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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section240.14a-12
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U.S. OFFICE PRODUCTS COMPANY
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
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[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rule 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated
and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-
11(a)(2) and identify the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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[LOGO]
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
(202) 339-6700
May 1, 1998
To our Stockholders:
We will be holding a Special Meeting on May 22, 1998 at 10 a.m. eastern
time.
At the Special Meeting we will ask you to consider and vote upon a proposed
investment in U.S. Office Products Company by an affiliate of an investment fund
managed by Clayton, Dubilier & Rice, Inc., a private investment firm.
Specifically, we need your approval to sell shares of common stock and warrants
to purchase additional shares of common stock to this investor. The enclosed
Notice of Special Meeting of Stockholders and Proxy Statement provides details
of the proposed investment and related information. Your Board of Directors
determined that the terms of the investment are fair to U.S. Office Products and
its stockholders. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND
RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL.
The investment is one part of a comprehensive restructuring plan that your
Board has approved. The restructuring plan includes a tender offer by U.S.
Office Products to purchase from its stockholders 37,037,037 shares of U.S.
Office Products' common stock (including shares that may be issued on exercise
of stock options). It also includes the creation by U.S. Office Products of four
companies that will own and operate U.S. Office Products' current corporate
travel, educational supplies, print management, and technology solutions
businesses and the distribution to U.S. Office Products' stockholders of shares
of those companies. As explained in this Proxy Statement, the Board believes
that the restructuring plan promotes the best interests of stockholders.
We will also ask you to approve a proposed one-for-four reverse stock split
of U.S. Office Products' common stock. This reverse stock split would take
effect after the tender offer has been completed and immediately after the
record date for the distributions. Stockholder approval for such a reverse stock
split is required by law. YOUR BOARD ALSO HAS UNANIMOUSLY APPROVED AND
RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL.
We have enclosed with this letter a Notice of the Special Meeting, a Proxy
Statement, a proxy card and a return envelope. We urge you to read all of the
enclosed materials carefully.
Please sign, date and promptly return the enclosed proxy card in the
enclosed, prepaid return envelope. Your shares will be voted at the Special
Meeting in accordance with your proxy instructions.
On behalf of the Board of Directors and the employees of U. S. Office
Products, we cordially invite all stockholders to attend the Special Meeting. If
you plan to attend the meeting, please mark the appropriate box on the enclosed
proxy card.
Sincerely,
[LOGO]
Jonathan J. Ledecky
Chairman of the Board of Directors
YOUR VOTE IS IMPORTANT
Please Sign, Date and Return Your Proxy Card by May 22, 1998
If you have questions about voting your shares, please contact our proxy
solicitor, MacKenzie Partners, Inc., toll-free at (800) 322-2885.
<PAGE>
[LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the Stockholders of U.S. Office Products Company:
We are holding a Special Meeting of the stockholders of U.S. Office Products
Company on May 22, 1998 at 10 a.m., eastern time. The meeting will be held at
the Latham Hotel Georgetown, 3000 M Street, N.W., Washington, D.C. At the
meeting, you will be asked to vote on the following:
- A proposal to sell common stock and warrants to purchase additional shares
of common stock to CDR-PC Acquisition, L.L.C., an affiliate of an
investment fund managed by Clayton, Dubilier & Rice, Inc., a private
investment firm. The Proxy Statement that we are delivering with this
Notice describes the terms of the proposed sale of the common stock and
the warrants, as well as other related transactions.
- A proposal to amend U.S. Office Products' certificate of incorporation to
effect a one-for-four reverse stock split of U.S. Office Products' common
stock.
- Any other business that may properly be presented at the Special Meeting.
You will be able to vote your shares at the Special Meeting if you were a
stockholder of U.S. Office Products Company at the close of business on March
26, 1998.
By order of the Board of Directors:
[LOGO]
Mark D. Director
Secretary
Dated: May 1, 1998
YOUR VOTE AT THE SPECIAL MEETING IS IMPORTANT.
PLEASE INDICATE YOUR VOTE ON THE ENCLOSED PROXY CARD AND RETURN IT IN THE
ENCLOSED ENVELOPE AS SOON AS POSSIBLE, EVEN IF YOU PLAN TO ATTEND THE MEETING.
IF YOU HAVE QUESTIONS ABOUT VOTING YOUR SHARES, PLEASE CONTACT OUR PROXY
SOLICITOR, MACKENZIE PARTNERS, INC., TOLL-FREE AT (800) 322-2885.
