection with the
Distributions.
F-49
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
PURCHASE ACCOUNTING RESTATEMENT
On December 24, 1997, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission which included audited supplemental
consolidated financial statements (the "Supplemental Financial Statements"). The
Supplemental Financial Statements gave retroactive effect to 20 fiscal 1998
business combinations, including the Mail Boxes Etc. acquisition, which were
originally accounted for under the pooling-of-interests method.
As a result of the Strategic Restructuring Plan and as required by generally
accepted accounting principles, the Company has restated its consolidated
financial statements for all periods to account for these acquisitions (as well
as two subsequent business combinations originally accounted for under the
pooling-of-interests method) under the purchase method. In relation to amounts
reflected in the Supplemental Financial Statements, this restatement and the
reclassification of assets and liabilities for discontinued operations, as
discussed above, had the combined effect of reducing the Company's reported
total assets at April 26, 1997 by $267,430 and reported net income for the
fiscal year then ended by $17,811 (or $0.02 per share). Additionally, the
restatement of the 22 business combinations as purchase transactions gave rise
to approximately $422.8 million of goodwill, associated with both continuing and
discontinued operations, during the nine months ended January 24, 1998.
NOTE 5--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1996 and 1997, the Company issued 8,440,852 and 22,108,776 shares
of common stock, respectively, to acquire 14 companies (the "1996 Poolings") and
40 companies, including 25 companies related to the continuing operations (the
"1997 Poolings"), respectively, in business combinations accounted for under the
pooling-of-interests method. The Company's consolidated financial statements
give retroactive effect to the acquisitions of the Pooled Companies for all
periods presented. Certain of the Pooled Companies previously reported on fiscal
years ending other than April 30, 1996 and April 26, 1997.
Commencing on May 1, 1995 and 1996, the year-ends of the 1996 Poolings and
the 1997 Poolings were changed to April 30, 1996 and April 26, 1997,
respectively, resulting in adjustments to retained earnings of $2,235, $8,898
and $286 during fiscal 1995, 1996 and 1997, respectively. Following is a summary
of the results related to the adjustments to retained earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- ---------- ----------
Revenues....................................................................... $ 55,126 $ 245,737 $ (9,907)
Costs and expenses............................................................. 52,891 236,839 (10,193)
--------- ---------- ----------
Net adjustment............................................................. $ 2,235 $ 8,898 $ 286
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F-50
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the separate results, in each of the periods
presented, of U.S. Office Products (excluding the results of Pooled Companies
prior to the dates on which they were acquired), and the Pooled Companies up to
the dates on which they were acquired:
<TABLE>
<CAPTION>
U.S. OFFICE POOLED
PRODUCTS COMPANIES COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
FOR THE YEAR ENDED APRIL 30, 1995:
Revenues.............................................................. $ 120,479 $ 538,015 $ 658,494
Income from continuing operations before extraordinary items.......... $ 1,514 $ 13,978 $ 15,492
FOR THE YEAR ENDED APRIL 30, 1996:
Revenues.............................................................. $ 488,670 $ 572,858 $ 1,061,528
Income from continuing operations before extraordinary items.......... $ 7,828 $ 11,271 $ 19,099
FOR THE YEAR ENDED APRIL 26, 1997:
Revenues.............................................................. $ 1,906,496 $ 209,458 $ 2,115,954
Income from continuing operations before extraordinary items.......... $ 27,978 $ 3,960 $ 31,938
FOR THE NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Revenues.............................................................. $ 1,300,421 $ 197,899 $ 1,498,320
Income from continuing operations before extraordinary items.......... $ 19,677 $ 5,716 $ 25,393
FOR THE NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Revenues.............................................................. $ 1,930,113 $ $ 1,930,113
Income from continuing operations before extraordinary items.......... $ 37,236 $ $ 37,236
</TABLE>
PURCHASE METHOD
In fiscal 1995, in addition to the acquisitions of the Combined Companies,
the Company made six acquisitions, including five related to continuing
operations, accounted for under the purchase method for an aggregate purchase
price of $29,849, consisting of $18,099 of cash, $3,000 of notes payable and
1,312,500 shares of common stock with a market value of $8,750. The total assets
related to these six acquisitions were $72,192, including goodwill of $21,079.
The results of these acquisitions have been included in the Company's results
form their respective dates of acquisition.
