<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 24, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________________to________________
Commission File Number 000-25372
U.S. OFFICE PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 52-1906050
(State of other jurisdiction (I.R.S. Employer
incorporation or organization.) Identification No.)
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
(Address of principal executive offices) (Zip Code)
(202) 339-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of December 4, 1998, there were 36,579,413 shares of common stock
outstanding.
<PAGE>
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet...................................................................................3
October 24, 1998 (unaudited) and April 25, 1998
Consolidated Statement of Operations.........................................................................4
For the three months ended October 24, 1998 (unaudited)
and October 25, 1997 (unaudited) and the six months ended
October 24, 1998 (unaudited) and October 25, 1997 (unaudited)
Consolidated Statement of Cash Flows.........................................................................5
For the six months ended October 24, 1998 (unaudited) and
October 25, 1997 (unaudited)
Notes to Consolidated Financial Statements (unaudited).......................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................................18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................................41
Item 4. Submission of Matters to a Vote of Security Holders..........................................................41
Item 6. Exhibits and Reports on Form 8-K.............................................................................42
Signatures..............................................................................................................43
Exhibit Index...........................................................................................................44
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
October 24, April 25,
ASSETS 1998 1998
------ --------------- --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,485 $ 52,021
Accounts receivable, less allowance for doubtful
accounts of $10,915 and $8,639, respectively 336,380 310,527
Inventories 241,846 228,671
Prepaid expenses and other current assets 147,820 117,150
------------- -------------
Total current assets 745,531 708,369
Property and equipment, net 229,702 228,715
Intangible assets, net 909,718 923,024
Other assets 212,101 194,701
Net assets from discontinued operations:
Amounts to become receivable upon the Distributions 132,145
All other net assets 354,473
------------- -------------
Total assets $ 2,097,052 $ 2,541,427
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 33,876 $ 368,227
Accounts payable 173,328 162,718
Accrued compensation 40,920 43,013
Other accrued liabilities 116,335 81,411
------------- -------------
Total current liabilities 364,459 655,369
Long-term debt 1,197,860 382,174
Other long-term liabilities and minority interests 17,453 17,753
------------- -------------
Total liabilities 1,579,772 1,055,296
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares
authorized, none outstanding
Common stock, $.001 par value, 500,000,000 shares authorized, 36,745,007 and
33,460,864 shares issued, 36,579,413 and 33,460,864 shares outstanding, and
165,594 and none held in treasury, respectively 37 33
Additional paid-in capital 678,232 1,472,125
Accumulated other comprehensive loss (142,798) (112,803)
Retained earnings (accumulated deficit) (18,191) 126,776
------------- -------------
Total stockholders' equity 517,280 1,486,131
------------- -------------
Total liabilities and stockholders' equity $ 2,097,052 $ 2,541,427
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- --------------------------
October 24, October 25, October 24, October 25,
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 677,205 $ 649,340 $ 1,329,154 $ 1,264,154
Cost of revenues 492,166 470,084 966,451 914,116
----------- ----------- ------------ -----------
Gross profit 185,039 179,256 362,703 350,038
Selling, general and administrative expenses 150,670 146,675 299,466 289,540
Amortization expense 6,137 4,281 12,123 8,396
Strategic Restructuring Plan costs 97,503
Operating restructuring costs 3,469 12,195
----------- ----------- ------------ -----------
Operating income (loss) 24,763 28,300 (58,584) 52,102
Interest expense 28,991 9,586 47,879 18,053
Interest income (460) (546) (827) (1,128)
Other (income) expense 1,927 (5,134) 1,517 (6,517)
----------- ----------- ------------ -----------
Income (loss) from continuing operations
before provision (benefit from) for income
taxes and extraordinary items (5,695) 24,394 (107,153) 41,694
Provision for (benefit from) income taxes (1,713) 11,624 (19,628) 19,889
------------ ----------- ------------ -----------
Income (loss) from continuing operations before
extraordinary items (3,982) 12,770 (87,525) 21,805
Income (loss) from discontinued operations, net
of income taxes 11,428 (1,294) 22,379
----------- ----------- ------------ -----------
Income (loss) before extraordinary items (3,982) 24,198 (88,819) 44,184
Extraordinary items - loss on early termination
of debt facilities, net of income tax benefit 269
----------- ----------- ------------
Net income (loss) $ (3,982) $ 24,198 $ (89,088) $ 44,184
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Basic income (loss) per share data:
Income (loss) from continuing operations before
extraordinary items $ (0.11) $ 0.46 $ (2.44) $ 0.80
Income (loss) from discontinued operations 0.42 (0.04) 0.83
Extraordinary items (0.01)
----------- ----------- ------------ -----------
Net income (loss) $ (0.11) $ 0.88 $ (2.49) $ 1.63
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Diluted income (loss) per share data:
Income (loss) from continuing operations before
extraordinary items $ (0.11) $ 0.45 $ (2.44) $ 0.79
Income (loss) from discontinued operations 0.40 (0.04) 0.81
Extraordinary items (0.01)
----------- ----------- ------------ -----------
Net income (loss) $ (0.11) $ 0.85 $ (2.49) $ 1.60
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
October 25, October 24,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (89,088) $ 44,184
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
(Income) loss from discontinued operations 1,294 (22,379)
Depreciation and amortization 29,769 27,207
Strategic Restructuring Plan costs 70,380
Loss on sale of business 2,536
Deferred income taxes (1,855) 51
Equity in net income of affiliate (1,611) (777)
Extraordinary loss 269
Gain on sale of investment (956)
Changes in assets and liabilities (net of assets acquired and liabilities
assumed in business combinations):
Accounts receivable (28,670) (20,182)
Inventory (16,614) (15,723)
Prepaid expenses and other current assets (37,084) (2,734)
Accounts payable 14,142 5,777
Accrued liabilities 34,592 5,190
------------- ------------
Net cash provided by (used in) operating activities (21,940) 19,658
------------- ------------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received (22,723) (51,196)
Additions to property and equipment, net of disposals (20,996) (17,210)
Proceeds from sale of investments 71 7,724
Other (814) 656
------------- ------------
Net cash used in investing activities (44,462) (60,026)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,152,595 346
Repurchase of common stock in Equity Tender (1,000,000)
Proceeds from (payments of) short-term debt, net (339,016) 126,906
Proceeds from issuance of common stock, net 322,720 6,500
Payments of long-term debt (213,666) (8,314)
Net repayments by (advances to) discontinued operations 123,551 (78,740)
------------- ------------
Net cash provided by financing activities 46,184 46,698
------------- ------------
Effect of exchange rates on cash and cash equivalents 200 (1,509)
------------- ------------
Cash used in discontinued operations (12,518) (5,547)
------------- ------------
Net decrease in cash and cash equivalents (32,536) (726)
Cash and cash equivalents at beginning of period 52,021 44,026
------------- -----------
Cash and cash equivalents at end of period $ 19,485 $ 43,300
------------- -----------
------------- -----------
</TABLE>
5
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except share amounts)
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Six Months Ended
----------------
October 24, October 25,
1998 1997
------------ -----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 37,871 $ 10,278
Income taxes paid $ 2,601 $ 31,308
</TABLE>
The Company issued common stock and cash in connection with certain business
combinations accounted for under the purchase method for the six months ended
October 24, 1998 and October 25, 1997. The estimated fair values of the assets
and liabilities at the dates of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
Six Months Ended
----------------
October 24, October 25,
1998 1997
------------ -----------
<S> <C> <C>
Accounts receivable $ 2,144 $ 17,140
Inventory 2,442 11,591
Prepaid expenses and other current assets 3,886 602
Property and equipment 2,532 42,507
Intangible assets 18,476 88,113
Other assets 416 2,270
Short-term debt (654) (6,497)
Accounts payable (538) (6,380)
Accrued liabilities (1,694) (3,618)
Long-term debt (580) (17,930)
Other long-term liabilities and minority interests (3,707) (2,275)
-------------- -----------
Net assets acquired $ 22,723 $ 125,523
-------------- -----------
-------------- -----------
</TABLE>
The acquisitions accounted for under the purchase method were funded as follows:
<TABLE>
<CAPTION>
Six Months Ended
----------------
October 24, October 25,
1998 1997
------------ ------------
<S> <C> <C>
Common stock $ $ 74,327
Cash 22,723 51,196
------------ ------------
Total $ 22,723 $ 125,523
------------ ------------
------------ ------------
</TABLE>
Non-cash transactions:
- - During the six months ended October 24, 1998, the Company issued 2,025,185
shares of common stock in exchange for $130,989 of the 5 1/2% convertible
subordinated notes due 2001.
See accompanying notes to consolidated financial statements.
6
<PAGE>
U. S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 24, 1998
(In thousands, except ratios and per share amounts)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products
Company (the "Company" or "U.S. Office Products"), and the companies acquired in
business combinations accounted for under the purchase method (the "Purchased
Companies") from their respective acquisition dates.
In June 1998, the Company completed a comprehensive restructuring plan (the
"Strategic Restructuring Plan"). The Company's Board of Directors approved the
Strategic Restructuring Plan in January 1998. The Strategic Restructuring Plan
included three principal elements: (i) the repurchase by the Company, through a
self-tender offer, of a portion of its outstanding shares (including shares
underlying employee stock options) (the "Equity Tender"); (ii) the Company's
distribution to its stockholders (the "Distributions") of the shares of four
separate companies that had been operated as divisions of the Company (together,
the "Spin-Off Companies"); and (iii) the purchase by an affiliate ("Investor")
of an investment fund managed by Clayton, Dubilier & Rice, Inc., a private
investment fund, of 24.9% of the Company's shares, plus warrants to purchase
additional shares, for a total of $270,000.
In conjunction with the Strategic Restructuring Plan, the Company also completed
several financing transactions (the "Financing Transactions") in June 1998. The
Financing Transactions consisted of the following: (i) through a tender offer,
the Company repurchased substantially all of its 5 1/2% convertible subordinated
notes due 2003 (the "2003 Notes") for a purchase price of 94.5% of the principal
amount and accrued interest on such notes; (ii) through an exchange offer, the
Company exchanged substantially all of its 5 1/2% convertible subordinated notes
due 2001 (the "2001 Notes") for shares of its common stock at an exchange rate
that represented an effective reduction in the conversion price of the 2001
Notes (the "2001 Notes Exchange"); (iii) the Company entered into a new
$1,225,000 senior secured bank credit facility (the "Credit Facility") and
terminated its former credit facility; and (iv) the Company issued and sold
$400,000 of 9 3/4% senior subordinated notes due 2008 (the "2008 Notes") in a
private placement at 99.583% of the principal amount.
For a complete description of the Strategic Restructuring Plan and the Financing
Transactions, see Note 3 of the Notes to the Company's audited consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended April 25, 1998.
The Company's consolidated financial statements reflect as discontinued
operations through June 9, 1998 (the effective date of the Distributions),
the results of the companies owned by the Spin-Off Companies (and thus
included in the Distributions). See Note 2, "Discontinued Operations." The
Company's continuing operations consist of its North American Office Products
Group (which includes office supply, office furniture, and office coffee,
beverage, and vending service businesses) ("NAOPG"), Mail Boxes Etc. ("MBE")
which the Company acquired in November 1997, the Company's operations in New
Zealand and Australia (referred to herein as "Blue Star Group"), and the
Company's 49% interest in Dudley Stationery Limited ("Dudley"), a U.K.
contract stationer. The NAOPG operates primarily in the United States; it
also includes three coffee and beverage businesses located in Canada.
7
<PAGE>
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair presentation of such operations. All such adjustments are of a normal
recurring nature. Operating results for interim periods are not necessarily
indicative of results that may be expected for the year as a whole. It is
suggested that these consolidated financial statements be read in conjunction
with the Company's audited consolidated financial statements for the fiscal year
ended April 25, 1998, included in the Company's Annual Report on Form 10-K.
NOTE 2 - 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 Spin-Off Companies (and their respective
lines of business) are Aztec Technology Partners, Inc. (technology solutions),
Navigant International, Inc. (corporate travel services), School Specialty, Inc.
(educational supplies), and Workflow Management, Inc (print management). The
Spin-Off Companies began operating as independent companies on June 10,1998.
Accordingly, no statement of operations amounts have been provided for the three
months ended October 24, 1998, as the Distributions were completed on June 9,
1998.
The income (loss) from discontinued operations included in the consolidated
statement of operations represents the sum of the results of the Spin-Off
Companies for the periods they were included in the results of the Company 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>
Three months ended October 25, 1997:
Revenues $ 88,884 $ 27,026 $ 111,460 $ 36,876 $ 264,246
Operating income 4,601 1,979 12,439 3,710 22,729
Income before provision for
income taxes 4,110 2,058 11,134 3,744 21,046
Provision for income taxes 1,840 1,033 5,125 1,620 9,618
Income from discontinued
operations, net of income taxes 2,270 1,025 6,009 2,124 11,428
Six months ended October 24, 1998:
Revenues $ 41,132 $ 19,346 $ 40,785 $ 30,951 $ 132,214
Operating income (loss) (1,601) 14 1,836 403 652
Income (loss) before provision for
(benefit from) income taxes (2,043) (108) 1,069 381 (701)
Provision for (benefit from)
income taxes (732) 158 703 464 593
Income (loss) from discontinued
operations, net of income taxes (1,311) (266) 366 (83) (1,294)
Six months ended October 25, 1997:
Revenues $ 171,047 $ 46,557 $ 198,489 $ 79,605 $ 495,698
Operating income 9,372 4,435 24,596 6,526 44,929
Income before provision for
income taxes 8,440 4,398 21,974 6,542 41,354
Provision for income taxes 3,777 2,230 10,138 2,830 18,975
Income from discontinued
operations, net of income taxes 4,663 2,168 11,836 3,712 22,379
</TABLE>
8
<PAGE>
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 all other net assets from discontinued operations included in the Company's
consolidated balance sheet at April 25, 1998, represents the sum of the net
assets of the Spin-Off Companies as of April 25, 1998, and are summarized as
follows:
<TABLE>
<CAPTION>
Corporate Total
Print Travel Educational Technology Discontinued
Management Services Supplies Solutions Operations
--------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
April 25, 1998:
Current assets $ 90,961 $ 21,993 $ 99,643 $ 66,835 $ 279,432
Property, plant and equipment, net 33,210 18,008 22,553 5,831 79,602
Intangible assets, net 14,014 87,590 99,613 63,829 265,046
Other assets 8,259 852 34 574 9,719
Current liabilities (57,434) (18,643) (54,642) (33,363) (164,082)
Long-term liabilities (30,250) (16,523) (63,415) (5,056) (115,244)
------------ ----------- ------------ ----------- -----------
Net assets from discontinued
operations $ 58,760 $ 93,277 $ 103,786 $ 98,650 $ 354,473
------------ ----------- ------------ ----------- -----------
------------ ----------- ------------ ----------- -----------
</TABLE>
The amounts to become receivable upon the Distributions reflected in the April
25, 1998 balance sheet were recovered from the Spin-Off Companies in connection
with the Distributions. No balance sheet amounts have been provided as of
October 24, 1998, as the Distributions were completed on June 9, 1998.