IF YOU ATTEND THE MEETING, YOU WILL BE ABLE TO REVOKE YOUR PROXY AND VOTE IN
PERSON.
<PAGE>
[LOGO]
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
PROXY STATEMENT FOR SPECIAL MEETING
This Proxy Statement provides information that you should read before you
vote on two proposals that will be presented to the stockholders of U.S. Office
Products Company at a Special Meeting to be held on May 22, 1998 at the Latham
Hotel Georgetown, 3000 M Street, N.W., Washington, D.C.
For convenience, we first provide a question-and-answer summary of important
information. The remainder of this Proxy Statement provides specific information
about the Special Meeting, the proposals on which you will be asked to vote at
the Special Meeting, our recently announced strategic restructuring plan (which
includes the investment that is the subject of the first proposal you will be
asked to consider), the business of U.S. Office Products after completion of the
strategic restructuring plan, and other relevant information.
On May 1, 1998, we began mailing information to people who, according to our
stockholder records, owned shares of U.S. Office Products' common stock at the
close of business on March 26, 1998.
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. WHEN USED IN THIS PROXY STATEMENT, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," AND "EXPECT" AND SIMILAR
EXPRESSIONS AS THEY RELATE TO U.S. OFFICE PRODUCTS OR ITS MANAGEMENT ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. U.S. OFFICE PRODUCTS
UNDERTAKES NO OBLIGATION TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT
ANY FUTURE EVENTS OR CIRCUMSTANCES. U.S. OFFICE PRODUCTS' ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED
IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW UNDER THE HEADINGS
"EFFECTS OF THE PROPOSED SALE OF EQUITY SECURITIES AND THE STRATEGIC
RESTRUCTURING PLAN" AND "FACTORS AFFECTING THE COMPANY'S BUSINESS" INCLUDED
WITHIN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" WITHIN THE FINANCIAL INFORMATION INCLUDED IN THIS PROXY STATEMENT
BEGINNING ON PAGE F-1.
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TABLE OF CONTENTS
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PAGE NO.
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SUMMARY............................................................................................... 1
INFORMATION ABOUT THE SPECIAL MEETING AND VOTING...................................................... 3
THE SPECIAL MEETING............................................................................... 3
THIS PROXY SOLICITATION........................................................................... 3
VOTING YOUR SHARES................................................................................ 3
VOTE REQUIRED FOR APPROVAL........................................................................ 4
OTHER MATTERS..................................................................................... 4
THE FIRST PROPOSAL--SALE OF EQUITY SECURITIES 4
INFORMATION ABOUT THE PROPOSED SALE OF EQUITY SECURITIES.............................................
INTRODUCTION...................................................................................... 4
RECOMMENDATION OF THE BOARD OF DIRECTORS.......................................................... 5
INFORMATION ABOUT THE INVESTMENT AGREEMENT AND RELATED AGREEMENTS................................. 6
USE OF PROCEEDS................................................................................... 12
INFORMATION ABOUT OTHER ELEMENTS OF THE STRATEGIC RESTRUCTURING PLAN.............................. 12
AGREEMENTS WITH JONATHAN LEDECKY.................................................................. 15
BACKGROUND OF AND REASONS FOR THE PROPOSED SALE OF EQUITY SECURITIES.............................. 17
OPINION OF FINANCIAL ADVISER...................................................................... 19
INFORMATION ABOUT INVESTOR AND CLAYTON, DUBILIER & RICE........................................... 23
EFFECTS OF THE PROPOSED SALE OF EQUITY SECURITIES AND THE STRATEGIC RESTRUCTURING PLAN............ 24
TAX CONSEQUENCES OF THE DISTRIBUTIONS............................................................. 27
THE BUSINESS OF U.S. OFFICE PRODUCTS AFTER THE RESTRUCTURING......................................... 29
COMPANY OVERVIEW.................................................................................. 29
MARKET OVERVIEW................................................................................... 30
BUSINESS STRATEGIES............................................................................... 32
NORTH AMERICAN OFFICE PRODUCTS GROUP.............................................................. 33
OPERATIONS OUTSIDE NORTH AMERICA.................................................................. 36
MAIL BOXES ETC.................................................................................... 37
COMPETITION....................................................................................... 39
EMPLOYEES......................................................................................... 40
PROPERTIES........................................................................................ 40
RELATIONSHIP WITH SPIN-OFF COMPANIES.............................................................. 40
ADJUSTMENTS TO EMPLOYEE STOCK OPTIONS............................................................. 41
INDEBTEDNESS OF U.S. OFFICE PRODUCTS AFTER THE RESTRUCTURING......................................... 42
INFORMATION ABOUT THE BOARD OF DIRECTORS AFTER THE PROPOSED SALE OF EQUITY SECURITIES................ 43
INFORMATION ABOUT U.S. OFFICE PRODUCTS STOCK OWNERSHIP............................................... 47
THE SECOND PROPOSAL--REVERSE STOCK SPLIT.............................................................. 48
WHERE TO GET ADDITIONAL INFORMATION................................................................... 50
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ANNEX A OPINION OF MORGAN STANLEY & CO. INCORPORATED DATED JANUARY 12, 1998.......................... A-1
ANNEX B INVESTMENT AGREEMENT DATED AS OF JANUARY 12, 1998, AS AMENDED FEBRUARY 3, 1998, BETWEEN U.S. B-I
OFFICE PRODUCTS COMPANY AND CDR-PC ACQUISITION, L.L.C........................................