In fiscal 1996, the Company made 34 acquisitions, including 31 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $206,937, consisting of $130,178 of cash, $8,141 of debt and
11,120,163 shares of common stock with a market value of $68,618. The total
assets related to these 34 acquisitions were $414,113, including goodwill of
$127,870. The results of these acquisitions have been included in the Company's
results from their respective dates of acquisition.
In fiscal 1997, the Company made 77 acquisitions, including 71 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $520,891 consisting of $354,811 of cash, and 8,685,450 shares
of common stock with a market value of $166,080. The total assets related to
these 77 acquisitions were $861,647, including goodwill of $506,386. The results
of these acquisitions have been included in the Company's results from their
respective dates of acquisition.
F-51
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 30, 1996 and April 26, 1997 and
includes the Company's consolidated financial statements, which give retroactive
effect to the acquisitions of the Pooled Companies for all periods presented,
and the results of the Purchased Companies as if all such purchase acquisitions
had been made at the beginning of fiscal 1996. The results presented below
include certain pro forma adjustments to reflect the amortization of intangible
assets, adjustments in executive compensation and the inclusion of a federal
income tax provision on all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
<S> <C> <C>
APRIL 30, APRIL 26,
1996 1997
------------ ------------
Revenues.................................................................... $ 2,413,720 $ 2,496,519
Income from continuing operations before extraordinary items................ 35,361 48,825
Income per share from continuing operations before extraordinary items...... 0.30 0.42
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1996 or the
results which may occur in the future.
EQUITY INVESTMENT IN AFFILIATE
In November 1996, the Company acquired a 49% equity interest in Dudley
Stationery Limited ("Dudley"), which is being accounted for under the equity
method. Under the terms of the agreement, the Company agreed to invest
approximately $80 million for working capital into Dudley over a two-year
period. The Company has currently invested approximately $41.3 million of the
total $80 million in Dudley.
NOTE 6--ACCRUED ACQUISITION COSTS
In conjunction with the acquisitions of the fiscal 1997 Purchased Companies,
the Company accrued the direct external costs incurred in conjunction with the
consummation of the acquisitions and the costs to consolidate acquired
operations into existing Company facilities, including the external costs
associated with closing redundant facilities of acquired companies, and
severance and relocation costs related to the acquired companies' employees.
As of the consummation date of 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.
F-52
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--ACCRUED ACQUISITION COSTS (CONTINUED)
The following table sets forth the Company's accrued acquisition costs for
the periods ended April 30, 1996, April 26, 1997 and January 24, 1998:
<TABLE>
<CAPTION>
EMPLOYEE DISPOSAL OF
REDUNDANT SEVERANCE & ASSETS &
FACILITIES RELOCATION OTHER TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30, 1996................... $ $ $ $
Additions................................. 1,593 2,484 6,712 10,789
----------- ------ ----------- ---------
Balance at April 26, 1997................... 1,593 2,484 6,712 10,789
Unaudited data:
Additions................................. 1,442 3,244 4,686
Utilizations.............................. (256) (141) (5,400) (5,797)
----------- ------ ----------- ---------
Balance at January 24, 1998................. $ 1,337 $ 3,785 $ 4,556 $ 9,678
----------- ------ ----------- ---------
----------- ------ ----------- ---------
</TABLE>
NOTE 7--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs for the periods ended April 30, 1996, April 26, 1997 and
January 24, 1998:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE- DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30 1995:
Additions.............................. $ 682 $ 682
Utilizations........................... (682) (682)
------ ----- ----------- ---------
Balance at April 30, 1996................
Additions.............................. 1,337 308 2,556 4,201
Utilizations........................... (302) (229) (2,150) (2,681)
------ ----- ----------- ---------
Balance at April 26, 1997................ 1,035 79 406 1,520
Unaudited data:
Utilizations........................... (937) (79) (348) (1,364)
------ ----- ----------- ---------
Balance at January 24, 1998.............. $ 98 $ $ 58 $ 156
------ ----- ----------- ---------
------ ----- ----------- ---------
</TABLE>
F-53
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- ----------
<S> <C> <C>
Land........................................................................... $ 4,878 $ 31,934
Buildings...................................................................... 32,140 44,814
Furniture and fixtures......................................................... 42,340 121,701
Warehouse equipment............................................................ 23,290 24,726
Equipment under capital leases................................................. 7,308 8,602
Leasehold improvements......................................................... 8,653 16,107
----------- ----------
118,609 247,884
Less: Accumulated depreciation................................................. (41,080) (65,251)
----------- ----------
Net property and equipment..................................................... $ 77,529 $ 182,633
----------- ----------
----------- ----------
</TABLE>
Depreciation expense for fiscal years 1995, 1996 and 1997 was $4,906, $7,926
and $20,699, respectively.