NOTE 3 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the six months ended October 24, 1998
were as follows:
<TABLE>
<S> <C>
Stockholders' equity balance at April 25, 1998 $ 1,486,131
Issuances (retirements) of common stock in conjunction with:
Equity investment by Investor, net of expenses 254,675
2001 Notes exchange 151,425
Exercise of stock options, including tax benefits 66,705
Employee stock purchase plan, net of expenses 1,559
Conversion of 2003 Notes 1,000
Purchase price adjustments related to acquisitions (101)
Repurchase of common stock in
Equity Tender (1,000,000)
Stock options participating in Equity Tender 57,708
Adjustments related to the Distributions (381,589)
Comprehensive loss (120,233)
--------------
Stockholders' equity balance at October 24, 1998 $ 517,280
--------------
--------------
</TABLE>
The adjustments related to the Distributions amount in the above table consists
of reductions in additional paid-in capital and retained earnings of $326,860
and $55,879, respectively, and a decrease in accumulated other comprehensive
loss of $1,150.
9
<PAGE>
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," effective April 26, 1998. SFAS No. 130
requires cumulative translation adjustment, which prior to adoption was reported
separately in stockholders' equity, to be included in other comprehensive loss.
The components of comprehensive loss are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
October 24, October 25, October 24, October 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C>
Net income (loss) $ (3,982) $ 24,198 $ (89,088) $ 44,184
Other comprehensive income (loss):
Cumulative translation adjustment 5,632 (33,039) (31,145) (72,415)
----------- ----------- ----------- ----------
Comprehensive income (loss) $ 1,650 $ (8,841) $ (120,233) $ (28,231)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
On June 10, 1998, the Company effected a one-for-four reverse split of its
common stock whereby each four shares of common stock were exchanged for one
share of common stock. All share and per share data appearing in these
consolidated financial statements and notes hereto have been retroactively
adjusted for this split.
NOTE 4 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for computing
and presenting earnings per share ("EPS"). SFAS No. 128 requires the dual
presentation of basic and diluted EPS on the face of the statement of
operations. 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 adopted SFAS No. 128
during Fiscal 1998 and has restated all prior period EPS data.
The following information presents the Company's computations of basic and
diluted EPS from continuing operations before extraordinary items for the
periods presented in the consolidated statement of operations.
<TABLE>
<CAPTION>
Income/
(Loss) Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Three months ended October 24, 1998:
Basic loss per share $ (3,982) 36,569 $ (0.11)
----------
----------
Effect of dilutive employee stock options
---------- ----------
Diluted loss per share $ (3,982) 36,569 $ (0.11)
---------- ---------- ----------
---------- ---------- ----------
Three months ended October 25, 1997:
Basic income per share $ 12,770 27,600 $ 0.46
----------
----------
Effect of dilutive employee stock options 733
---------- ----------
Diluted income per share $ 12,770 28,333 $ 0.45
---------- ---------- ----------
---------- ---------- ----------
Six months ended October 24, 1998:
Basic loss per share $ (87,525) 35,821 $ (2.44)
----------
----------
Effect of dilutive employee stock options
---------- ----------
Diluted loss per share $ (87,525) 35,821 $ (2.44)
---------- ---------- ----------
---------- ---------- ----------
Six months ended October 25, 1997:
Basic income per share $ 21,805 27,089 $ 0.80
----------
----------
Effect of dilutive employee stock options 596
---------- ----------
Diluted income per share $ 21,805 27,685 $ 0.79
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
10
<PAGE>
The basic and diluted loss per share amounts, for the three and six month
periods ended October 24, 1998, were calculated using the same number of shares
outstanding since, as a result of the net losses for such periods, all of the
Company's employee stock options and the two series of convertible debt
securities outstanding during such periods were anti-dilutive.
The Company had additional employee stock options and two series of convertible
debt securities outstanding during the three and six month periods ended October
25, 1997, that were not included in the computation of diluted EPS because they
were anti-dilutive.
NOTE 5 - BUSINESS COMBINATIONS
In fiscal 1998, the Company completed a total of 73 business combinations (51
related to continuing operations and 22 related to discontinued operations), all
of which were accounted for under the purchase method. During the six months
ended October 24, 1998, the Company completed a total of 16 business
combinations (all related to continuing operations), all of which were accounted
for under the purchase method, for an aggregate cash purchase price of $22,723.
NOTE 6 - PRO FORMA RESULTS OF OPERATIONS
The following presents the unaudited pro forma results of operations of the
Company for the three and six month periods ended October 24, 1998 and October
25, 1997, as if the Strategic Restructuring Plan, the Financing Transactions and
all of the purchase acquisitions related to continuing operations completed
since the beginning of fiscal 1998 had been consummated at the beginning of
fiscal 1998. The pro forma results of operations, compared to the historical
actual results, 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 MBE), 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 incurred to help finance the cost
of the Equity Tender; and (iii) substantially higher effective income tax rates,
due to increased non-deductible goodwill expense and the Company's inability to
account for the acquisition of subchapter S corporations under the
pooling-of-interests method. The pro forma results of operations reflect certain
pro forma adjustments including the amortization of intangible assets,
reductions in executive compensation and the removal of Strategic Restructuring
Plan costs. The pro forma results of operations include $3,469 and $12,195 in
operating restructuring costs during the three and six month periods ended
October 24, 1998, respectively, and a $2,536 loss on the sale of a business in
New Zealand during both the three and six month periods ended October 24, 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
October 24, October 25, October 24, October 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 679,055 $ 718,554 $ 1,341,886 $ 1,417,685
Income (loss) from continuing operations $ (3,664) $ 2,538 $ (8,922) $ 3,883
Basic income (loss) per share from
continuing operations $ (0.10) $ 0.07 $ (0.24) $ 0.11
Diluted income (loss) per share from
continuing operations $ (0.10) $ 0.07 $ (0.24) $ 0.10
</TABLE>
The pro forma results of operations are prepared for comparative purposes only
and do not necessarily reflect the results that would have occurred had the
Strategic Restructuring Plan, the Financing Transactions and the acquisitions
occurred at the beginning of fiscal 1998 or the results that may occur in the
future.
11
<PAGE>
NOTE 7 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial information for
the Company, showing guarantor subsidiaries and non-guarantor subsidiaries
separately. The financial information shown in the "Guarantor Subsidiaries"
column represents the financial information of the domestic subsidiaries that
are guarantors of the Credit Facility and the 2008 Notes. The guarantor
subsidiaries are wholly-owned subsidiaries of the Company and the guarantees are
full, unconditional and joint and several. Separate financial statements of the
guarantor subsidiaries are not presented because management believes that
separate financial statements would not provide additional meaningful
information to investors.
Balance Sheets
<TABLE>
<CAPTION>
October 24, 1998
-------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 4,975 $ 7,211 $ 7,299 $ $ 19,485
Accounts receivable, less allowance for ....
doubtful accounts......................... (1,950) 247,452 90,878 336,380
Inventory................................... 121,579 120,343 (76)(b) 241,846
Prepaid expenses and other current
assets.................................... 61,609 33,499 52,478 234 (b) 147,820
----------- ----------- ---------- ----------- -------------
Total current assets.................... 64,634 409,741 270,998 158 745,531
Property and equipment, net.................... 9,196 107,323 113,739 (556)(b) 229,702
Intangible assets, net......................... 572,600 337,118 909,718
Investment in subsidiaries..................... 958,901 (958,901)(a)
Other assets................................... 110,920 30,223 70,958 212,101
----------- ----------- ---------- ----------- -------------
Total assets............................ $1,143,651 $ 1,119,887 $ 792,813 $ (959,299) $2,097,052
----------- ----------- ---------- ----------- -------------
----------- ----------- ---------- ----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................. $ 31,000 $ 1,691 $ 1,185 $ $ 33,876
Short-term intercompany balances............ 148,726 (150,403) 1,677
Accounts payable............................ 1,411 98,689 73,228 173,328
Accrued compensation........................ 3,230 20,461 17,229 40,920
Other accrued liabilities................... 23,967 19,137 73,231 116,335
----------- ----------- ---------- ----------- -------------
Total current liabilities............... 208,334 (10,425) 166,550 364,459
Long-term debt................................. 1,190,604 4,634 2,622 1,197,860
Other long-term liabilities and minority
interests.................................... 13,929 3,233 291 17,453
Long-term intercompany balances................ (662,461) 259,187 403,371 (97)(b)
----------- ----------- ---------- ----------- -------------
Total liabilities....................... 750,406 256,629 572,834 (97) 1,579,772
----------- ----------- ---------- ----------- -------------
Stockholders' equity:
Common stock................................ 37 37
Additional paid-in capital.................. 651,080 724,263 261,790 (958,901)(a) 678,232
Accumulated other comprehensive loss........ (77,151) (65,647) (142,798)
Retained earnings (accumulated deficit)..... (180,721) 138,995 23,836 (301)(b) (18,191)
----------- ----------- ---------- ----------- -------------
Total stockholders' equity.............. 393,245 863,258 219,979 (959,202) 517,280
----------- ----------- ---------- ----------- -------------
Total liabilities and stockholders'
equity $ 1,143,651 $ 1,119,887 $ 792,813 $ (959,299) $ 2,097,052
----------- ----------- ---------- ----------- -------------
----------- ----------- ---------- ----------- -------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
April 25, 1998
-------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Total
ASSETS
Current assets:
Cash and cash equivalents................... $ 19,684 $ 15,743 $ 16,594 $ $ 52,021
Accounts receivable, less allowance for ....
doubtful accounts......................... 219,046 91,481 310,527
Inventory................................... 118,553 110,248 (130)(b) 228,671
Prepaid expenses and other current
assets.................................... 29,799 34,753 52,598 117,150
-------------- -------------- ------------ -------------- -------------
Total current assets.................... 49,483 388,095 270,921 (130) 708,369
Property and equipment, net.................... 11,441 101,671 116,103 (500)(b) 228,715
Intangible assets, net......................... 567,010 356,014 923,024
Investment in subsidiaries..................... 1,140,020 (1,140,020)(a)
Other assets................................... 97,683 30,334 66,684 194,701
Net assets of discontinued operations:
Amounts to become receivable upon the
Distributions............................. 132,145 132,145
All other net assets........................ 354,473 354,473
-------------- -------------- ------------ -------------- -------------
Total assets............................ $ 1,430,772 $ 1,087,110 $ 1,164,195 $ (1,140,650) $ 2,541,427
-------------- -------------- ------------ -------------- -------------
-------------- -------------- ------------ -------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................. $ 365,000 $ 1,859 $ 1,368 $ $ 368,227
Short-term intercompany balances............ 66,027 (100,324) 34,297
Accounts payable............................ 2,303 85,712 74,703 162,718
Accrued compensation........................ 4,218 20,918 17,877 43,013
Other accrued liabilities................... (26,456) 60,113 47,988 (234) (b) 81,411
-------------- -------------- ------------ -------------- -------------
Total current liabilities............... 411,092 68,278 176,233 (234) 655,369
Long-term debt................................. 373,750 5,083 3,341 382,174
Other long-term liabilities and minority
interests.................................... 13,908 3,510 335 17,753
Long-term intercompany balances................ (651,930) 195,242 456,785 (97) (b)
-------------- -------------- ------------ -------------- -------------
Total liabilities....................... 146,820 272,113 636,694 (331) 1,055,296
-------------- -------------- ------------ -------------- -------------
Stockholders' equity:
Common stock................................ 33 33
Additional paid-in capital.................. 1,417,917 709,266 484,962 (1,140,020) (a) 1,472,125
Accumulated other comprehensive loss........ (66,472) (46,331) (112,803)
Retained earnings (accumulated deficit)..... (67,526) 105,731 88,870 (299) (b) 126,776
-------------- -------------- ------------ -------------- -------------
Total stockholders' equity.............. 1,283,952 814,997 527,501 (1,140,319) 1,486,131
-------------- -------------- ------------ -------------- -------------
Total liabilities and stockholders'
equity $ 1,430,772 $ 1,087,110 $ 1,164,195 $ (1,140,650) $ 2,541,427
-------------- -------------- ------------ -------------- -------------
-------------- -------------- ------------ -------------- -------------
</TABLE>
13
<PAGE>
Statements of Operations
<TABLE>
<CAPTION>
For the Three Months Ended October 24, 1998
-------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ $ 491,013 $ 195,225 $ (9,033)(c) $ 677,205
Cost of revenues............................... (1,924) 367,045 136,064 (9,019)(c) 492,166
-------------- -------------- ------------ -------------- -------------
Gross profit............................ 1,924 123,968 59,161 (14) 185,039
Selling, general and administrative expenses... 7,917 93,622 49,131 150,670
Amortization expense........................... 206 3,819 2,112 6,137
Strategic Restructuring Plan costs.............
Operating restructuring costs.................. 1,179 2,290 3,469
-------------- -------------- ------------ -------------- -------------
Operating income (loss)................. (6,199) 25,348 5,628 (14) 24,763
Interest expense............................... 30,959 (11,290) 9,322 28,991
Interest income................................ (40) (364) (56) (460)
Other expense................................. 4 152 1,771 1,927
-------------- -------------- ------------ -------------- -------------
Income (loss) before provision for (benefit from)
income taxes ................................ (37,122) 36,850 (5,409) (14) (5,695)
Provision for (benefit from) income taxes...... (16,775) 16,362 (1,294) (6)(c) (1,713)
-------------- -------------- ------------ -------------- -------------
Net income (loss).............................. $ (20,347) $ 20,488 $ (4,115) $ (8) $ (3,982)
-------------- -------------- ------------ -------------- -------------
-------------- -------------- ------------ -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended October 25, 1997
-------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ $ 438,135 $ 217,266 $ (6,061)(c) $ 649,340
Cost of revenues............................... (329) 328,480 147,872 (5,939)(c) 470,084
-------------- -------------- ------------ -------------- -------------
Gross profit............................ 329 109,655 69,394 (122) 179,256
Selling, general and administrative expenses... 5,194 85,328 56,173 (20)(c) 146,675
Amortization expense........................... 1,966 2,315 4,281
Strategic Restructuring Plan costs.............