ANNEX C PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION........................................... C-1
INDEX TO FINANCIAL INFORMATION........................................................................ F-1
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<PAGE>
SUMMARY
This summary answers basic questions about the proposals. Please read the
rest of the Proxy Statement for full information about the proposals.
WHAT ARE WE ASKING YOU TO APPROVE?
Two proposals: The first proposal for you to consider is the sale by U.S.
Office Products of shares of common stock and warrants. We propose to sell U.S.
Office Products' common stock and two types of warrants to purchase additional
shares of common stock to an affiliate of an investment fund managed by Clayton,
Dubilier & Rice, Inc. ("Clayton, Dubilier & Rice"). (We will use the term
"equity securities" to refer to the common stock and warrants that we are
proposing to sell. We will use the term "Investor" to refer to the buyer of the
equity securities.) Investor will pay $270.0 million for the equity securities.
Investor will purchase a number of shares of common stock that equals 24.9% of
the shares outstanding after the issuance of the shares to Investor. Investor
will purchase two types of warrants. The first type of warrants (which we call
"special warrants") gives Investor the ability to maintain (at nominal cost) its
24.9% interest if U.S. Office Products issues additional shares in the special
circumstances described on pages 6-7 of this Proxy Statement. The second type of
warrant (which we refer to as the "warrants" or "common stock warrants") gives
Investor the right to buy in the future the same number of shares Investor buys
at closing (plus the number of shares it is entitled to receive pursuant to the
special warrants) at a total cost of $405.0 million.
The second proposal for you to consider is a one-for-four reverse stock
split of U.S. Office Products' common stock. A reverse stock split reduces the
number of shares of common stock outstanding and thereby proportionally
increases the trading price of the shares.
WHY IS U.S. OFFICE PRODUCTS SELLING EQUITY SECURITIES TO INVESTOR?
Your Board approved the sale of equity securities to Investor because it
recognized that U.S. Office Products is moving into a new stage of development,
less reliant on acquisitions and more focused on growth through improvement and
expansion of existing operations. (We will sometimes refer to the sale of the
equity securities to Investor as the "Equity Investment.") The Board concluded
that the Equity Investment in U.S. Office Products, and Clayton, Dubilier &
Rice's support of the management of U.S. Office Products, would contribute to
this development. The Board determined that the financial and other terms of the
Equity Investment were fair to U.S. Office Products and its stockholders.
Clayton, Dubilier & Rice is a leading private investment firm. It manages a
pool of equity capital in excess of $1.5 billion. It has substantial experience
in providing companies in which its affiliates invest with financial and
managerial advisory services aimed at building value and improving operational,
marketing and financial performance. Clayton, Dubilier & Rice is also
experienced in advising and assisting companies in managing high levels of debt.
WHAT IS U.S. OFFICE PRODUCTS' STRATEGIC RESTRUCTURING PLAN?
The Equity Investment is part of a Strategic Restructuring Plan approved by
your Board. This plan includes a tender offer by U.S. Office Products for
37,037,037 shares of common stock (including shares that may be issued on
exercise of vested and unvested stock options) at $27.00 per share (or, in the
case of shares underlying stock options, at $27.00 minus the exercise price of
the options) (the "Tender Offer"). It also includes the creation by U.S. Office
Products of four companies that will own and operate U.S. Office Products'
current corporate travel, educational supplies, print management, and technology
solutions businesses and the distribution to U.S. Office Products' stockholders
of the shares of those companies. As part of the financing for the Strategic
Restructuring Plan, U.S. Office Products is obtaining a new senior credit
facility, issuing new subordinated debt, offering to repurchase one series of
its convertible notes and offering to exchange another series of convertible
notes for common stock at a reduced conversion price.