NOTE 9--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill......................................................... $ 136,338 $ 625,074 $ 928,365
Other............................................................ 2,549 3,063 3,915
---------- ---------- ------------
138,887 628,137 932,280
Less: Accumulated amortization................................... (3,747) (16,663) (28,558)
---------- ---------- ------------
$ 135,140 $ 611,474 $ 903,722
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
Amortization expense for fiscal years 1995, 1996, 1997 and the nine months
ended January 24, 1998 was $801, $2,711, $12,416 and $13,830, respectively.
F-54
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Credit facilities with banks, average interest rates of 7.6% at April 26, 1997 and
7.8% at April 30, 1996.......................................................... $ 1,020 $ 140,090
Annual renewal loans provided by banks and other financial institutions of foreign
subsidiary secured by lease receivables of foreign subsidiary. Interest rates
ranging from 7.8% to 10.2% at April 30, 1996.................................... 67,660
Bank lines of credit of foreign subsidiary operations secured by assets of those
operations. Interest rates ranging from 9.2% to 9.8% at April 30, 1996......... 12,731
Other............................................................................. 4,749 1,367
Current maturities of long-term debt.............................................. 8,014 2,668
---------- ----------
Total short-term debt....................................................... $ 94,174 $ 144,125
---------- ----------
---------- ----------
</TABLE>
The Company currently has an agreement under which a syndicate of financial
institutions, led by Bankers Trust Company, as Agent (the "Bank"), is providing
the Company with a $500 million credit facility (the "Credit Facility") bearing
interest, at the Company's option, at the Bank's base rate plus an applicable
margin of up to 1.25%, or a eurodollar rate plus an applicable margin of up to
2.5%. The availability under the Credit Facility is subject to certain
sublimits including $100 million for working capital loans and $400 million for
acquisition loans. The Credit Facility is secured by a majority of the assets
of the Company and its subsidiaries and contains customary covenants, including
financial covenants with respect to the Company's consolidated leverage and
interest coverage ratios, capital expenditures, payment of dividends and
purchases and sales of assets, and customary default provisions, including
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy. The Company was in compliance with or obtained
waivers relating to these covenants at April 26, 1997. At April 26, 1997, the
balance outstanding under the Credit Facility was $140,090 and included five
eurodollar contracts, expiring within 30 days, totaling $105,000 at an average
interest rate of 7.2%.
F-55
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Convertible Subordinated Notes due 2003, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$31.60 per share, subject to adjustment in certain events....................... $ 230,000
Convertible Subordinated Notes due 2001, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$19.00 per share, subject to adjustment in certain events....................... $ 143,750 143,750
Notes payable, secured by certain assets of the Company, interest rates ranging
from 8.0% to 10.0%, maturities from October 1996 through 2003................... 13,384
Other............................................................................. 22,370 3,610
Capital lease obligations......................................................... 4,740 5,517
---------- ----------
184,244 382,877
Less: Current maturities of long-term debt........................................ (8,014) (2,668)
---------- ----------
Total long-term debt........................................................ $ 176,230 $ 380,209
---------- ----------
---------- ----------
</TABLE>
The 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 26, 1997, based upon quoted market prices, totaled
$184,000.
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 26, 1997, based upon quoted market prices,
totaled $147,344.