Operating restructuring costs..................
-------------- -------------- ------------ -------------- -------------
Operating income (loss)................. (4,865) 22,361 10,906 (102) 28,300
Interest expense............................... 7,669 (1,806) 3,723 9,586
Interest income................................ 1,593 (1,595) (544) (546)
Other income.................................. (4,743) (391) (5,134)
-------------- -------------- ------------ -------------- -------------
Income (loss) from continuing operations
before provision for (benefit from) income
taxes........................................ (14,127) 30,505 8,118 (102) 24,394
Provision for (benefit from) income taxes...... (8,302) 16,524 3,446 (44)(c) 11,624
-------------- -------------- ------------ -------------- -------------
Income (loss) from continuing operations ...... (5,825) 13,981 4,672 (58) 12,770
Income from discontinued operations,
net of income taxes.......................... 11,428 11,428
-------------- -------------- ------------ -------------- -------------
Net income (loss).............................. $ (5,825) $ 13,981 $ 16,100 $ (58) $ 24,198
-------------- -------------- ------------ -------------- -------------
-------------- -------------- ------------ -------------- -------------
</TABLE>
14
<PAGE>
Statements of Operations
<TABLE>
<CAPTION>
For the Six Months Ended October 24, 1998
-------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ $ 951,470 $ 394,559 $ (16,875) (c) $ 1,329,154
Cost of revenues............................... (2,697) 711,693 274,290 (16,835) (c) 966,451
-------------- -------------- ------------ -------------- -------------
Gross profit............................ 2,697 239,777 120,269 (40) 362,703
Selling, general and administrative expenses... 15,983 182,151 101,369 (37) (c) 299,466
Amortization expense........................... 206 7,585 4,332 12,123
Strategic Restructuring Plan costs............. 96,948 555 97,503
Operating restructuring costs.................. 7,495 4,700 12,195
-------------- -------------- ------------ -------------- -------------
Operating income (loss)................. (110,440) 41,991 9,868 (3) (58,584)
Interest expense............................... 51,864 (21,581) 17,596 47,879
Interest income................................ (92) (528) (207) (827)
Other expense.................................. 4 309 1,204 1,517
-------------- -------------- ------------ -------------- -------------
Income (loss) from continuing operations
before provision for (benefit from) income
taxes and extraordinary items................ (162,216) 63,791 (8,725) (3) (107,153)
Provision for (benefit from) income taxes...... (49,290) 30,527 (864) (1) (c) (19,628)
-------------- -------------- ------------ -------------- -------------
Income (loss) from continuing operations
before extraordinary items ................. (112,926) 33,264 (7,861) (2) (87,525)
Loss from discontinued operations,
net of income taxes.......................... (1,294) (1,294)
-------------- -------------- ------------ -------------- -------------
Income (loss) before extraordinary items....... (112,926) 33,264 (9,155) (2) (88,819)
Extraordinary items - loss on early
termination of debt facilities, net of
income taxes................................. 269 269
-------------- -------------- ------------ -------------- -------------
Net income (loss).............................. $ (113,195) $ 33,264 $ (9,155) $ (2) $ (89,088)
-------------- -------------- ------------ -------------- -------------
-------------- -------------- ------------ -------------- -------------
</TABLE>
<TABLE>
For the Six Months Ended October 25, 1997
-------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ $ 828,511 $ 444,316 $ (8,673) (c) $ 1,264,154
Cost of revenues............................... (544) 619,666 303,480 (8,486) (c) 914,116
-------------- -------------- ------------ -------------- -------------
Gross profit............................ 544 208,845 140,836 (187) 350,038
Selling, general and administrative expenses... 10,063 163,370 116,153 (46) (c) 289,540
Amortization expense........................... 3,821 4,575 8,396
Strategic Restructuring Plan costs.............
Operating restructuring costs..................
-------------- -------------- ------------ -------------- -------------
Operating income (loss)................. (9,519) 41,654 20,108 (141) 52,102
Interest expense............................... 14,329 (3,238) 6,962 18,053
Interest income................................ 2,429 (2,512) (1,045) (1,128)
Other income.................................. (1,085) (4,935) (497) (6,517)
Income (loss) from continuing operations
before provision for (benefit from) income
taxes and extraordinary items................ (25,192) 52,339 14,688 (141) 41,694
Provision for (benefit from) income taxes...... (12,762) 26,515 6,198 (62) (c) 19,889
-------------- -------------- ------------ -------------- -------------
Income (loss) from continuing operations....... (12,430) 25,824 8,490 (79) 21,805
Income from discontinued operations,
net of income taxes.......................... 22,379 22,379
-------------- -------------- ------------ -------------- -------------
Net income (loss).............................. $ (12,430) $ 25,824 $ 30,869 $ (79) $ 44,184
-------------- -------------- ------------ -------------- -------------
-------------- -------------- ------------ -------------- -------------
</TABLE>
15
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Six Months Ended October 24, 1998
------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities........... $ (67,460) $ 37,197 $ 8,379 $ (56)(d) $ (21,940)
Cash flows from investing activities........... (14,525) (12,499) (17,494) 56 (d) (44,462)
Cash flows from financing activities........... 67,276 (33,230) 12,138 46,184
Effect of exchange rates on cash and cash
equivalents.................................. 200 200
Cash used in discontinued operations........... (12,518) (12,518)
-------------- -------------- ------------ -------------- ------------
Net decrease in cash and cash
equivalents................................... (14,709) (8,532) (9,295) (32,536)
Cash and cash equivalents at beginning
of period.................................... 19,684 15,743 16,594 52,021
-------------- -------------- ------------ -------------- ------------
Cash and cash equivalents at end of period..... $ 4,975 $ 7,211 $ 7,299 $ $ 19,485
-------------- -------------- ------------ -------------- -----------
-------------- -------------- ------------ -------------- -----------
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended October 25, 1997
-------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities........... $ (36,475) $ 36,388 $ 19,883 $ (138) (d) $ 19,658
Cash flows from investing activities........... 2,375 (9,558) (53,078) 235 (d) (60,026)
Cash flows from financing activities.......... 41,263 (28,729) 34,261 (97) (d) 46,698
Effect of exchange rates on cash and cash
equivalents.................................. (1,509) (1,509)
Cash used in discontinued operations........... (5,547) (5,547)
-------------- -------------- ------------ -------------- -------------
Net increase (decrease) in cash and cash
equivalents.................................. 7,163 (1,899) (5,990) (726)
Cash and cash equivalents at beginning
of period.................................... 13,210 7,758 23,058 44,026
-------------- -------------- ------------ -------------- -------------
Cash and cash equivalents at end of period..... $ 20,373 $ 5,859 $ 17,068 $ $ 43,300
-------------- -------------- ------------ -------------- -------------
-------------- -------------- ------------ -------------- -------------
</TABLE>
The "U.S. Office Products Company (Parent Company)" column in the foregoing
condensed consolidating financial information reflects equity method accounting
for the Company's investment in subsidiaries.
Consolidating adjustments to the condensed consolidating balance sheets
include the following:
(a) Elimination of investments in subsidiaries.
(b) Elimination of intercompany profit in inventory and property and
equipment.
Consolidating adjustments to the condensed consolidating statements of
income include the following:
(c) Elimination of intercompany sales.
Consolidating adjustments to the condensed consolidating statements of
cash flows include the following:
(d) Elimination of intercompany profits.
16
<PAGE>
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (fiscal 2000 for the
Company). SFAS No. 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management of the Company
anticipates that, due to its limited use of derivative instruments, the adoption
of SFAS No. 133 will not have a significant effect on the Company's results of
operations or its financial position.
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998 (fiscal 1999 for the Company). SOP 98-1
provides guidance for accounting for the costs of computer software developed or
obtained for internal use. Management of the Company anticipates that the
adoption of SOP 98-1 will not have a significant effect on the Company's results
of operations or its financial position.
NOTE 9 - SUBSEQUENT EVENTS
Subsequent to October 24, 1998 and through December 3, 1998, the Company has
completed three business combinations for an aggregate cash purchase price of
$10,060.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. When used in this Report, the words
"anticipate," "believe," "estimate," "intend," "may," "will," "expect" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include those discussed under the heading
"-Factors Affecting the Company's Business." The Company does not undertake any
obligation to revise these forward-looking statements to reflect any future
events or circumstances.
Capitalized terms used in the Management's Discussion and Analysis of Financial
Condition and Results of Operations without separate definitions have the
meaning given to them in Note 1 to the notes to the consolidated financial
statements which appear elsewhere in the Quarterly Report on Form 10-Q.
Introduction
As a result of the completion of the Strategic Restructuring Plan in June 1998
(see Note 1 to the notes to the Company's consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q), the Company consists
of three operating divisions: the North American Office Products Group, which
includes office supplies, office furniture, and breakroom products and services
(office coffee, beverage, and vending services) ("NAOPG"); Mail Boxes Etc.
("MBE"), which the Company acquired in November 1997; and the Company's
operations in New Zealand and Australia (owned principally through Blue Star
Group Limited). The Company also holds a 49% equity interest in Dudley
Stationery Limited, a U.K. contract stationer. These businesses make up the
Company's continuing operations. The NAOPG operates primarily in the United
States; it also includes three coffee and beverage businesses located in Canada.
The Company's continuing operations derive revenues primarily from the sale of a
wide variety of office supplies, office furniture, and other office products,
including office coffee, beverage, and vending products and services to
corporate, commercial and industrial customers. Cost of revenues represents the
purchase price for office supplies, office furniture, and other office products
and includes occupancy and delivery costs and is reduced by rebates and
discounts on inventory when such inventory is sold. Selling, general and
administrative expenses represent product marketing and selling costs, customer
service and product design costs, warehouse costs, and other administrative
expenses.
From its inception in 1994 through the end of the 1997 calendar year, the
Company grew primarily through acquisitions. At the time it adopted the
Strategic Restructuring Plan, the Company announced its intention to change its
strategic focus and pursue increased revenues and profitability primarily
through operating strategies intended to improve the efficiency of its existing
businesses. The Company said it expected to reduce its acquisition volume
significantly. The Company has acquired many fewer businesses since the start of
the 1998 calendar year than it did during comparable periods of prior years. In
addition, consistent with the Company's announced expectations, acquisitions
have involved smaller businesses and have accounted for a much smaller
percentage of the Company's revenue growth than in the past. In November 1998,
the Company indicated that it intended to reduce future acquisitions even
further than originally expected, in order to devote substantially all of its
management attention and capital resources to the operation of its existing
businesses. See "--Factors Affecting the Company's Business - Change in
Strategic Focus and Growth Strategy" and "--Challenges of Business Integration
and Consolidation" for a discussion of risks and uncertainties associated with
these changes.
18
<PAGE>
As a result of the Strategic Restructuring Plan and the Financing Transactions,
the Company's reported results reflect substantially higher amortization and
interest expense, and higher effective income tax rates, than in prior periods.
Consistent with the Company's announced expectations at the time it adopted the
Strategic Restructuring Plan, these increased expenses have significantly
reduced the Company's reported net income and net income per share in fiscal
1999, as compared to prior periods. Rather than net income and net income per
share, management believes that a more meaningful indication of the Company's
performance is cash flows from operations and earnings before interest expense,
provision for income taxes, depreciation expense, amortization expense, and
restructuring costs ("EBITDA"). In focusing on improving the operations of its
existing businesses, the Company is seeking to increase EBITDA both in absolute
terms and as a percentage of revenues. For a discussion of the Company's plans
to seek increases in EBITDA as a percentage of revenues, see "--Consolidated
Results of Operations."
The Company derives approximately one-third of its revenues from operations in
New Zealand and Australia. Consequently, the Company's results of operations,
cash flows and financial position will continue to be affected by fluctuations
in foreign currency exchange rates. The exchange rates for the New Zealand and
Australian dollars, as compared to the U.S. dollar, have declined significantly
since the beginning of fiscal 1998. See "--Liquidity and Capital Resources" and
"--Factors Affecting the Company's Business -Fluctuations in the Value of the
New Zealand and Australian Dollars."
Consistent with the objectives of the Strategic Restructuring Plan and as part
of the Company's increased focus on operational matters, the Company is pursuing
cost reduction measures including the elimination of duplicative facilities, the
consolidation of certain operating functions, and the deployment of common
information systems. In implementing these cost reduction measures, the Company
has incurred, and will in the future incur, certain operating restructuring
costs. In June 1998, the Company estimated that these operating restructuring
costs would total $80-105 million, and the Company expressed an intention to
record all of these charges, on a one-time basis, in the first quarter of the
1999 fiscal year. Upon review of formal plans to implement this operating
restructuring, the Company's senior management concluded that the plans
warranted further review and refinement before they could be approved and
implemented. Accordingly, management approved only those operating restructuring
plans that actually were being implemented during the first fiscal quarter. This
represented a small portion of the expected total number of operating
restructuring plans. The Company recorded an operating restructuring charge of
approximately $8.7 million in the first quarter of fiscal 1999, reflecting the
costs of the plans actually being implemented. Approximately $1.3 million of
this amount reflected non-cash items.
In the second fiscal quarter of 1999, the Company recorded operating
restructuring charges of approximately $3.5 million. During the second quarter,
the Company initiated a broad cost-reduction effort, and it expects this effort
to produce annualized cost savings of approximately $30-$36 million, of which
approximately $10 million is expected to be realized in the last two quarters of
the 1999 fiscal year. A majority of the restructuring charge recorded in the
second fiscal quarter reflects the portion of the severance costs relating to
employees who were notified during the second quarter that their positions were
being eliminated. The remainder of the charges reflect costs associated with
facility consolidations. Approximately $1.0 million of this amount reflects
non-cash items.