1
<PAGE>
Your Board decided that the Strategic Restructuring Plan promotes the best
interests of stockholders for several reasons. First, it will permit
stockholders to choose to receive cash in exchange for a portion of their U.S.
Office Products' stock. Second, it will permit U.S. Office Products' management
to implement operational improvements in a more focused business. Third, it will
give U.S. Office Products' stockholders an opportunity to own stock in each of
four companies that will focus on a separate line of business. Finally, it will
bring to U.S. Office Products' core business the managerial assistance and
support of Clayton, Dubilier & Rice.
WHAT WILL BE U.S. OFFICE PRODUCTS' BUSINESS AFTER THESE TRANSACTIONS?
U.S. Office Products will continue to conduct its office supply, office
furniture, and office coffee, beverage and vending services businesses (which
will operate as the North American Office Products Group), its Mail Boxes Etc.
business, and its New Zealand and Australia operations. U.S. Office Products
also will continue to own its 49% interest in Dudley Stationery Limited (a U.K.
contract stationer).
WHAT FACTORS SHOULD YOU TAKE INTO ACCOUNT IN CONSIDERING THE PROPOSED EQUITY
INVESTMENT?
U.S. Office Products' Board approved the Strategic Restructuring Plan
because it believed it would be in the best interests of U.S. Office Products
and its stockholders. The Board received an opinion from its financial adviser,
Morgan Stanley & Co. Incorporated, that the Strategic Restructuring Plan was
fair from a financial point of view to the stockholders of U.S. Office Products.
You should also consider the factors described at pages 24-29 below. These
include:
- Current stockholders will own a smaller portion of U.S. Office Products
after Investor buys the equity securities.
- U.S. Office Products will need to borrow a large amount of money to help
fund the tender offer and related transactions. As a result, U.S. Office
Products will have a much larger amount of debt outstanding than it
currently does.
- U.S. Office Products will make adjustments in the number, and in the
exercise price, of options to buy U.S. Office Products' common stock that
are now held by employees, as well as in the conversion price of U.S.
Office Products' convertible notes. These adjustments probably will
increase the number of shares that holders of options and convertible
notes will be able to receive. The increase in the number of shares as a
result of these adjustments will be offset to the extent shares underlying
options are purchased in the Tender Offer. The increase will also be
offset to the extent the convertible notes are purchased by U.S. Office
Products or exchanged for shares of common stock prior to completion of
the Strategic Restructuring Plan.
- There may be a significant effect on the price of U.S. Office Products'
stock and an increase in trading volatility.
- U.S. Office Products may be responsible for some of the liabilities of the
four companies that it will be spinning off to stockholders to the extent
those companies are unable to satisfy such liabilities. U.S. Office
Products will also be directly liable for certain costs of the Strategic
Restructuring Plan and other liabilities. These liabilities are described
at pages 25-26.
- There may be tax risks for you and U.S. Office Products.
WHY SHOULD STOCKHOLDERS APPROVE A REVERSE STOCK SPLIT?
The Board believes a reverse stock split is in the interests of stockholders
because it will adjust U.S. Office Products' per share trading price upward by
reducing the number of shares outstanding. The Board believes a higher trading
price will better maintain U.S. Office Products' visibility in the marketplace
and its attractiveness to investors. The reverse stock split will not affect any
stockholder's proportionate equity interest in U.S. Office Products (except with
respect to cash received in lieu of fractional shares). Of course, U.S. Office
Products cannot give any assurances as to the prices at which U.S. Office
Products' common stock will trade after any of the transactions.
2
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INFORMATION ABOUT THE SPECIAL MEETING AND VOTING
THE SPECIAL MEETING
The Special Meeting will be held on May 22, 1998 at the Latham Hotel
Georgetown, 3000 M Street, N.W., Washington, D.C. at 10:00 a.m. eastern time.
THIS PROXY SOLICITATION
U.S. Office Products is sending you this Proxy Statement because U.S. Office
Products' Board of Directors is seeking your proxy to vote your shares at the
Special Meeting. This Proxy Statement includes information that U.S. Office
Products is required to provide to you under the rules of the Securities
Exchange Commission ("SEC"). It is intended to assist you in voting your shares.