F-56
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $ 2,668
1999.............................................................. 2,211
2000.............................................................. 1,524
2001.............................................................. 144,436
2002.............................................................. 219
Thereafter........................................................ 231,819
---------
$ 382,877
---------
---------
</TABLE>
NOTE 11--INCOME TAXES
Domestic and foreign income from continuing operations before provision for
income taxes and extraordinary items consist of the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Domestic......................................................................... $ 16,099 $ 22,139 $ 38,024
Foreign.......................................................................... 2,193 2,992 21,853
--------- --------- ---------
Total...................................................................... $ 18,292 $ 25,131 $ 59,877
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Income taxes currently payable:
Federal...................................................................... $ 2,126 $ 4,632 $ 18,776
State........................................................................ 232 351 1,987
Foreign...................................................................... 809 1,245 8,211
--------- --------- ---------
3,167 6,228 28,974
--------- --------- ---------
Deferred income tax expense (benefit)............................................ (367) (196) (1,035)
--------- --------- ---------
Total provision for income taxes........................................... $ 2,800 $ 6,032 $ 27,939
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-57
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory.................................................................................. $ 1,386 $ 708
Allowance for doubtful accounts............................................................ 1,325 1,253
Accrued liabilities........................................................................ 2,971 6,091
--------- ---------
Total current deferred tax assets...................................................... 5,682 8,052
--------- ---------
Long-term deferred tax liabilities:
Property and equipment..................................................................... (4,457) (2,357)
Intangible assets.......................................................................... (1,063) (961)
Internal Revenue Service tax assessment.................................................... (3,383) (3,383)
Other...................................................................................... 2,717 4,243
--------- ---------
Total long-term deferred tax liabilities................................................. (6,186) (2,458)
--------- ---------
Net deferred tax asset (liability)....................................................... $ (504) $ 5,594
--------- ---------
--------- ---------
</TABLE>
The Internal Revenue Service ("IRS") tax assessment relates to the deferral
of a gain on the sale of land and a building by a subsidiary of the Company. The
IRS has determined that a portion of the gain recorded by the subsidiary does
not qualify for deferral and has assessed the Company additional taxes. The
subsidiary has recorded a deferred tax liability, including interest, as a
result of the assessment. The Company has filed an appeal with the IRS relating
to the above assessment; however, the IRS has not yet responded to the appeal.
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate........................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit.............................. 1.3 1.4 3.3
Subchapter S corporation income not subject to
corporate level taxation......................................................... (27.2) (26.1) (3.3)
Foreign earnings not subject to U.S. taxes......................................... (4.2) (4.1) (12.8)
Nondeductible goodwill............................................................. 2.7 3.7 4.9
Nondeductible acquisition costs.................................................... 8.4 4.7
Foreign taxes...................................................................... 4.4 4.9 13.7
Other.............................................................................. 3.3 0.8 1.2
----------- ----------- -----------
Effective income tax rate.......................................................... 15.3% 24.0% 46.7%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to these acquisitions by the Company.
F-58
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the specific Pooled Companies had been subject to
federal income taxes for the entire periods presented.
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED
-----------------
APRIL 26,
1997
-----------------
<S> <C>
Income from continuing operations before extraordinary items per consolidated statement of
income....................................................................................... $ 31,938
Pro forma income tax provision adjustment...................................................... 1,976
-------
Pro forma income from continuing operations before extraordinary items......................... $ 29,962
-------
-------
</TABLE>
NOTE 12--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998................................................................... $ 953 $ 46,645
1999................................................................... 1,662 38,434
2000................................................................... 1,055 30,700
2001................................................................... 697 20,514
2002................................................................... 470 15,458
Thereafter............................................................. 3,433 53,778
--------- ----------
Total minimum lease payments........................................... 8,270 $ 205,529
----------
----------
Less: Amounts representing interest.................................... (2,753)
---------
Present value of net minimum lease payments............................ $ 5,517
---------
---------
</TABLE>
Rent expense for all operating leases for fiscal 1995, 1996 and 1997 was
$12,587, $19,023 and $40,183, respectively.
NOTE 13--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
F-59
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements.
NOTE 14--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue
Code. The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service. In fiscal 1997, the Company's matching contribution expense was
$1,195.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For fiscal 1995, 1996 and 1997, the
subsidiaries incurred expenses totaling $2,023, $2,138 and $1,398, respectively,
related to these plans.