19
<PAGE>
Management now estimates that the Company will record a total of approximately
$30-35 million of operating restructuring charges (including the $12.2 million
recorded in the first two quarters of the 1999 fiscal year) during the 1999 and
2000 fiscal years. Management expects to record approximately $16 million of
these charges in the second half of fiscal 1999, and the remaining amount in
fiscal 2000. It is expected that approximately one-quarter of these charges will
reflect non-cash items. These charges will include employee severance costs
resulting from the expense reduction program that the Company initiated in the
second quarter of the current fiscal year, costs associated with the
establishment of District Fulfillment Centers ("DFCs") in Nashville, New
Orleans, Austin, Portland, Los Angeles, and Milwaukee, and other costs
associated with additional facility consolidation. (DFCs are centralized
warehouses conducting operations that service geographic regions previously
serviced by multiple facilities.) The total expected amount of operating
restructuring charges is substantially less than the $80-$105 million originally
estimated by management. The lower overall costs result primarily from
management's decision to pursue the construction of substantially fewer new
facilities to serve as DFCs than had been originally planned. Management
believes that it can realize the cost reductions and efficiencies of its DFC
strategy without building as many new facilities. The Company believes that many
of its districts can consolidate operations and reduce expenses by reconfiguring
and continuing to use certain existing facilities, rather than constructing new
facilities. In light of this expectation, management has significantly reduced
the amount of operating restructuring charges it expects the Company to incur in
connection with the DFC program. Overall, management expects that the savings
associated with the planned operating restructuring can be achieved with
substantially less cost. See "--Consolidated Results of Operations" and
"--Liquidity and Capital Resources."
The Company may incur additional restructuring charges in the future in
connection with the consolidation of certain administrative and service
functions now handled at multiple locations. Although the Company is studying
additional strategies for reducing expenses and eliminating duplicative
functions and facilities, no decisions have yet been made about any specific
additional consolidation strategies. If any of these strategies are approved and
implemented, any associated restructuring charges would be in addition to the
$30-35 million related to plans that have already been approved.
Except where specifically noted, the discussion of financial condition and
results of operations that appears below covers only the Company's continuing
operations. For additional information about the results of discontinued
operations, see Note 2 to the Notes to the Company's consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
The Company's financial condition and results of operations have changed
dramatically from the Company's inception in October 1994 to October 24, 1998 as
a result of the Company's aggressive acquisition program and the completion of
the Strategic Restructuring Plan. The Company completed 238 business
combinations (195 related to continuing operations and 43 related to
discontinued operations) from its inception through the end of fiscal 1998, 54
of which were accounted for under the pooling-of-interests method (39 related to
continuing operations and 15 related to discontinued operations). All 73
business combinations completed during fiscal 1998 were accounted for under the
purchase method. Prior to the adoption of the Strategic Restructuring Plan, 22
of the fiscal 1998 business combinations had been accounted for under the
pooling-of-interests method (12 related to continuing operations, including the
acquisition of MBE, and 10 related to discontinued operations). Following
adoption of the Strategic Restructuring Plan, the Company restated its
historical consolidated financial statements to account for these 22 business
combinations under the purchase method. The Company has completed an additional
16 business combinations, all of which were accounted for under the purchase
method, during the six months ended October 24, 1998. The Company's consolidated
financial statements give retroactive effect to the business combinations
accounted for under the pooling-of-interests method during fiscal 1997 and 1996
and include the results of companies acquired in business combinations accounted
for under the purchase method from their respective acquisition dates.
20
<PAGE>
Due to the Company's growth through acquisitions, year-to-year comparisons of
the historical results of the Company's operations have been affected primarily
by the addition of acquired companies. In most instances, dollar increases in
the various revenue and expense components of the Company's results are due
primarily to growth from acquisitions. However, the increases in interest
expense are directly related to the increase in debt, and the interest rates
associated with such debt, resulting from the completion of certain elements of
the Strategic Restructuring Plan. Neither the magnitude nor the source of such
year-to-year changes is necessarily indicative of changes that will occur in the
future. As noted above, the Company's strategy is to focus on operational
improvements and to significantly reduce its acquisition activity. The Company
expects that the impact of acquisitions on the future results of the Company's
continuing operations will decrease because the number and size companies that
it acquires are likely to be much smaller, and the Company's existing operations
are much larger, than in prior years.
Consolidated Results of Operations
Three Months Ended October 24, 1998 Compared to Three Months Ended
October 25, 1997
Consolidated revenues increased 4.3%, from $649.3 million for the three months
ended October 25, 1997, to $677.2 million for the three months ended October 24,
1998. This increase was primarily due to acquisitions. Revenues for the three
months ended October 24, 1998 include revenues from 53 companies acquired in
business combinations accounted for under the purchase method after the
beginning of the second quarter of fiscal 1998 (the "2Q Purchased Companies").
Revenues for the three months ended October 25, 1997 include revenues from ten
of such 2Q Purchased Companies for a portion of such period. This increase was
partially offset by a decline in international revenues as a result of the
devaluation of the New Zealand and Australian dollars against the U.S. dollar
(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 increase in reported consolidated revenues (in U.S.
dollar terms) by approximately 7.6%. On a pro forma basis, and assuming that the
average exchange rates for the New Zealand and Australian dollars in the second
fiscal quarter of 1998 were equal to the average exchange rates in the second
quarter of fiscal 1999, revenues increased 1.3%. See "--Pro Forma Results of
Operations."
International revenues decreased 10.1%, from $217.3 million, or 33.5% of
consolidated revenues, for the three months ended October 25, 1997, to $195.2
million, or 28.8% of consolidated revenues, for the three months ended October
24, 1998. International revenues consisted primarily of revenues from New
Zealand and Australia, with the balance from Canada. This decrease is due
exclusively to the devaluation of the New Zealand and Australian dollars against
the USD. The following table details the declines in the average exchanges rates
of the New Zealand and Australian dollars versus the USD for the three months
ended October 24, 1998 and October 25, 1997:
<TABLE>
<CAPTION>
Average Exchange Rates
for the Three Months Ended
---------------------------
October 24, October 25,
1998 1997 Decline
----------- ----------- -----------
<S> <C> <C> <C>
New Zealand dollar $.51 $.64 $(.13)
Australian dollar $.60 $.73 $(.13)
</TABLE>
International revenues in New Zealand and Australia, calculated in their local
currencies, increased 12.6% for the three months ended October 24, 1998, as
compared to the three months ended October 25, 1997. This increase was due
primarily to the inclusion, in the revenues for the three months ended October
24, 1998, of revenues from 23 companies that were acquired in business
combinations accounted for under the purchase method after the beginning of the
second quarter of fiscal 1998. Revenues from two such companies were included in
revenues for a portion of the three months ended October 25, 1997.
21
<PAGE>
Gross profit increased 3.2%, from $179.3 million for the three months ended
October 25, 1997, to $185.0 million for the three months ended October 24, 1998.
The increase in gross profit is directly related to the increase in revenues. As
a percentage of revenues, gross profit decreased from 27.6% for the three months
ended October 25, 1997, to 27.3% for the three months ended October 24, 1998.
The Company believes that the decline in gross profit as a percentage of
revenues is the result of a number of factors, including: (i) certain
merchandising changes included in the Company's 1998 office products catalog,
which the Company distributed to customers in January 1998, that the Company
believes had a negative impact on the overall profitability of customer orders;
(ii) a slight change in product mix (an increase in furniture sales, which
typically carry a lower gross profit margin than other products that the Company
sells); (iii) significant competitive pressures on portions of the Company's
technology business in New Zealand; (iv) a slight change in account mix at some
of the Company's NAOPG operating units, with some lower margin accounts
replacing higher margin business; and (v) the increased cost of importing
certain inventory into New Zealand, as a result of the decline in the value of
the New Zealand dollar. Late in the first fiscal quarter of this year, the
Company began to implement measures that it believes address the factors that
have been responsible for the majority of the declines in gross margin. These
include making changes in merchandising decisions for the Company's 1999 office
products catalog, which was distributed to customers in late September and
October of 1998, reviewing and revising purchasing programs with vendors and
wholesalers, providing managers and sales associates with increased incentives
to improve overall customer account profitability, and implementing operational
programs designed to help operating units achieve higher gross margins. Although
the Company cannot yet assess the effectiveness of such measures, the decline in
gross profit, as a percentage of revenues, was less in the second quarter than
the decline than occurred in the first quarter, and substantially less than the
decline that occurred in the fourth quarter of last fiscal year. Management
expects that its corrective actions will lead to improved gross margins in the
future, although gross margins are affected in part by circumstances beyond
management's control (including the factors described under "--Factors Affecting
the Company's Business" below) and there can be no assurances of the timing or
magnitude of such improvements, or whether they will be realized at all. Gross
margin improvement efforts could be offset in whole or in part by further
declines in the value of the New Zealand dollar, continued competitive pressures
in the technology business in New Zealand, increasing price competition in the
United States, and other factors discussed below under "--Factors Affecting the
Company's Business."
Selling, general and administrative expenses increased 2.7%, from $146.7 million
for the three months ended October 25, 1997, to $150.7 million for the three
months ended October 24, 1998, primarily due to the increase in revenues.
Selling, general and administrative expenses as a percentage of revenues
decreased from 22.6% for the three months ended October 25, 1997, to 22.2% for
the three months ended October 24, 1998. The decrease in selling, general and
administrative expenses as a percentage of revenues was due to several factors,
including (i) elimination of some expenses through the consolidation of certain
redundant facilities and job functions; and (ii) reductions in the costs of many
general and administrative expenses incurred by the Company through the
negotiation of national or other large-scale contracts with the providers of
certain services affecting these general and administrative expenses.
Amortization expense increased 43.4%, from $4.3 million for the three months
ended October 25, 1997, to $6.1 million for the three months ended October 24,
1998. This increase is due exclusively to the amortization of intangible assets
recorded in conjunction with the 53 business combinations, accounted for under
the purchase method, completed since the beginning of the fiscal 1998.
EBITDA increased from $42.0 million, for the three months ended October 25,
1997, to $43.4 million, for the three months ended October 24, 1998. EBITDA as a
percentage of revenues decreased from 6.5% for the three months ended October
25, 1997, to 6.4% for the three months ended October 24, 1998. EBITDA represents
earnings before interest, income taxes, depreciation, amortization, Strategic
Restructuring Plan costs, operating restructuring costs and extraordinary items.
EBITDA is provided because it is a measure commonly used by analysts and
investors to determine a company's ability to incur and service debt. EBITDA is
not a measurement of performance under generally accepted accounting principles
and should not be considered an alternative to net income as a measure of
performance or to cash flow as a measure of liquidity. EBITDA is not necessarily
comparable with similarly titled measures for other companies.
22
<PAGE>
The Company recorded operating restructuring costs of approximately $3.5 million
during the three months ended October 24, 1998. See "--Introduction" for a
complete discussion of operating restructuring charges.
Interest expense, net of interest income, increased 215.6%, from $9.0 million
for the three months ended October 25, 1997, to $28.5 million for the three
months ended October 24, 1998. This increase is due primarily to the completion
of the Strategic Restructuring Plan and the Financing Transactions in June 1998.
This resulted from a significant increase in both the amount of debt outstanding
and the average interest rate related to such debt. At October 24, 1998, the
Company had total debt outstanding of approximately $1,231.7 million at an
average interest rate of approximately 9.2%.
Other income decreased from income of $5.1 million for the three months ended
October 25, 1997, to expense of $1.9 million for the three months ended October
24, 1998. Other income includes the Company's 49% share of the net income of
Dudley, in which the Company has a 49% equity investment, and miscellaneous
other income and expense items. The decrease is due primarily to the recording
of a $4.7 million marketing fee earned in conjunction with providing a license
to use a list of the Company's customers in the United States during the three
months ended October 25, 1997 versus the recognition of a $2.5 million loss on
the sale of a business in New Zealand during the three months ended October 24,
1998.
Provision for income taxes changed from an income tax provision of $11.6 million
for the three months ended October 25, 1997 to an income tax benefit of $1.7
million for the three months ended October 24, 1998, reflecting an effective
income tax rate of 47.7% and an effective income tax benefit rate of 30.1%,
respectively. The provision for income taxes for the three month period ended
October 25, 1997 reflects the recording of an income tax provision at the
federal statutory rate of 35.0%, plus appropriate state, local and foreign
taxes. In addition, the effective tax rate was increased to reflect
non-deductible goodwill amortization expense. The benefit from income taxes for
the three months ended October 24, 1998 reflects the net impact of (i) an income
tax provision of 90.0% on the results from continuing operations, excluding the
operating restructuring costs and loss on the sale of the business in New
Zealand; and (ii) an income tax benefit on the operating restructuring costs
($3.5 million) and the loss on the sale of a businesses in New Zealand ($2.5
million), as the Company believes that such costs will be deductible for income
tax purposes. The 90.0% effective tax rate discussed above reflects the
recording of an income tax provision at the federal statutory rate of 35.0%,
plus appropriate state, local and foreign taxes. The effective tax rate was
increased to reflect the incurrence of non-deductible goodwill amortization
expense. The effective tax rate is substantially higher in the current quarter
than it was in the second quarter of last year because the Company has
substantially more non-deductible goodwill and substantially less reported net
income. As a result, the Company's tax provision represents a higher percentage
of reported net income (since the statutory rate is applied to the sum of net
income and non-deductible goodwill).
Although Note 6 of the notes to the Company's consolidated financial statements
indicates that, on a pro forma basis, the Company would have had a net loss of
$3.6 million from continuing operations before extraordinary items for the three
months ended October 24, 1998, the Company had pro forma EBITDA for such period
of $43.5 million, which was significantly greater than the pro forma interest
expense of $27.9 million. The pro forma loss for the three months ended October
24, 1998 included approximately $3.5 million in one-time operating restructuring
charges and a $2.5 million loss on the sale of a business in New Zealand which
in the aggregate, net of the related benefits from income taxes, totaled $4.0
million. See "--Liquidity and Capital Resources" and "--Factors Affecting the
Company's Business" for a discussion of the Company's ability to meet its debt
service obligations.
Income from discontinued operations was $11.4 million for the three months ended
October 25, 1997. There was no income from discontinued operations included in
the Company's consolidated financial statements for the three months ended
October 24, 1998, as the Distributions were completed on June 9, 1998.