On May 1, 1998, we began mailing information to all people who, according to our
stockholder records, owned shares at the close of business on March 26, 1998.
U.S. Office Products will pay the cost of requesting these proxies. U.S.
Office Products' directors, officers and employees may request proxies in person
or by telephone, mail, telecopy or letter. U.S. Office Products also has
retained MacKenzie Partners, Inc. to assist in distributing proxy solicitation
materials and seeking proxies. U.S. Office Products will pay MacKenzie a fee of
approximately $10,000, plus reasonable out-of-pocket expenses, for this
assistance. U.S. Office Products will reimburse brokers and other nominees their
reasonable out-of-pocket expenses for forwarding proxy materials to beneficial
owners of stock.
VOTING YOUR SHARES
You are entitled to one vote at the Special Meeting for each share of U.S.
Office Products' common stock that you owned of record at the close of business
on March 26, 1998. The number of shares you own (and may vote) is listed on the
enclosed proxy card.
You may vote your shares at the Special Meeting in person or by proxy. To
vote in person, you must attend the Special Meeting and obtain and submit a
ballot. We will give you a ballot at the Special Meeting. To vote by proxy, you
must complete and return the enclosed proxy card. By completing and returning
the proxy card, you will be directing the persons designated on the proxy card
to vote your shares at the Special Meeting in accordance with the instructions
you give on the proxy card.
Your proxy card will be valid only if you sign, date and return it before
the Special Meeting. IF YOU COMPLETE THE PROXY CARD EXCEPT FOR THE VOTING
INSTRUCTIONS, THEN YOUR SHARES WILL BE VOTED FOR THE PROPOSED SALE OF EQUITY
SECURITIES TO INVESTOR AND FOR THE PROPOSED ONE-FOR-FOUR REVERSE STOCK SPLIT.
You may revoke your proxy at any time before it is voted by any of the following
means:
- Notifying the Secretary of U.S. Office Products in writing that you wish
to revoke your proxy.
- Submitting a proxy dated later than your original proxy.
- Attending the Special Meeting and voting. Merely attending the Special
Meeting will not by itself revoke a proxy; you must vote your shares at
the Special Meeting to revoke the proxy.
IF YOU WERE A HOLDER OF SHARES AT THE CLOSE OF BUSINESS ON MARCH 26, 1998,
YOU WILL BE ENTITLED TO VOTE YOUR SHARES WHETHER OR NOT YOU SUBSEQUENTLY TENDER
YOUR SHARES IN THE TENDER OFFER DESCRIBED ON PAGES 13-14 OF THIS PROXY
STATEMENT. YOU SHOULD THEREFORE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
EVEN IF YOU HAVE ALREADY TENDERED, OR INTEND TO TENDER, YOUR SHARES IN THE
TENDER OFFER.
The Board of Directors does not expect any matter other than the proposals
that are discussed in this Proxy Statement to be presented at the Special
Meeting. Under U.S. Office Products' by-laws, no business may be transacted at
the meeting other than the proposals discussed in this Proxy Statement unless
all stockholders are present in person or by proxy. However, if any other matter
properly comes before the Special Meeting, your proxies will act on such matter
in their discretion.
3
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VOTE REQUIRED FOR APPROVAL
We have agreed with Investor that we will ask you to approve the sale of
equity securities to Investor. Also, the rules of the Nasdaq Stock Market (where
U.S. Office Products stock is traded) require stockholders to approve
substantial sales of stock unless certain exceptions apply. Although the sale of
equity securities to Investor might fall within these exceptions, your Board of
Directors has decided it is appropriate to ask you to approve this important
transaction.
The proposed sale of equity securities to Investor will be approved if a
majority of the votes cast on the proposal are cast in favor of the proposal.
The proposed amendment to the certificate of incorporation requires a majority
of the issued and outstanding shares for approval. On the record date for the
Special Meeting, March 26, 1998, 133,225,298 shares were issued and outstanding.
In addition, a "quorum" must be present at the Special Meeting. A quorum will be
present if 66,612,650 shares are represented at the Special Meeting, either in
person (by the stockholders) or by proxy. If a quorum is not present, a vote
cannot occur.