NOTE 15--STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 requires the dual
presentation of basic and diluted EPS on the face of the statement of income.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company has adopted SFAS No. 128 during the nine months
ended January 24, 1998 and has restated all prior period EPS data. The following
information presents the
F-60
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's computations of basic and diluted EPS from continuing operations
before extraordinary items for the periods presented in the consolidated
statement of income.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -------------
<S> <C> <C> <C>
FISCAL 1995:
Basic EPS.............................................................. $ 15,492 45,562 $ .34
---
---
Effect of dilutive employee stock options.............................. 142
------------ -------------
Diluted EPS............................................................ $ 15,492 45,704 $ .34
------------ ------------- ---
------------ ------------- ---
FISCAL 1996:
Basic EPS.............................................................. $ 19,099 67,545 $ .28
---
---
Effect of dilutive employee stock options.............................. 829
------------ -------------
Diluted EPS............................................................ $ 19,099 68,374 $ .28
------------ ------------- ---
------------ ------------- ---
FISCAL 1997:
Basic EPS.............................................................. $ 31,938 90,026 $ .35
---
---
Effect of dilutive employee stock options.............................. 1,735
------------ -------------
Diluted EPS............................................................ $ 31,938 91,761 $ .35
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Basic EPS.............................................................. $ 25,393 85,978 $ .30
---
---
Effect of dilutive employee stock options.............................. 1,846
------------ -------------
Diluted EPS............................................................ $ 25,393 87,824 $ .29
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Basic EPS.............................................................. $ 37,236 114,758 $ .32
---
---
Effect of dilutive employee stock options.............................. 2,427
------------ -------------
Diluted EPS............................................................ $ 37,236 117,185 $ .32
------------ ------------- ---
------------ ------------- ---
</TABLE>
The Company had additional employee stock options and two series of
convertible debt securities outstanding during the periods presented that were
not included in the computation of diluted EPS because they were anti-dilutive.
COMMON STOCK
In November 1994, the Board of Directors of the Company approved a one
thousand-for-one split of the Company's common stock and changed the par value
of common stock from $1 per share to $.001 per share. The consolidated
financial statements have been adjusted to reflect the stock split. In February
1996, the Company's stockholders approved the amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 25,000,000 to 100,000,000 shares. In August 1996,
the Company's stockholders approved the amendment to the
F-61
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's Restated Certified of Incorporation to increase the number of
authorized shares of common stock from 100,000,000 to 500,000,000.
In October 1997, the Board of Directors of the Company approved a three for
two split of the Company's common stock. The financial statements give
retroactive effect for the split for all periods presented.
STOCK COMPENSATION PLANS
In October 1994, the Board of Directors and the Company's stockholders
approved the Company's 1994 Long-Term Compensation Plan (the "Plan"). The
purpose of the Plan is to provide officers, key employees and consultants with
additional incentives by increasing their ownership interests in the
Company. The maximum number of options to purchase common stock granted in any
calendar or fiscal year under the Plan, as amended, is equal to 20% of the
aggregate number of shares of the Company's common stock outstanding at the time
an award is granted, less, in each case, the number of shares subject to
previously outstanding awards under the Plan.
In August 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Non-Employee Directors' Stock Plan (the "Directors'
Plan"). The purpose of the Directors' Plan is to promote ownership by
non-employee directors of a greater proprietary interest in the Company, thereby
aligning such directors' interests more closely with the interests of
stockholders of the Company. A total of 750,000 shares of common stock has been
reserved for issuance under the Directors' Plan. At April 26, 1997, options to
acquire 108,000 shares of common stock have been granted under the Directors'
Plan.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans. Accordingly, because the exercise prices of the options have equaled the
market price on the date of grant, no compensation expense has been recognized
for stock options granted. Had compensation cost for the Company's stock
options been recognized based upon the fair value of the stock options on the
grant date under the methodology prescribed by SFAS 123, the Company's net
income and net income per share would have been impacted as indicated in the
following table. The pro forma results shown below reflect only the impact of
options granted in fiscal 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
--------------------
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Income from continuing operations:
As reported..................................................... $ 18,398 $ 30,488
Pro forma....................................................... 16,339 17,842
Income from continuing operations per share:
As reported:
Basic......................................................... $ 0.27 $ 0.33
Diluted....................................................... 0.27 0.33
Pro forma:
Basic......................................................... $ 0.24 $ 0.20
Diluted....................................................... 0.24 0.19
</TABLE>
F-62
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Expected life of option.................................................. 7 years 7 years
Risk free interest rate.................................................. 6.58% 6.66%
Expected volatility of USOP stock........................................ 58.5% 44.0%
</TABLE>
The weighted-average fair value of options granted was $12.44 and $17.06 for
fiscal 1996 and 1997, respectively.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1994.......... 125,498 $ 0.45 125,498 $ 0.45
Granted.......................... 944,250 5.95
Canceled......................... (10,500) 6.67
------------
Balance at April 30, 1995.......... 1,059,248 5.29 177,998 1.89
Granted.......................... 4,146,886 12.55
Exercised........................ (95,025) 6.25
Canceled......................... (24,300) 8.47
------------
Balance at April 30, 1996.......... 5,086,809 11.18 324,798 3.77
Granted.......................... 6,729,165 20.41
Exercised........................ (197,744) 8.39
Canceled......................... (73,444) 12.65
------------
Balance at April 26, 1997.......... 11,544,786 $ 16.60 1,598,228 $ 10.10
------------
------------
</TABLE>
The following table summarizes information about stock options outstanding
at April 26, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE EXERCISABLE PRICE
- ------------------------------- ------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.45 to $6.67................. 884,498 7.2 years $ 5.09 476,630 $ 4.32
$6.68 to $13.33................ 2,660,398 7.9 years 9.33 702,303 9.70
$13.34 to $20.00............... 4,234,986 9.3 years 17.55 313,866 16.25
$20.01 to $26.67............... 3,737,004 9.3 years 23.27 105,429 20.65
$26.68 to $29.92............... 27,900 9.1 years 28.13
------------ ----------
$0.45 to $29.92................ 11,544,786 8.7 years $ 16.60 1,598,228 $ 10.10
------------ ----------
------------ ----------
</TABLE>
F-63
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The options outstanding information includes 125,498, 58,802 and 343,488
options to acquire common stock at exercise prices of $.45, $10.59 and $10.70,
respectively, which were granted at certain Pooled Companies prior to their
respective acquisitions by the Company.