Therefore, the results of the Spin-Off Companies were not included in the
Company's consolidated statement of operations during the three months ended
October 24, 1998. See Note 2 of the notes to the Company's consolidated
financial statements included elsewhere in the Quarterly Report on Form 10-Q.
23
<PAGE>
Six Months Ended October 24, 1998 Compared to Six Months Ended
October 25, 1997
Consolidated revenues increased 5.1%, from $1,264.2 million for the six months
ended October 25, 1997, to $1,329.2 million for the six months ended October 24,
1998. This increase was primarily due to acquisitions. Revenues for the six
months ended October 24, 1998 include revenues from 67 companies acquired in
business combinations accounted for under the purchase method after the
beginning of the first quarter of fiscal 1998 (the "Purchased Companies").
Revenues for the six months ended October 25, 1997 include revenues from 24 of
such Purchased Companies for a portion of such period. This increase was
partially offset by a decline in international revenues as a result of the
devaluation of the New Zealand and Australian dollars against 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
increase in reported consolidated revenues (in U.S. dollar terms) by
approximately 8.3%. On a pro forma basis, and assuming that the average exchange
rates for the New Zealand and Australian dollars in the first two quarters of
fiscal 1998 were equal to the average exchange rates in the first two quarters
of fiscal 1999, revenues increased 2.2%. See "--Pro Forma Results of
Operations."
International revenues decreased 11.2%, from $444.3 million, or 35.1% of
consolidated revenues, for the six months ended October 25, 1997, to $394.6
million, or 29.7% of consolidated revenues, for the six months ended October 24,
1998. This decrease is due exclusively to the devaluation 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 six months ended October 24, 1998 and October 25, 1997:
<TABLE>
<CAPTION>
Average Exchange Rates
for the Three Months Ended
---------------------------
October 24, October 25,
1998 1997 Decline
----------- ----------- -----------
<S> <C> <C> <C>
New Zealand dollar $.52 $.66 $(.14)
Australian dollar $.62 $.74 $(.12)
</TABLE>
International revenues in New Zealand and Australia, calculated in their local
currencies, increased 12.5% for the six months ended October 24, 1998, as
compared to the six months ended October 25, 1997. This increase was due
primarily to the inclusion, in the revenues for the six months ended October 24,
1998, of revenues from 28 companies that were acquired in business combinations
accounted for under the purchase method after the beginning of the first quarter
of fiscal 1998. Revenues from seven such companies were included in revenues for
a portion of the six months ended October 25, 1997.
Gross profit increased 3.6%, from $350.0 million for the six months ended
October 25, 1997, to $362.7 million for the six months ended October 24, 1998.
The increase in gross profit is directly related to the increase in revenues. As
a percentage of revenues, gross profit decreased from 27.7% for the six months
ended October 25, 1997, to 27.3% for the six months ended October 24, 1998. For
a discussion of factors that the Company believes have caused gross margins to
decline, as well as steps the Company has taken to address these issues and the
Company's expectations regarding future gross margin trends, see "--Consolidated
Results of Operations - Three Months Ended October 24, 1998 as Compared to Three
Months Ended October 25, 1997."
Selling, general and administrative expenses increased 3.4%, from $289.5 million
for the six months ended October 25, 1997, to $299.5 million for the six months
ended October 24, 1998, primarily due to the increase in revenues. Selling,
general and administrative expenses as a percentage of revenues decreased from
22.9% for the six months ended October 25, 1997, to 22.5% for the six months
ended October 24, 1998. The decrease in selling, general and administrative
expenses as a percentage of revenues was due to several factors, including (i)
elimination of some expenses through the consolidation of certain redundant
facilities and job functions; and (ii) reductions in the costs of many general
and administrative expenses incurred by the Company through the negotiation of
national or other large-scale contracts with the providers of certain services
affecting these general and administrative expenses.
24
<PAGE>
Amortization expense increased 44.3%, from $8.4 million for the six months ended
October 25, 1997, to $12.1 million for the six months ended October 24, 1998.
This increase is due exclusively to the amortization of intangible assets
recorded in conjunction with the 67 business combinations, accounted for under
the purchase method, completed since the beginning of the fiscal 1998.
EBITDA increased from $79.3 million, for the six months ended October 25, 1997,
to $80.9 million, for the six months ended October 24, 1998. EBITDA as a
percentage of revenues decreased from 6.3% for the six months ended October 25,
1997, to 6.1% for the six months ended October 24, 1998.
In conjunction with the completion of the Strategic Restructuring Plan, the
Company incurred non-recurring costs from continuing operations of approximately
$97.5 million, $70.4 million of which were non-cash. In addition, approximately
$11.7 million in such costs were incurred by the Spin-Off Companies and were
included in results of discontinued operations. The Strategic Restructuring Plan
costs related to continuing operations consisted of: (i) compensation expense of
approximately $50.8 million ($49.9 million of which was non-cash) related to the
difference between the exercise prices of employee stock options underlying
shares that were accepted in the Equity Tender and the $108.00 per share ($27.00
per share prior to the Reverse Stock Split) purchase price in the Equity Tender;
(ii) professional fees (including accounting, legal, investment banking and
printing fees) of approximately $26.2 million; and (iii) a non-cash expense of
approximately $20.5 million resulting from the issuance of 301,646 incremental
shares of common stock (with a market value of $67.75 per share on the date of
issuance) related to the temporary, effective reduction in the conversion price
of the 2001 Notes from $76.00 to $64.68 per share ($19.00 and $16.17 per share
prior to the Reverse Stock Split) on approximately $131.0, principal amount, of
the 2001 Notes, which the Company made as part of the exchange offer for the
2001 Notes. For a description of the Strategic Restructuring Plan and the
Financing Transactions, see Note 1 of the Notes to the Company's consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.
The Company recorded operating restructuring costs of $12.2 million during the
six months ended October 24, 1998, related to the approval and commencement of
restructuring plans at a limited number of operating locations.
See "--Introduction" for a complete discussion of operating restructuring
charges.
Interest expense, net of interest income, increased 178.0%, from $16.9 million
for the six months ended October 25, 1997, to $47.1 million for the six months
ended October 24, 1998. This increase is due primarily to the completion of the
Strategic Restructuring Plan and the Financing Transactions in June 1998. This
resulted in a significant increase in both the amount of debt outstanding and
the average interest rate related to such debt.
The Company expects that interest expense will be higher in second half of
fiscal 1999 than in the six months ended October 24, 1998, as the impact of the
increased debt resulting from the completion of the Strategic Restructuring Plan
and the Financing Transactions was only included in the results for the six
months ended October 24, 1998 for approximately 75% of the period. Although Note
6 of the Notes to the Company's consolidated financial statements indicates
that, on a pro forma basis, the Company would have had a net loss of $8.9
million from continuing operations before extraordinary items for the six months
ended October 24, 1998, the Company had pro forma EBITDA for such period of
$82.0 million, which was significantly greater than the pro forma interest
expense of $58.0 million. The pro forma loss for the six months ended October
24, 1998 included approximately $12.2 million in one-time operating
restructuring charges and a $2.5 million loss on the sale of a business in New
Zealand, which in the aggregate, net of the benefits from income taxes, totaled
$9.6 million. See "--Liquidity and Capital Resources" and "--Factors Affecting
the Company's Business" for a discussion of the Company's ability to meet its
debt service obligations.
25
<PAGE>
Other income decreased from income of $6.5 million for the six months ended
October 25, 1997, to expense of $1.5 million for the six months ended October
24, 1998. The decrease is due primarily to the recording of a gain on the sale
of an investment and a marketing fee earned in conjunction with providing a
license to use a list of the Company's customers during the six months ended
October 25, 1997 versus the recognition of a loss on the sale of a business in
New Zealand during the six months ended October 24, 1998.
Provision for income taxes changed from an income tax provision of $19.9 million
for the six months ended October 25, 1997 to an income tax benefit of $19.6
million for the six months ended October 24, 1998, reflecting an effective
income tax rate of 47.7% and an effective income tax benefit rate of 18.3%,
respectively. The provision for income taxes for the six month period ended
October 25, 1997 reflects the recording of an income tax provision at the
federal statutory rate of 35.0%, plus appropriate state, local and foreign
taxes. In addition, the effective tax rate was increased to reflect
non-deductible goodwill amortization expense. The benefit from income taxes for
the six months ended October 24, 1998 reflects the net impact of (i) an income
tax provision of 66.5% on the results from continuing operations, excluding the
aggregate $112.2 million of Strategic Restructuring Plan costs, operating
restructuring costs and the loss on the sale of a business in New Zealand; and
(ii) an income tax benefit on approximately half of the aggregate $114.7 million
of Strategic Restructuring Plan costs ($97.5 million), operating restructuring
costs ($12.2 million) and the loss on the sale of the business in New Zealand
($2.5 million), as the Company believes that approximately half of such costs
will be deductible for income tax purposes. The 66.5% effective tax rate
discussed above reflects the recording of an income tax provision at the federal
statutory rate of 35.0%, plus appropriate state, local and foreign taxes. The
effective tax rate was also increased to reflect the incurrence of
non-deductible goodwill amortization expense. The effective tax rate is
substantially higher in the current quarter than it was in the second quarter of
last year because the Company has substantially more non-deductible goodwill and
substantially less reported net income. As a result, the Company's tax provision
represents a higher percentage of reported net income (since the statutory rate
is applied to the sum of net income and non-deductible goodwill). Income from
discontinued operations changed from income of $22.4 million for the six months
ended October 25, 1997, to a loss of $1.3 million for the six months ended
October 24, 1998. See Note 2 of the Notes to Company's consolidated financial
statements included elsewhere in the Quarterly Report on Form 10-Q.
The extraordinary loss, net of income taxes, of $269,000 represents the
aggregate of several extraordinary items, all of which involve indebtedness that
the Company either repaid or converted into equity in connection with the
Strategic Restructuring Plan and the Financing Transactions. The primary
components of this extraordinary loss are: (i) the pre-tax non-cash write-offs
of $5.2 million, $4.7 million and $2.9 million of debt issue costs incurred in
conjunction with the issuance of the 2003 Notes, the former credit facility and
the issuance of the 2001 Notes, respectively; and (ii) a pre-tax gain of $12.2
million related to the early extinguishment of $222.2 million of 2003 Notes at a
purchase price of 94.5% of the principal amount. See "--Introduction."
Pro Forma Results of Operations - Exchange Rate Adjusted
The following presents the unaudited quarterly pro forma results of operations
of the Company by operating division for the first six months of fiscal 1999 and
1998 and the unaudited quarterly exchange rate adjusted pro form results of
operations of the Company by operating division for the first six months of
fiscal 1998. The pro forma financial information represents the results of the
Company as if the Strategic Restructuring Plan, the Financing Transactions and
all of the purchase acquisitions related to continuing operations completed
after the beginning of fiscal 1998 had been completed on the first day of fiscal
1998. The exchange rate adjusted pro forma results of operations for fiscal 1998
reflect the financial results for the Blue Star Group during the first and
second quarters of fiscal 1998 converted to USD using the average currency
exchange rates from the first and second quarters of fiscal 1999, respectively,
rather than the average currency exchange rates for the first and second
quarters of fiscal 1998. The inclusion of exchange rate adjusted data has been
made to permit a comparison of the performance of the Company's business,
excluding the impact of currency fluctuation, which is beyond the Company's
control. This adjustment is not intended to suggest that currency fluctuation
does not have a real cost to, or impact on, the Company. However, the impact of
currency fluctuation can distort or obscure the Company's true operating
performance.
26
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1999 Pro Forma Results
---------------------------------------------
First Second Six Month
Quarter Quarter Total
------------ ------------ -------------
<S> <C> <C> <C>
Consolidated:
Revenues .................... $ 662,831 $ 679,055 $ 1,341,886
Operating income before
restructuring costs ........ 23,464 28,306 51,770
EBITDA before
restructuring costs ........ 38,456 43,518 81,974
NAOPG:
Revenues .................... 449,701 467,851 917,552
Operating income before
restructuring costs ........ 18,183 21,334 39,517
EBITDA before
restructuring costs ........ 25,110 28,709 53,819
Blue Star Group:
Revenues .................... 197,684 192,860 390,544
Operating income before
restructuring costs ........ 6,529 7,780 14,309
EBITDA before
restructuring costs ........ 12,625 13,555 26,180
Average exchange rates ...... .53 .51 .52
Mail Boxes Etc.:
Revenues .................... 15,446 18,344 33,790
Operating income before
restructuring costs ........ 3,415 3,579 6,994
EBITDA before
restructuring costs ........ 5,288 5,507 10,795
Parent Company:
Revenues
Operating loss before
restructuring costs ........ (4,663) (4,387) (9,050)
EBITDA before
restructuring costs ........ (4,567) (4,253) (8,820)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1998 Pro Forma Results
---------------------------------------------
First Second Six Month
Quarter Quarter Total
------------ ------------ -------------
<S> <C> <C> <C>
Consolidated:
Pro forma:
Revenues ........................ $ 699,131 $ 718,554 $ 1,417,685
Operating income ................ 31,507 33,220 64,727
EBITDA .......................... 48,904 50,401 99,305
Pro forma - Exchange rate adjusted:
Revenues ........................ 643,071 670,166 1,313,237
Operating income ................ 29,045 30,758 59,803
EBITDA .......................... 44,677 46,384 91,061
NAOPG:
Pro forma:
Revenues ........................ 427,070 461,170 888,240
Operating income ................ 20,784 24,004 44,788
EBITDA .......................... 27,342 30,768 58,110
Blue Star Group:
Pro forma:
Revenues ........................ 256,382 238,838 495,220
Operating income ................ 11,262 12,149 23,411
EBITDA .......................... 19,331 19,831 39,162
Average exchange rates .......... .68 .64 .66
Pro forma - Exchange rate adjusted:
Revenues ........................ 200,322 190,450 390,772
Operating income ................ 8,800 9,687 18,487
EBITDA .......................... 15,104 15,814 30,918
Average exchange rates .......... .53 .51 .52
Mail Boxes Etc.:
Pro forma:
Revenues ........................ 15,679 18,546 34,225
Operating income ................ 2,805 1,865 4,670
EBITDA .......................... 4,595 3,605 8,200
Parent Company:
Pro forma:
Revenues
Operating income ................ (3,344) (4,798) (8,142)
EBITDA .......................... (2,364) (3,803) (6,167)
</TABLE>
For the three months ended October 24, 1998, pro forma consolidated revenues
increased $8.9 million or 1.3% over the exchange rate adjusted pro forma
consolidated revenues for the three months ended October 25, 1997. Pro forma
revenues for the three months ended October 24, 1998 increased 1.4% and 1.3%
at NAOPG and Blue Star Group, respectively, and declined 1.1% at MBE, over
pro forma revenues (exchange rate adjusted in the case of Blue Star Group)
for the three months ended October 25, 1997.