In deciding whether a quorum is present, abstentions and "broker non-votes"
will be counted as shares that are represented at the Special Meeting. (A broker
non-vote can occur if you hold your shares with a broker and are asked to
instruct your broker how to vote your shares. If you do not tell your broker how
to vote, your broker will not be able to vote for or against the proposal. If
your broker returns a proxy card for your shares without any voting
instructions, your shares will be counted as "broker non-vote" shares.) In
deciding whether the Equity Investment proposal has been approved, abstentions
will count as if they were votes against the proposal, but broker non-votes will
not count. Abstentions and broker non-votes will be equivalent to a vote against
the reverse stock split proposal.
OTHER MATTERS
Under Section 262 of the Delaware General Corporation Law, U.S. Office
Products' stockholders are not entitled to appraisal rights whether or not they
vote against the sale of common stock and warrants to Investor or the reverse
stock split.
The high and low sales prices on the Nasdaq Stock Market for shares of U.S.
Office Products' common stock on January 12, 1998, the last trading day before
we announced the Strategic Restructuring Plan, were $18.1250 and $15.5625 per
share, respectively.
Price Waterhouse LLP is U.S. Office Products' independent accountant.
Representatives of Price Waterhouse LLP will attend the Special Meeting. They
will have the opportunity to make a statement if they wish, and to respond to
appropriate questions.
If you want to include a proposal in the proxy statement for U.S. Office
Products' 1998 Annual Meeting, send the proposal to U. S. Office Products
Company, Attn: Mark D. Director, Executive Vice President-Administration,
General Counsel and Secretary, at 1025 Thomas Jefferson Street, N.W., Suite 600
East, Washington, D.C. 20007. Proposals must be received on or before May 12,
1998. Please note that proposals must comply with all of the requirements of
Rule 14a-8 under the Securities Exchange Act of 1934, as well as the
requirements of U.S. Office Products' by-laws.
THE FIRST PROPOSAL--SALE OF EQUITY SECURITIES
INFORMATION ABOUT THE PROPOSED SALE OF EQUITY SECURITIES
INTRODUCTION
U.S. Office Products is asking you to approve a sale of equity securities to
CDR-PC Acquisition, L.L.C. ("Investor"), an affiliate of an investment fund
managed by Clayton, Dubilier & Rice, for $270.0 million. On January 12, 1998,
Investor and U.S. Office Products signed an Investment Agreement that sets out
the terms of the proposed sale of equity securities. This contract, as amended
on February 3, 1998, is included as Annex B to this Proxy Statement. You should
read the entire Investment Agreement.
4
<PAGE>
Investor's purchase of the equity securities is one part of a comprehensive
restructuring plan (the "Strategic Restructuring Plan"). This Strategic
Restructuring Plan includes three stages that are expected to occur
contemporaneously:
- U.S. Office Products will offer to purchase from its stockholders
37,037,037 shares of its common stock (including shares that may be issued
on exercise of vested and unvested stock options), at a price of $27.00
per share (or, in the case of shares underlying stock options, at $27.00
minus the exercise price of the options), in a tender offer (the "Tender
Offer"). As described below, U.S. Office Products will pay for the Tender
Offer with borrowed money and proceeds of the sale of the equity
securities.
- U.S. Office Products will create four new companies to conduct its current
corporate travel services, educational supplies, print management and
technology solutions businesses (which we call collectively the "Spin-Off
Companies" and each a "Spin-Off Company"). After it buys shares in the
Tender Offer, U.S. Office Products will distribute to its remaining
stockholders shares of each of the four separate companies. (We will refer
to these distributions of shares as the "Distributions.") Each Spin-Off
Company intends to issue additional common stock in an underwritten public
offering concurrently with the Distributions.
- U.S. Office Products will then sell the equity securities to Investor, on
the terms and subject to the conditions in the Investment Agreement. (We
will sometimes refer to the sale of the equity securities to Investor as
the "Equity Investment.") Investor will not receive any shares of the
Spin-Off Companies.
In connection with the Strategic Restructuring Plan, U.S. Office Products
expects to enter into certain financing transactions. We expect these financing
transactions will include:
- A new $1.225 billion senior credit facility that U.S. Office Products will
use to refinance its current outstanding debt, pay for the Tender Offer
and the 2003 Note Tender (as defined below), and finance future
acquisitions and capital needs.
- The sale of at least $400.0 million in senior subordinated notes that will
be due in 2008.
- An offer to purchase any and all of its $230.0 million outstanding 5 1/2%
convertible subordinated notes that are due 2003 (the "2003 Notes") for a
purchase price of 94.5% of the principal amount, plus accrued interest. We
refer to this offer as the "2003 Note Tender."