Non-qualified options granted to employees are generally exercisable
beginning one year from the date of grant in cumulative yearly amounts of 25% of
the shares under option and generally expire ten years from the date of grant.
NOTE 16--SEGMENT REPORTING
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
NEW ZEALAND
NORTH AND
AMERICA AUSTRALIA TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
FISCAL 1995:
Revenues.......................................... $ 629,920 $ 28,574 $ 658,494
Operating income.................................. 18,133 1,429 19,562
Identifiable assets of continuing operations at
year-end........................................ 220,878 5,512 226,390
FISCAL 1996:
Revenues.......................................... $ 984,387 $ 77,141 $ 1,061,528
Operating income.................................. 25,540 3,533 29,073
Identifiable assets of continuing operations at
year-end........................................ 584,170 188,134 772,304
FISCAL 1997:
Revenues.......................................... $ 1,415,161 $ 700,793 $ 2,115,954
Operating income.................................. 56,126 28,708 84,834
Identifiable assets of continuing operations at
year-end........................................ 894,506 753,254 1,647,760
</TABLE>
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during fiscal 1996 and 1997
in the Company's Quarterly Reports on Form 10-Q as a result of the restatement
of the financial statements to give retroactive effect to the results of the
companies acquired during fiscal 1996 and 1997 in business combinations
accounted for under the pooling-
F-64
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
of-interests method and as a result of the reporting of the results of Spin-Off
Companies as discontinued operations.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit.................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................ 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items........................... 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations...... 3,387 5,550 7,727 (886) 15,778
Net income...................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.24
Net income.................................. 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.23
Net income.................................. 0.08 0.15 0.20 0.07 0.50
</TABLE>
F-65
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
Revenues........................................ $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
<S> <C> <C> <C> <C> <C>
Gross profit.................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................ 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items........................... 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations............. 9,475 8,933 2,003 6,389 26,800
Net income...................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.31
Net income.................................. 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.29
Net income.................................. 0.20 0.20 0.12 0.12 0.62
Pro forma income from continuing operations
before extraordinary items (see Note 11)...... 6,431 9,166 8,225 6,140 29,962
Pro forma basic income per share from continuing
operations before extraordinary item.......... 0.08 0.11 0.09 0.06 0.33
Pro forma diluted income per share from
continuing operations before extraordinary
item.......................................... 0.08 0.10 0.09 0.06 0.33
</TABLE>
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED)
In January 1998, U.S. Office Products announced its intention to complete
the Strategic Restructuring Plan described in Note 4. In addition, subsequent to
April 26, 1997 and through March 9, 1998, the Company has completed 42 business
combinations related to continuing operations for an aggregate purchase price of
$502.3 million, consisting of approximately $79.8 million of cash and 20.4
million shares of the Company's common stock with an aggregate market value on
the dates of acquisition of approximately $422.5 million. In addition, on
December 22, 1997, U.S. Office Products made an additional equity investment of
$40.8 million in Dudley Stationery Limited, its 49% owned independent office
products dealer in the United Kingdom, to fund additional acquisitions at
Dudley.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the Strategic Restructuring Plan and the
acquisitions described above had been consummated as of
F-66
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
the beginning of fiscal 1997. The results presented below include certain pro
forma adjustments to reflect (i) substantially higher amortization expenses as
compared to prior periods (as a result of reclassifying 12 business combinations
as purchase acquisitions (including the Company's acquisition of Mail Boxes
Etc.), rather than under the pooling-of-interests method, as the Company had
expected when it completed those acquisitions); (ii) substantially higher