For the six months ended October 24, 1998, pro forma consolidated revenues
increased $28.6 million or 2.2% over the exchange rate adjusted pro forma
consolidated revenues for the six months ended October 25, 1997. Pro forma
revenues for the six months ended October 24, 1998 increased 3.3% at NAOPG
and declined .1% and 1.3% at Blue Star Group and MBE, respectively, over pro
forma revenues (exchange rate adjusted in the case of Blue Star Group) for
the six months ended October 25, 1997.
28
<PAGE>
The decline in revenues at MBE is due primarily to a decline in franchisee
fee revenue due to a fewer number of domestic franchises sold in the second
quarter and first six months of fiscal 1999 versus the second quarter and
first six months of fiscal 1998. See "--Consolidated Results of Operations"
for an explanation of the changes in revenues at NAOPG and Blue Star Group.
For the three months ended October 24, 1998, pro forma consolidated EBITDA
declined $2.9 million or 6.2% over the exchange rate adjusted pro forma
consolidated EBITDA for the three months ended October 25, 1997. Pro forma
EBITDA for the three months ended October 24, 1998 increased 52.8% at MBE and
declined 6.7% and 14.3% at NAOPG and Blue Star Group, respectively, over pro
forma EBITDA (exchange rate adjusted in the case of Blue Star Group) for the
three months ended October 25, 1997.
For the six months ended October 24, 1998, pro forma consolidated EBITDA
declined $9.1 million or 10.0% over the exchange rate adjusted pro forma
consolidated EBITDA for the six months ended October 25, 1997. Pro forma
EBITDA for the six months ended October 24, 1998 increased 31.6% at MBE and
declined 7.4% and 15.3% at NAOPG and Blue Star Group, respectively, over pro
forma EBITDA (exchange rate adjusted in the case of Blue Star Group) for the
six months ended October 25, 1997.
The increase in EBITDA at MBE is due primarily to the impact of the United
Parcel Service strike during the second quarter of fiscal 1998, which had the
impact of significantly reducing fiscal 1998 EBITDA. See "--Consolidated
Results of Operations" for an explanation of the changes in EBITDA at NAOPG
and Blue Star Group.
Historical Divisional Results of Operations
The following presents the unaudited quarterly results of operations of the
Company by operating division for the first six months of fiscal 1999 and
1998.
<TABLE>
<CAPTION>
Fiscal 1999 Historical Results
---------------------------------------
First Second Six Month
Quarter Quarter Total
------------ ------------ -------------
<S> <C> <C> <C>
Consolidated:
Revenues .............. $ 651,949 $ 677,205 $1,329,154
Operating income before
restructuring costs .. 22,882 28,232 51,114
EBITDA before
restructuring costs .. 37,500 43,383 80,883
NAOPG:
Revenues .............. 440,212 466,481 906,693
Operating income before
restructuring costs .. 17,702 21,298 39,000
EBITDA before
restructuring costs .. 24,268 28,615 52,883
Blue Star Group:
Revenues .............. 196,291 192,380 388,671
Operating income before
restructuring costs .. 6,428 7,742 14,170
EBITDA before
restructuring costs .. 12,511 13,514 26,025
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1999 Historical Results
---------------------------------------
First Second Six Month
Quarter Quarter Total
------------ ------------ -------------
<S> <C> <C> <C>
Mail Boxes Etc.:
Revenues .............. $ 15,446 $ 18,344 $ 33,790
Operating income before
restructuring costs .. 3,415 3,579 6,994
EBITDA before
restructuring costs .. 5,288 5,507 10,795
Parent Company:
Revenues
Operating loss before
restructuring costs .. (4,663) (4,387) (9,050)
EBITDA before
restructuring costs .. (4,567) (4,253) (8,820)
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 Historical Results
---------------------------------------
First Second Six Month
Quarter Quarter Total
------------ ------------ -------------
<S> <C> <C> <C>
Consolidated:
Revenues ....... $ 614,814 $ 649,340 $ 1,264,154
Operating income 23,802 28,300 52,102
EBITDA ......... 37,296 42,013 79,309
NAOPG:
Revenues ....... 390,655 435,057 825,712
Operating income 18,309 22,635 40,944
EBITDA ......... 23,786 28,546 52,332
Blue Star Group:
Revenues ....... 224,159 214,283 438,442
Operating income 8,837 10,463 19,300
EBITDA ......... 15,874 17,270 33,144
Parent Company:
Revenues
Operating loss ..... (3,344) (4,798) (8,142)
EBITDA ............. (2,364) (3,803) (6,167)
</TABLE>
Historical results for the first and second quarters of fiscal 1998 were not
included for MBE since MBE was not acquired by the Company until the third
quarter of fiscal 1998.
Liquidity and Capital Resources
At October 24, 1998, the Company had cash of $19.5 million and working capital
of $381.1 million. The Company's capitalization, defined as the sum of long-term
debt and stockholders' equity, at October 24, 1998, was approximately $1.7
billion.
30
<PAGE>
In June 1998, the Company completed the Strategic Restructuring Plan. See Note 1
of the Notes to the Company's consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q. The Company financed the
aggregate cost of purchasing shares in the Equity Tender, repurchasing $222.2
million of the 2003 Notes, and repaying its former credit facility with the
proceeds of the Equity Investment, the net proceeds from the sale and issuance
of the 2008 Notes and borrowings under the Credit Facility. The Company also
incurred significant transaction (including financing) costs and expenses. See
"--Consolidated Results of Operations." In connection with the completion of the
Strategic Restructuring Plan, the Company incurred approximately $400.0 million
of additional indebtedness, and the weighted average annual interest rate on all
outstanding indebtedness increased from approximately 6.8% prior to completion
of the Strategic Restructuring Plan to approximately 9.2% after completion of
the Strategic Restructuring Plan.
At October 24, 1998, the Company had $806.0 million outstanding under its
Credit Facility. Under the terms of the current financial covenants, which
include restrictions based upon pro forma EBITDA, as of October 24, 1998, the
Company had the ability to draw down up to approximately an additional $40.0
million under its Credit Facility. Additional pro forma EBITDA, through
operating improvements or acquisitions, would increase borrowing availability
under the Credit Facility. While the Company does not currently anticipate
that it will violate the financial covenants contained in the Credit
Facility, if EBITDA for fiscal 1999 falls short of management's current
expectations, the Company could violate its financial covenants unless it is
able to reduce its total indebtedness significantly. See "--Factors Affecting
the Company's Business--Substantial Leverage; Ability to Service Debt." The
Company's retail operations in New Zealand, Australia, and California
typically earn the vast majority of their profits during the Christmas
holiday shopping period, and the results of these operations will have a
significant impact on the Company's EBITDA in the third quarter of the 1999
fiscal year, which ends on January 24, 1999.
Upon completion of the Strategic Restructuring Plan, the Company terminated and
repaid the balance outstanding under its former $500.0 million credit facility
and entered into the Credit Facility. The Credit Facility provides for an
aggregate principal amount of $1,225.0 million, consisting of (i) a seven-year
multi-draw term loan facility totaling $200.0 million, (ii) a seven-year
revolving credit facility totaling $250.0 million, (iii) a seven-year term loan
facility totaling $100.0 million, and (iv) an eight-year term loan facility
totaling $675.0 million. In connection with the completion of the Strategic
Restructuring Plan and the Financing Transactions, the Company borrowed the full
amount of the two single-draw term loan facilities. The multi-draw facility and
the revolving facility remain available for future borrowings. Interest rates on
such borrowings bear interest, at the Company's option, at the lending bank's
base rate plus an applicable margin of up to 1.50%, or a eurodollar rate plus an
applicable margin of up to 2.50%. The Company's obligations under the Credit
Facility are guaranteed by its present domestic subsidiaries; future material
domestic subsidiaries will also be required to guarantee these obligations. The
Credit Facility is secured by substantially all of the assets of the Company and
its domestic subsidiaries; future material domestic subsidiaries also will be
required to pledge their assets as security. The Company was required to enter
into arrangements to ensure that the effective interest rate paid by the Company
on at least 50% of the aggregate amount outstanding under the Credit Facility
and the 2008 Notes was at a fixed rate of interest. As a result, the Company has
entered into interest rate swap arrangements to limit the LIBOR-based interest
rate exposure on $500.0 million of the outstanding balance under the Credit
Facility to rates ranging from 5.7% to 6.0%. The interest rate swap agreements
expire over a period ranging from 2001 to 2003. As a result of these swap
agreements (and including the fixed-rate 2008 Notes), the Company has fixed the
interest rates on $900 million (73%) of the long-term debt outstanding at
October 24, 1998.
31
<PAGE>
The Credit Facility includes, among others, restrictions on the Company's
ability to incur additional indebtedness, sell assets, pay dividends, or engage
in certain other transactions, and requirements that the Company maintain
certain financial ratios, and other provisions customary for loans to highly
leveraged companies, including representations by the Company, conditions to
funding, cost and yield protections, restricted payment provisions, amendment
provisions and indemnification provisions. The Credit Facility is subject to
mandatory prepayment in a variety of circumstances, including upon certain asset
sales and financing transactions, and also from excess cash flow (as defined in
the Credit Facility).
The 2008 Notes are unsecured but are guaranteed by the Company's present
domestic subsidiaries; future material domestic subsidiaries will be required to
guarantee the 2008 Notes. The indenture governing the 2008 Notes places
restrictions on the Company's ability to incur indebtedness, to make certain
payments, investments, loans and guarantees and to sell or otherwise dispose of
a substantial portion of its assets to, or merge or consolidate with, another
entity. The eight-year term loan facility contains negative covenants and
default provisions substantially similar to those contained in the indenture
governing the 2008 Notes.
During the six months ended October 24, 1998, the New Zealand and Australian
dollars weakened against the USD. The New Zealand exchange rate decreased from
U.S. $.56 at April 25, 1998 to U.S. $.53 at October 24, 1998. The Australian
exchange rate decreased from U.S. $.65 at April 25, 1998 to U.S. $.62 at October
24, 1998. This resulted in a reduction in stockholders' equity, through a
cumulative translation adjustment, of approximately $30.6 million, reflecting
the impact of the declining exchange rate on the Company's investments in its
New Zealand and Australian subsidiaries. In addition, the devaluation has
adversely affected the return on the Company's investment in its New Zealand and
Australian operations. The Company cannot predict whether exchange rates will
increase or decline in the future. The New Zealand exchange rate increased from
U.S. $.52 at July 25, 1998 to US $.53 at October 24, 1998. On December 3, 1998,
the New Zealand exchange rate was U.S. $.53. During this period, the Australian
exchange rate has been relatively flat. If the exchange rates were to stabilize
at current levels or were to decline further, the Company's return on assets and
equity from its New Zealand and Australian operations will continue to be
depressed. See "--Factors Affecting the Company's Business - Fluctuations in the
Value of the New Zealand and Australian Dollars."
As a result of the Company's increased indebtedness, a portion of the cash flows
from the Company's international operations will be required to service debt and
interest payments. The Company expects that it will incur additional costs with
respect to accessing cash flows from international operations including such
items as New Zealand and Australian withholding and other taxes and foreign
currency hedging costs. During the six months ended October 24, 1998, the
Company entered into foreign currency forward contracts against (i) the New
Zealand dollar with an aggregate notional amount of approximately $30.0 million
expiring in January through April 1999; and (ii) the Australian dollar with an
aggregate notional amount of approximately $3.5 million expiring in January
1999. The effect of these foreign currency forward contracts is to limit the
foreign currency exposure on (i) approximately $30.0 million of the Company's
net investment in its New Zealand subsidiary at rates of U.S. $.48 to U.S. $.51;
and (ii) approximately $3.5 million of the Company's net investment in its
Australian subsidiary at a rate of U.S. $.60. See "--Factors Affecting the
Company's Business - Fluctuations in the Value of the New Zealand and Australian
Dollars."
32
<PAGE>
The Company anticipates its cash on hand, cash flows from operations and
borrowings available from the Credit Facility will be sufficient to meet its
liquidity requirements for its operations, capital expenditures and additional
debt service obligations for the remainder of the fiscal year. The Company does
not currently anticipate that any possible restructuring costs related to the
Company's planned cost reduction measures, coupled with the expected effects of
such cost reduction measures, would have a material adverse effect on the
Company's liquidity or cash flows. See "--Introduction," "--Factors Affecting
the Company's Business - Changes in Strategic Focus and Business and Growth
Strategies" and "-- Challenges of Business Integration and Consolidation." The
Company anticipates capital expenditures of approximately $40.0 million in both
fiscal 1999 and fiscal 2000. The anticipated capital expenditures will support
the Company's program of consolidating existing facilities, including its DFC
program, computer system upgrades and maintenance of the Company's existing
infrastructure
During the six months ended October 24, 1998, net cash used in operating
activities was $21.9 million. This use of cash included the payment of
approximately $21.7 million of costs related to the Strategic Restructuring
Plan, the payment of approximately $5.5 million of operating restructuring costs
and increases in accounts receivable (due to significant seasonal furniture
sales) and inventory (due to building of inventory for the Christmas retail
season). Net cash used in investing activities was $44.5 million, including
$22.7 million used for acquisitions and $21.0 million used for additions to
property and equipment. Net borrowings increased approximately $481.3 million
during the six months ended October 24, 1998, primarily to fund the Strategic
Restructuring Plan and Financing Transactions, and also to fund the purchase
prices of acquisitions and additions to property and equipment during the
period. In addition, the Company received approximately $254.7 million from
Investor related to the Equity Investment, net of expenses, and $123.6 million
from discontinued operations in repayment of intercompany loan balances
outstanding at the date of the Distributions. Discontinued operations used $12.5
million of cash during the six months ended October 24, 1998.