- An offer to exchange its 5 1/2% convertible subordinated notes that are
due 2001 (the "2001 Notes") for common stock at an exchange rate of 61.483
shares per $1,000 principal amount, which effectively reduces the
conversion price from $19.00 to $16.17 while the offer is open. Shares of
U.S. Office Products' common stock issued upon conversion of these notes
will be eligible to be tendered in the Tender Offer and will receive
shares of the Spin-Off Companies. We refer to this offer as the "2001 Note
Offer."
U.S. Office Products hired Morgan Stanley & Co. Incorporated ("Morgan
Stanley") to advise it about the Strategic Restructuring Plan. On January 12,
1998 Morgan Stanley delivered an opinion to the Board of Directors that the
transactions comprising the Strategic Restructuring Plan, taken as a whole, are
fair from a financial point of view to the stockholders of U.S. Office Products.
Morgan Stanley's written opinion is included as Annex A to this Proxy Statement.
The opinion sets forth the assumptions made, matters considered and limitations
on the review undertaken by Morgan Stanley. Additional information about the
opinion can be found at pages 19-23. You should read the entire opinion and the
additional information.
RECOMMENDATION OF THE BOARD OF DIRECTORS
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE PROPOSED SALE OF COMMON STOCK AND WARRANTS TO INVESTOR.
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INFORMATION ABOUT THE INVESTMENT AGREEMENT AND RELATED AGREEMENTS
The important terms of the Investment Agreement are described below. The
Investment Agreement is included as Annex B to this Proxy Statement. You should
read the entire Investment Agreement. U.S. Office Products also has agreed to
sign certain other agreements relating to the Distributions and the future
relationships among U.S. Office Products and the Spin-Off Companies. This
section also describes the expected terms of those other agreements.
SALE OF COMMON STOCK, SPECIAL WARRANTS AND COMMON STOCK WARRANTS
U.S. Office Products has agreed to sell, and Investor has agreed to buy, the
following equity securities, if the conditions in the Investment Agreement are
satisfied, for $270.0 million in cash:
- COMMON STOCK
Investor will acquire shares of U.S. Office Products' common stock, par
value $.001 per share, that will give it ownership of 24.9% of all shares
of common stock outstanding immediately after it buys these shares. U.S.
Office Products expects that approximately 109.9 million shares will be
outstanding after the Tender Offer assuming all 2001 Notes are exchanged
in the 2001 Note Offer and holders of options for common stock tender
into the Tender Offer all shares they could receive on exercise of their
options. In that case, Investor would buy approximately 36.4 million
shares. This purchase will give Investor ownership of 24.9% of 146.3
million outstanding shares (109.9 million + 36.4 million). If, for any
reason, U.S. Office Products issues more shares of common stock before
the date on which Investor buys shares, Investor will receive a larger
number of shares. If any 2001 Notes are not exchanged in the 2001 Note
Offer or less than all options are tendered, Investor will receive a
smaller number of shares. Regardless of the number of shares Investor
receives, the result still will be that Investor will own 24.9% of all
shares outstanding immediately after it buys its shares.
- SPECIAL WARRANTS
In the following circumstances, the special warrants will permit Investor
to buy additional shares of common stock to maintain its 24.9% ownership
position:
- The special warrants will allow Investor to buy additional shares
equal to 24.9% of the number of shares that would be outstanding if
any 2001 Notes that remain outstanding after the 2001 Note Offer were
converted into common stock at the conversion price in effect after
adjusting for the Tender Offer and Distributions. For purposes of
determining shares outstanding, the shares issued to Investor are
included. Investor will be entitled to exercise these warrants pro
rata as 2001 Notes are converted. Any warrants not previously
exercised will be exercisable beginning two years after closing, even
if all the 2001 Notes have not been converted.
- If U.S. Office Products issues additional shares of common stock to a
former owner of Blue Star Group Limited under the terms of the
agreement by which U.S. Office Products acquired Blue Star Group
Limited, Investor will have the right to acquire additional shares in
order to maintain a total of 24.9% of all shares outstanding
(including for this purpose shares issued to Investor and assuming
conversion of all 2001 Notes that are not exchanged in the 2001 Note
Offer). The former owner is entitled to receive up to 3.0 million more
shares (prior to any adjustment that may be appropriate to take
account of the effect of the Strategic Restructuring Plan) depending
on a number of future events, including the future trading price of
the U.S. Office Products' common stock and the consolidated pre-tax
earnings of Blue Star and its New Zealand subsidiaries for the fiscal
year ending April 1999. In view of the uncertainty of these future
events, U.S. Office Products cannot reasonably estimate what portion,
if any, of these additional shares may be issued.