interest expense, as a result of increased borrowing that the Company expects to
incur to help finance the cost of the Tender Offer; and (iii) higher effective
income tax rates, due to increased non-deductible goodwill expense and the
Company's inability to acquire subchapter S corporations in pooling-of-interests
transactions:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED NINE MONTHS ENDED
APRIL 26, 1997 JANUARY 24, 1998
---------------- ------------------
<S> <C> <C>
Revenues............................................... $ 2,794,009 $ 2,070,655
Income from continuing operations before extraordinary
items................................................ 11,943 11,644
Basic income per share from continuing operations
before extraordinary items........................... 0.09 0.09
Diluted income per share from continuing operations
before extraordinary items........................... 0.09 0.09
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
F-67
<PAGE>
ITEM 7--FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
<TABLE>
<C> <S>
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Hertz, Herson & Co. LLP
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of KPMG Peat Marwick LLP
23.6 Consent of BDO Seidman LLP
23.7 Consent of Rubin, Koehmstedt & Nadler, PLC
23.8 Consent of Deloitte & Touche LLP
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
U.S. OFFICE PRODUCTS COMPANY
By: /s/ DONALD H. PLATT
-----------------------------------------
Donald H. Platt
Dated: March 12, 1998 CHIEF FINANCIAL OFFICER
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -------- ---------------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Hertz, Herson & Co. LLP
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of KPMG Peat Marwick LLP
23.6 Consent of BDO Seidman LLP
23.7 Consent of Rubin, Koehmstedt & Nadler, PLC
23.8 Consent of Deloitte & Touche LLP
</TABLE>
<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 6, 1997, except as to the
second paragraph of the Common Stock Section of Note 15, which is as of November
6, 1997 and Note 4, which is as of January 13, 1998 pertaining to the related
financial statements which appear in this Current Report on Form 8-K of U.S.
Office Products Company.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
March 12, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
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 February 2, 1996, with respect to
the financial statements of School Specialty, Inc. for the years ended December
31, 1995 and 1994 included in the Current Report on Form 8-K of U.S. Office
Products Company.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
March 10, 1998
<PAGE>
EXHIBIT 23.3
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 March 6, 1996,
relating to the financial statements of United Envelope Co., Inc. and its
affiliate, Rex Envelope Co., Inc., and our report dated March 4, 1996, relating
to the financial statements of Huxley Envelope Corporation, which reports appear
in the Current Report on Form 8-K of U.S. Office Products Company.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 10, 1998
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
SFI Corp. and Hano Document Printers, Inc.:
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) and inclusion in this Current Report on Form 8-K of U.S.
Office Products Company of our report dated August 28, 1996, with respect to the
combined balance sheet of SFI Corp. and Hano Document Printers, Inc. as of
December 31, 1994 and the related combined statements of income, stockholders'
equity and cash flows for each of the years in the two-year period then ended.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
March 10, 1998
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Hano Document Printers, Inc.:
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) and inclusion in this Current Report on Form 8-K 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.
KPMG Peat Marwick LLP
Norfolk, Virginia
March 10, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (333-01574, 333-12789, and 333-24581); 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, which report appears in this
Current Report on Form 8-K of U.S. Office Products Company.
BDO SEIDMAN, LLP
Atlanta, Georgia
March 10, 1998
<PAGE>
EXHIBIT 23.7
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 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 Current
Report on Form 8-K of U.S. Office Products Company.
RUBIN, KOEHMSTEDT & NADLER, PLC
Springfield, Virginia
March 10, 1998
<PAGE>
EXHIBIT 23.8
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 relating to the
financial statements of MTA, Inc. (not presented separately herein) as of
December 31, 1995, and for the period from January 25, 1995 (date of
incorpoation) to December 31, 1995 appearing in this Current Report on Form 8-K
of U.S. Office Products Company dated January 13, 1998.
DELOITTE & TOUCHE LLP
Seattle, Washington
March 10, 1998