During the six months ended October 25, 1997, net cash provided by operating
activities was $19.7 million. Net cash used in investing activities was $60.0
million, including $51.2 million used for acquisitions and $17.2 million used
for additions to property and equipment, partially offset by $7.7 million
received on the sale of an investment. Net borrowings increased $118.9 million
during the six months ended October 25, 1997, primarily to fund the purchase
prices of acquisitions and to repay higher-cost debt assumed in acquisitions.
The Company advanced $78.7 million to the discontinued operations during the six
months ended October 25, 1997 and the discontinued operations used $5.5 million
of cash during such period.
Year 2000 Compliance
The Company has commenced a process to assess Year 2000 compliance of its
systems and the systems of major vendors and third party service providers, and
to remediate any non-compliance of its systems.
The Company has not performed any material acceleration of hardware or software
systems write-down as a result of Year 2000 performance and/or compliance
issues.
As described below, each of NAOPG, MBE, Blue Star Group and Dudley is
performing its own Year 2000 readiness review, using similar three-phase
processes.
NAOPG
NAOPG's Year 2000 compliance process involves three phases, as described below.
33
<PAGE>
Phase One - Inventory and Planning
The Company completed this phase in May 1998. In this phase, the Company
inventoried all hardware and software that potentially is susceptible to Year
2000 problems, prepared plans for assessing compliance and for completing
remediation, and prepared vendor and supplier compliance surveys.
Phase Two - Assessment
In this phase, the Company is assessing which of its systems are Year 2000
compliant, obtaining compliance statements from hardware and software vendors,
supply manufacturers and service trading partners, and planning for remediation
of non-compliant systems. The Company is near completion of this phase, which is
planned for completion in December 1998.
Phase Three - Remediation and Testing
In this phase, the Company will deploy plans for elimination, upgrade,
replacement or modification of non-compliant systems, and test compliance. The
Company has scheduled completion of this phase for the summer of 1999.
The Company's Trinity system, which is the core information management and
processing system for its NAOPG operations, is Year 2000 compliant. The Company
is installing this system throughout its NAOPG operations, but does not expect
to complete installation at all locations before the end of 1999. Therefore, the
Company is assessing the compliance of other systems used by its NAOPG operating
subsidiaries. The Company has determined that some of the systems used by its
NAOPG subsidiaries are not currently Year 2000 compliant, but the Company
believes that it is highly likely that these systems will be made compliant
without material expense by the middle of 1999.
The Company's assessment plan includes assessment of Year 2000 compliance of
non-information technology (non-IT) components, including the Company's bindery
machinery, coffee roasting facilities, office furniture manufacturing
facilities, security systems, credit card processing devices and freight
elevators. The Company believes there are no significant uses of
micro-processing oriented equipment within its manufacturing systems and will
complete assessment of other non-IT components by December 1998.
The Company has received compliance statements from approximately 85% of its
primary supply vendors. Based on these statements, the Company believes that 95%
of supply vendors who have responded will be Year 2000 compliant by the end of
June 1999. The Company has identified eight vendors as fitting a "concerned"
profile due to late compliance dates or because responses indicate some
possibility of poor planning. The Company is working with each of these vendors
to remediate these concerns. Failure of these eight vendors to reach Year 2000
compliance or remediate prior to the century change would not have a material
adverse effect on the Company's performance.
If the Company fails to achieve Year 2000 compliance in all its systems, the
Company could lose the ability to process certain of its customer's orders until
compliance is achieved or a means to work around the failure is implemented. The
Company's systems are not now uniform across all operations and the Company does
not expect uniformity by the end of 1999. Therefore, any failure would not be
system wide. The Company believes that in a worst case scenario, at most 20% of
its orders would be affected. A failure to fill orders would not however,
necessarily result in a complete loss of the order. An order could be filled
through alternative methods within a relatively short period. Nevertheless, any
disruption in order fulfillment could result in some loss of revenue. If this
disruption is the result of noncompliance that is greater than anticipated, the
loss of revenue could be material. The Company intends to establish by the
middle of 1999 contingency plans to deal with possible failures in order
fulfillment systems or other systems.
The Company's assessment and remediation of Year 2000 compliance issues has a
budget of less than $1.0 million, and expenses have been less than expected.
The Company does not currently expect that future expenses for assessment or
remediation will be material.
34
<PAGE>
MBE, Blue Star Group and Dudley
The Company has received reports from MBE that address the Year 2000
readiness of software and hardware provided by MBE and used by MBE
franchisees, as well as that used by MBE's corporate operations. MBE creates
proprietary software for its franchisees that is used for a variety of
functions. Based on MBE's testing, the majority of this software is currently
Year 2000 compliant. For the remaining software, MBE plans either (i) to
reprogram or otherwise upgrade such software, or (ii) to no longer support,
or require franchisees to purchase and use, such software. MBE's franchisees
may also use other software, not provided by MBE, which may not be Year 2000
compliant. With respect to hardware, MBE's franchisees are free to purchase
such hardware from the vendor of their choice, and the franchisees are
responsible for ensuring that such hardware, as well as software not provided
by MBE, is Year 2000 compliant. With respect to software and hardware used by
MBE's corporate operations, MBE has reported to the Company that some
software products used by MBE for certain accounting and database functions,
as well as some desktop computers, are not currently Year 2000 compliant. MBE
and certain third parties are in the process of reprogramming such software
and upgrading such hardware, and expect to complete this process by May 1999.
MBE expects to be able to bring its software and hardware that are not
currently Year 2000 compliant into compliance within budgeted limits and
without material expense. MBE has not determined the effect on its operations
of any failure to reprogram or upgrade the non-compliant software supplied to
its franchisees or the software and hardware used by MBE in its corporate
operations, but such failure could have a material adverse effect.
Much of MBE's hardware and software depends upon the proper interaction of
various hardware, software and services furnished by third parties. While MBE
is performing Year 2000 readiness tests on its systems and attempting to
obtain statements from its primary vendors, the vast array of combinations of
MBE and third party components, functions and entry and exit points make it
impractical to test every aspect of the systems. MBE is currently assessing
the impact and reviewing its contingency plans in the event of one or more of
its primary vendors experiencing a failure due to Year 2000 non-readiness.
Based on reports received by the Company from Blue Star Group, the Company
expects that systems used in Australia and New Zealand will be compliant within
a safe time frame and without material expense.
Based on reports received by the Company from Dudley, an initial assessment
of the systems indicates that there are no significant Year 2000 issues.
The Company's review of Year 2000 compliance issues at MBE, Blue Star Group
and Dudley to date has been based on reports received from those operations,
and no on-site review or testing has been conducted to date by Company
personnel. Based on the reports received to date, the Company does not
believe that there is an immediate need for on-site testing by Company
personnel. The Company does intend to schedule on-site testing at MBE, Blue
Star Group and Dudley by Company personnel, by mid-1999. MBE, Blue Star Group
and the Company's interest in Dudley represent approximately one-third of the
Company's consolidated revenues. If the operations of any of these groups is
not materially compliant within a safe timeframe, the Company's results of
operations could be materially adversely affected.
Fluctuations in Quarterly Results of Operations
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
revenues and profitability of the Company's operations in New Zealand and
Australia and at MBE have generally been higher in the Company's third quarter.
As the Company's mix of businesses evolves through future acquisitions, these
seasonal fluctuations may continue to change. Therefore, results for any quarter
are not necessarily indicative of the results that the Company may achieve for
any subsequent fiscal quarter or for a full fiscal year.
Quarterly results also may be affected by the timing and magnitude of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold, and general economic conditions. Moreover, the operating
margins of companies acquired by the Company may differ substantially from those
of the Company, which could contribute to the further fluctuation in its
quarterly operating results. Therefore, results for any quarter are not
necessarily indicative of the results that the Company may achieve for any
subsequent fiscal quarter or for a full fiscal year.
Inflation
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1998 or the first two quarters of fiscal
1999.
Factors Affecting the Company's Business
A number of factors, including those discussed below, may affect the Company's
future operating results.
35
<PAGE>
Change in Strategic Focus and Business and Growth Strategies. From its inception
in 1994 through the end of the 1997 calendar year, the Company grew primarily
through acquisitions. At the time it adopted the Strategic Restructuring Plan,
the Company announced its intention to change its strategic focus and pursue
increased revenues and profitability primarily through operating strategies
intended to improve the efficiency of its existing businesses. The Company does
not currently anticipate that acquisitions will contribute materially to its
financial results during fiscal 1999, although the Company expects to pursue
targeted, strategic acquisition opportunities from time to time. See
"--Introduction." The Company has begun transitioning into this new stage of its
development, in which its strategy focuses on achieving operational
efficiencies, organic revenue growth and improved profit margins from its
existing businesses. The Company's ability to achieve its operating objectives
will depend upon a number of factors, including its generation of increased
revenues and margins in existing businesses through, among other things, (i)
improved sales and marketing programs and increased "cross selling" among the
three divisions within the NAOPG, and (ii) the achievement of operating
improvements and cost reductions, through, among other things, expanding and
improving consolidated purchasing and procurement arrangements, further
consolidating general corporate and administrative functions, eliminating
redundant facilities (and establishing new DFCs and reconfiguring existing
facilities), reducing headcount, and improving technology and operating and
distribution systems. There can be no assurance that these efforts to achieve
operating improvements will be successful or will result in anticipated levels
of cost savings and efficiencies or growth in revenues and margins.
Challenges of Business Integration and Consolidation. The Company's
acquisition program produced a significant increase in revenues, employees,
facilities and distribution systems. One of the Company's primary strategies
is to take advantage of substantial opportunities to reduce costs by
rationalizing and consolidating the businesses it has acquired. Such efforts
initially will require additional costs and expenditures to expand
operational and financial systems, construct DFCs and reconfigure existing
facilities, and augment management and administrative functions. Because
cost-savings strategies will involve some initial increases in expenses and
are likely to impact overall spending over a period of time, operating
results may fluctuate in the near future and historical operating results may
not be indicative of future performance. In addition, attempts to achieve
economies of scale through cost cutting and lay-offs of existing personnel
may, at least in the short term, have an adverse impact upon the Company.
Delays in implementing planned integration and consolidation strategies, or
the failure of such strategies to achieve anticipated cost savings, also
could adversely affect the Company's results of operations and financial
condition. Finally, there can be no assurance that the Company's management
and financial controls, personnel, computer systems and other corporate
support systems will be adequate to manage the size and scope of its
operations and the complexity of its integration and consolidation efforts.
Operations Outside of the United States. Management expects foreign revenues to
continue to represent a significant portion of the Company's total revenues. In
general, the discussion included in this "Factors Affecting the Company's
Business" section that apply to the Company's domestic operations may also
affect the Company's foreign operations. In addition, the Company's foreign
operations are subject to a number of other risks, including fluctuations in
currency exchange rates; new and different legal and regulatory requirements in
local jurisdictions; tariffs and trade barriers; potential difficulties in
staffing and managing local operations; credit risk of local customers and
distributors; potential difficulties in protecting intellectual property;
potential imposition of restrictions on investments; potentially adverse tax
consequences, including imposition or increase of withholding and other taxes on
remittances and other payments by subsidiaries; and local economic, political
and social conditions, including the possibility of hyper-inflationary
conditions, in certain countries. There can be no assurance that one or a
combination of these factors will not have a material adverse impact on the
Company's ability to maintain or increase its foreign revenues or on its
business, financial condition or results of operations.
36
<PAGE>
Impact of Fluctuations in the Value of the New Zealand and Australian Dollars.
Approximately 29.2% of the Company's revenues and 32.2% of its EBITDA for the
six months ended October 24, 1998 were generated by operations in New Zealand
and Australia. Declines in the value of the currencies in those countries,
relative to the value of the USD, may materially adversely affect the Company's
business, financial condition and results of operations. In addition, because
substantially all of the Company's indebtedness is denominated in USD, declines
in currency exchange rates may also materially adversely affect the Company's
ability to meet its obligations under agreements relating to indebtedness.
Declines in the value of the New Zealand and Australian dollars relative to the
USD have adversely affected the Company's reported results. The Company cannot
predict whether these currencies will, in the future, continue to decline or
will increase in value relative to the USD. For a discussion of the impact of
recent declines in the value of these currencies on the Company's financial
condition and results of operations, see "--Consolidated Results of Operations"
and "--Liquidity and Capital Resources."
Substantial Leverage; Ability to Service Debt. The Company incurred substantial
indebtedness in connection with the Strategic Restructuring Plan and the
Financing Transactions. See "--Introduction." As a result, total indebtedness at
December 3, 1998 was approximately $1,245.0 million. See "--Liquidity and
Capital Resources." Subject to limitations in its existing debt agreements, the
Company may incur additional indebtedness in the future. The Company's high
leverage could have material consequences to the Company, including, but not
limited to, the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate or other purposes may be impaired or any such financing may
not be available on terms favorable to the Company; (ii) a substantial portion
of the Company's cash flow will be required for debt service and, as a result,
will not be available for its operations and other purposes; (iii) a substantial
decrease in net operating cash flows or an increase in expenses could make it
difficult for the Company to meet its debt service requirements or force it to
modify its operations or sell assets; (iv) the Company's ability to withstand
competitive pressures may be limited; and (v) the Company's level of
indebtedness could make it more vulnerable to economic downturns, and reduce its
flexibility in responding to changing business and economic conditions. In
addition, a portion of the Company's borrowings under the Credit Facility are
and will continue to be at variable rates of interest, which exposes the Company
to the risk of increased interest rates. The ability of the Company to meet its
debt service and other obligations (including compliance with financial
covenants) will be dependent upon the future performance of the Company and its
cash flows from operations, which will be subject to prevailing economic
conditions and financial, business and other factors, certain of which are
beyond the Company's control. As a result of the Company's substantial leverage,
its financial capacity to respond to changing market conditions, extraordinary
capital needs, and other developments may be limited. In addition, management's
discretion in responding to certain business matters may be limited by covenants
contained in the Credit Facility and the 2008 Notes. Among other things, these
covenants limit the Company's ability to incur additional indebtedness, create
liens on assets or make loans, investments or guarantees. These limitations may
materially and adversely affect the Company's ability to pursue operating
strategies or capital expenditure plans, or to engage in other business
activities, that the Company may otherwise consider to be in its best interests.
See "--Liquidity and Capital Resources" for a discussion of current limitations
on the Company's borrowing capacity and its ability to comply with financial
covenants.
37
<PAGE>
Risks Related to Acquisitions. Although the Company does not currently expect to
complete a significant amount of acquisitions in the remainder of fiscal 1999,
the Company continues to consider selected strategic acquisition opportunities.
No assurance can be given that the Company will be able to identify, finance and
complete additional suitable acquisitions on acceptable terms, or that future
acquisitions, if completed, will be successful. The Company will likely incur
additional debt to finance any additional acquisitions. Certain limitations
under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"),
may restrict the Company's ability to issue capital stock for a period of time
after the Distributions. These limitations may restrict the Company's ability to
undertake transactions involving issuances of capital stock of the Company that
management otherwise believes would be beneficial. See "--Potential Limitations
on Stock Issuances." Acquired companies may not achieve future revenues and
profitability levels that justify the prices that the Company paid to acquire
them. Acquisitions also may involve a number of risks that could have a material
adverse effect on future operations and financial performance, including
diversion of management's attention; unanticipated declines in revenues or
profitability following acquisitions; difficulties with the retention, hiring
and training of key personnel; risks associated with unanticipated business
problems or legal liabilities; and the amortization of acquired intangible
assets, such as goodwill.
Highly Competitive Markets. The Company operates in a highly competitive
environment. It generally competes with a large number of smaller, independent
companies, many of which are well-established in their markets. In addition, in
the United States, the NAOPG competes with five large office products companies,
each of which may have greater financial resources than the Company. Several of
the Company's large competitors operate in many of its geographic and product
markets, and other competitors may choose to enter its geographic and product
markets in the future. In addition, as a result of this competition, the Company
may lose customers or have difficulty acquiring new customers. As a result of
competitive pressures in the pricing of products, the Company's revenues or
margins may decline. The highly leveraged nature of the Company after the
transactions related to the Strategic Restructuring Plan and the Financing
Transactions could limit the Company's ability to continue to make necessary or
desirable investments or capital expenditures to compete effectively and to
respond to market conditions.
Franchise Operations of Mail Boxes Etc. MBE conducts its business principally
through franchisees or licensees, with the result that MBE has limited control
over franchisee operations and is subject to significant government regulation
of its legal relationships with franchisees that limits the control that MBE has
over its franchisees.
Ability of Investor to Influence Management. As part of the Strategic
Restructuring Plan, Investor acquired shares, amounting to 24.9% of the
outstanding shares of the common stock after giving effect to the issuance of
such shares. Investor also acquired various warrants that give it the right to
acquire additional shares of common stock in the future that in certain
circumstances could increase its ownership to as much as 39.9% of the common
stock (if no currently outstanding stock options are exercised). Investor has,
among other things, the right (subject to certain conditions) to nominate three
of the nine members of the Company's Board of Directors (the "Board"), including
the Chairman of the Board. Investor will retain this right until Investor's
level of ownership of common stock declines by more than one-third. In addition,
certain Board decisions will be subject to super-majority voting provisions
that, in certain circumstances, may require the concurrence of at least one
director nominated by Investor. The super-majority voting provisions require the
affirmative vote of three-fourths of the Board for certain decisions such as the
sale of certain equity securities; any merger, tender offer involving the
Company's equity securities or sale, lease or disposition of all or
substantially all of the Company's assets or other business combination
involving the Company; any dissolution or partial liquidation of the Company;
and certain changes to the Company's charter and by-laws. These super-majority
Board voting requirements may give Investor the ability to block the approval of
certain actions requiring the super-majority vote of the Board. In addition,
Investor's significant ownership of the common stock may permit Investor to
influence significantly matters requiring the approval of the Company's
stockholders.
38
<PAGE>
Intangible Assets. As of October 24, 1998, approximately $909.7 million, or
43.4% of the Company's total assets, represented intangible assets, the
substantial majority of which was goodwill. As a result, a substantial portion
of the value of the Company's assets may not be available to repay creditors in
the event of a bankruptcy or dissolution of the Company. As a result of the
Equity Tender and the Distributions, the Company may be precluded from
completing business combinations accounted for under the pooling-of-interests
method for a period of up to six to nine months. Any business combinations that
the Company completes during this period will have to be accounted for under the
purchase method. As a result, the amount of goodwill reflected on the Company's
balance sheet will increase to the extent that the Company acquires additional
companies under the purchase method of accounting.
Effect of Shares Eligible for Future Sale. Sales of a substantial number of
shares of common stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for shares of common stock. Investor
holds shares of common stock representing 24.9% of shares outstanding and
warrants to purchase an equal number of shares (plus additional shares in
certain circumstances). An investment agreement with Investor restricts
Investor's ability to sell these shares or warrants, but when these restrictions
expire (or if they are waived) Investor may sell these shares or warrants.
Additional shares may be issued either in connection with acquisitions by the
Company, upon exercise of outstanding options, options that may be issued in the
future, and warrants, and upon maturity or exercise of other rights to acquire
stock. The sale of shares upon exercise of options or by Investor, or the
perception that such sales could occur, may have an adverse effect on the
trading price of the common stock if a significant number of shares become
available over a limited period of time.
Current Limitation on Option Issuances. In connection with the Strategic
Restructuring Plan, and pursuant to the terms of the anti-dilution provisions of
the Company's option plans, adjustments were made to the number of shares
covered by employee stock options outstanding after completion of the Strategic
Restructuring Plan. As a result of these adjustments, the Company's ability to
grant additional stock options to employees is extremely limited, as the
Company's stock option plan prohibits additional grants to be made if such
additional grants would cause the total number of shares covered by stock
options outstanding to exceed 20% of total shares outstanding. Options
outstanding under the Company's stock option plan are approximately equal to 20%
of total shares outstanding.
The Company recently commenced an option exchange program under which holders
of existing options are being given an opportunity to exchange their current
options (which have exercise prices substantially above current market
prices) for a significantly smaller number of options with an exercise price
equal to the current market price. The exchange program is currently
scheduled to expire on December 11, 1998, and it is expected that most option
holders will elect to participate in the exchange program. As a result, the
Company expects that the number of outstanding options will be reduced
significantly, to substantially less than 20% of total shares outstanding and
therefore the Company would be permitted to make additional option grants and
other long-term equity-based incentive awards under the terms of its existing
plans. There can however be no assurance that this will occur or that the
Company will obtain additional flexibility in issuing options.
Potential Liability for Certain Liabilities of the Spin-Off Companies. As part
of the Strategic Restructuring Plan, the Spin-Off Companies are required to
indemnify the Company for certain liabilities that the Company could incur
relating to the Distributions, the operations of the Spin-Off Companies and
other matters. There can be no assurance that the Spin-Off Companies will be
able to satisfy any such indemnities, and the Company may therefore incur such
liabilities even if they arose out of the activities of the Spin-Off Companies.
The Company could be adversely affected if in the future the Spin-Off Companies
are unable to satisfy these obligations. In addition, the Company had agreed to
indemnify Investor and its affiliates against losses resulting from any of the
Spin-Off Companies failing to satisfy their indemnity obligations to the
Company.
39
<PAGE>
Potential Liability for Taxes Related to the Distributions. In connection with
the Strategic Restructuring Plan, the Company received an opinion of counsel
that the Distributions qualify as tax-free spin-offs under Section 355 of the
Code, and that the Distributions are not taxable under Section 355(e) of the
Code. That opinion was subject to certain assumptions and limitations and is
not, in any event, binding upon either the Internal Revenue Service or any
court.
If a Distribution fails to qualify as a tax-free spin-off under Section 355 of
the Code, the Company will recognize a gain equal to the difference between the
fair market value of the Spin-Off Company's common stock on the date of the
Distribution and the Company's adjusted tax basis in the Spin-Off Company's
common stock on the date of the Distribution. In addition, each stockholder of
the Company will be treated as having received a taxable corporate distribution
in an amount equal to the fair market value (on the date of the Distribution) of
the Spin-Off Company's common stock distributed to such stockholder. If the
Company were to recognize gain on one or more Distributions, such gain would
likely be substantial. If the Distribution is taxable under Section 355(e), but
otherwise satisfies the requirements of a tax-free spin-off, the Company will
recognize gain equal to the difference between the fair market value of the
Spin-Off Company's common stock on the date of the Distribution and the
Company's adjusted tax basis in the Spin-Off Company's common stock on the date
of the Distribution. However, no gain or loss will be recognized by holders of
common stock (except with respect to cash received in lieu of fractional
shares). If the Company were to recognize gain on one or more Distributions,
such gain would likely be substantial.
Potential Limitations on Stock Issuances. Certain limitations under Section 355
of the Code may restrict the Company's ability to issue capital stock after the
Distributions. These limitations will generally prevent the Company from issuing
capital stock to the extent the issuance is part of a plan or series of related
transactions that includes one or more of the Distributions and pursuant to
which one or more persons acquire capital stock of the Company that represents
50% or more of the voting power or 50% or more of the value of the Company's
capital stock. These limitations may restrict the Company's ability to undertake
transactions involving issuances of capital stock of the Company that management
otherwise believes would be beneficial.
40
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Individuals purporting to represent various classes composed of stockholders
who purchased shares of U.S. Office Products common stock between June 5,
1997 and November 2, 1998 have filed five actions in the United States
District Court for the Southern District of New York and two actions in the
United States District Court of the District of Columbia. The actions in the
Southern District of New York were filed on October 27, 1998, November 3,
1998, November 10, 1998 and November 17, 1998. The actions in the District of
Columbia were filed on November 6, 1998 and November 25, 1998. As of the date
of this report, the Company has been served with four of these actions. Each
of the actions name the Company and Jonathan J. Ledecky and, in some cases
Sands Brothers & Co., Ltd. as defendants. The actions claim that the
defendants made misstatements, failed to disclose material information and
otherwise violated Sections 10(b) and/or 14 of the Securities Exchange Act of
1934 and Rules 10b-5 and 14a-9 promulgated thereunder in connection with the
Company's Strategic Restructuring Plan. One of the actions alleges a
violation of Sections 11 and 15 of the Securities Act of 1933 relating to the
Company's acquisition of MBE. The actions seek declaratory relief,
unspecified money damages and attorney's fees. The Company intends to
vigorously contest these actions.
The Company also understands that a complaint filed in the Southern
District of New York on November 30, 1998 by an individual purporting to
represent a class of stockholders who acquired shares of the Company's common
stock and options to acquire such shares in connection with the acquisition
of MBE. The action names the Company and Mr. Ledecky and includes allegations
that are virtually identical to those in the other class actions in addition
to claims alleging a violation of Sections 11 and 12 of the Securities Act of
1933 in connection with the acquisition of MBE and breach of contract related
to the acquisition agreement. The action seeks money damages of an
unspecified amount, declaratory relief, attorney's fees and unspecified
equitable relief. The Company intends to vigorously contest this action.
The Company has entered into tolling agreements with the sellers of two
businesses acquired in the Fall of 1997 and that were spun off in connection
with the Company's Strategic Restructuring Plan. In addition, the Company has
been advised that a complaint was filed on October 23, 1998 in the United
States District Court for the Central District of California by the sellers
of a third business naming, among others, the Company as a defendant. As of
the date of this report, this complaint has not been served on the Company.
Each of these disputes generally relates to events surrounding the Strategic
Restructuring Plan. The Company believes that if claims are asserted against
the Company, some or all of the claims would be subject to indemnification
under the terms of the distribution agreement between the Company and the
Spin-Off Companies that was executed in connection with the Strategic
Restructuring Plan. The Company does not presently anticipate that these
individual sellers' claims will have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the Company's stockholders was held on September 16, 1998.
All nominees for Director were elected pursuant to the following votes:
<TABLE>
<CAPTION>
Authority Broker
Nominee For Withheld Non-Votes
- ------- --- -------- ---------
<S> <C> <C> <C>
Charles P. Pieper 31,760,109 376,379 0
Thomas Morgan 31,759,973 376,515 0
Kevin J. Conway 31,760,013 376,475 0
Frank P. Doyle 31,758,649 377,839 0
Brian D. Finn 31,758,673 377,815 0
L. Dennis Kozlowski 31,758,673 377,815 0
Milton H. Kuyers 31,758,673 377,815 0
Allon H. Lefever 31,753,568 382,920 0
Edward J. Mathias 31,760,109 376,379 0
</TABLE>
41
<PAGE>
The stockholders ratified the Board of Directors' selection of
PricewaterhouseCoopers LLP as the Company's independent accountants to audit the
Company's consolidated financial statements for the fiscal year ending April 24,
1999, pursuant to the following votes:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
------ ------- --------- -----------
<S> <C> <C> <C>
31,877,047 244,088 15,353 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the period covered by this report, the Company filed the following
Current Reports on Form 8-K:
i. Form 8-K/A dated September 15, 1998 and filed with the Commission
on September 22, 1998 reporting information under Item 5.
ii. Form 8-K dated September 15, 1998 and filed with the Commission on
September 21, 1998 reporting information under Item 5.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. OFFICE PRODUCTS COMPANY
December 4, 1998 By: /s/ Thomas I. Morgan
---------------- ------------------------
Date Thomas I. Morgan
Chief Executive Officer
December 4, 1998 By: /s/ Joseph T. Doyle
---------------- ------------------------
Date Joseph T. Doyle
Chief Financial Officer
43
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Exhibit
<S> <C>
27 Financial Data Schedule
</TABLE>
44
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF
OPERATIONS, INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-24-1999
<PERIOD-START> JUL-26-1998
<PERIOD-END> OCT-24-1998
<CASH> 19,485
<SECURITIES> 0
<RECEIVABLES> 347,295
<ALLOWANCES> 10,915
<INVENTORY> 241,846
<CURRENT-ASSETS> 745,531
<PP&E> 229,702
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,097,052
<CURRENT-LIABILITIES> 364,459
<BONDS> 1,197,860
0
0
<COMMON> 37
<OTHER-SE> 517,243
<TOTAL-LIABILITY-AND-EQUITY> 2,097,052
<SALES> 677,205
<TOTAL-REVENUES> 677,205
<CGS> 492,116
<TOTAL-COSTS> 652,442<F1>
<OTHER-EXPENSES> 1,927
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,531
<INCOME-PRETAX> (5,695)
<INCOME-TAX> (1,713)
<INCOME-CONTINUING> (3,982)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,982)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
<FN>
<F1>Includes operating restructing costs of $3,469.
</FN>
</TABLE>