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- If U.S. Office Products issues additional shares of common stock to
other people under agreements that existed on January 12, 1998, but
were not identified to Investor in the Investment Agreement, Investor
will be entitled to acquire enough additional shares to maintain its
24.9% ownership position.
Investor will pay U.S. Office Products $0.01 for each share of common
stock that Investor purchases using the special warrants. The special
warrants will expire after twelve years, if they have not previously been
used to purchase shares.
- COMMON STOCK WARRANTS
Investor also will buy warrants that will give it the right to buy one
share of common stock for each share of common stock purchased by
Investor in the Equity Investment and each share that Investor has the
right to buy pursuant to the special warrants. The exercise price will be
1.5 times the price Investor pays per share of common stock at closing
(as defined below). Investor may use these warrants to purchase shares of
common stock at any time after the second anniversary of the date on
which Investor first buys common stock in the Equity Investment until the
twelfth anniversary of that date.
If Investor exercises all of these warrants, it will be required to pay
U.S. Office Products an additional $405.0 million for the common shares
it will receive. This amount is equal to 150% of Investor's original
investment of $270.0 million for the equity securities. Investor will not
be obligated to exercise these warrants and pay the additional $405.0
million. Investor is unlikely to exercise the warrants unless the price
of U.S. Office Products' stock rises to a level that makes receiving
additional shares in exchange for the exercise price attractive to
Investor. The common stock warrants will contain provisions that adjust
the number of shares Investor may purchase if U.S. Office Products takes
actions such as declaring a stock split or extraordinary dividend or
other actions that affect the value of the warrants.
Investor's warrants, together with the rights to purchase shares of U.S.
Office Products' common stock under the special warrants, would give it
ownership of approximately 34.7% of the common stock on a fully-diluted
basis. This assumes that all currently outstanding stock options were
exercised in accordance with their existing terms, and that all 2003
Notes were converted in accordance with their existing terms, in each
case without any adjustment for the restructuring transactions. We expect
to make adjustments to the number and exercise price of outstanding
options, and to the conversion price of any 2001 Notes and 2003 Notes
remaining after the 2001 Note Offer and the 2003 Note Tender, on account
of the restructuring transactions, and these adjustments will result in a
greater number of shares that may be issued upon exercise of the options
and conversion of the notes. Although the amount of these adjustments
will not be known until after the completion of the Strategic
Restructuring Plan, the effect of these adjustments will be to reduce
Investor's fully-diluted ownership interest in U.S. Office Products from
the amount set forth above. If no currently outstanding stock options are
exercised, exercise of these warrants would give Investor ownership of
approximately 39.9% of U.S. Office Products' common stock after
implementation of the Strategic Restructuring Plan (assuming that all of
the 2001 Notes are exchanged in the 2001 Note Offer and all of the 2003
Notes are tendered and accepted in the 2003 Note Tender).
CORPORATE GOVERNANCE
After the closing, U.S. Office Products' Board of Directors will have nine
members. (We will use the term "closing," or the term "closing date," to refer
to the time when we complete the sale of the equity securities to Investor.) At
closing, one of the directors must be the Chief Executive Officer of U.S. Office
Products, and three directors must be persons named by Investor. Two of the
remaining five directors also must be satisfactory to Investor. The existing
members of your Board will select these five new directors
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who will serve on the Board after the closing and until the next annual meeting
of stockholders (which is currently scheduled for September 1998). U.S. Office
Products also has agreed that the Chairman of the Board will be one of directors
named by Investor. For information about the members of the Board after the
closing, see pages 43-46. At each election of directors after the closing, as
long as Investor continues to hold certain levels of equity ownership in U.S.
Office Products, Investor will have the right to nominate up to three of nine
directors and to name the Chairman of the Board.
In addition, three-fourths of the directors must approve certain
transactions. These are: (i) the sale by U.S. Office Products of equity
securities, other than (A) a specified amount made available under employee
benefit plans, such as option plans, or (B) a specified amount issued to acquire
companies or issued in public offerings; (ii) any merger, tender offer or sale,
lease, or disposition of all or substantially all of U.S. Office Products'
assets, or other business combination involving U.S. Office Products, unless the
consideration for such sale is all cash or is freely tradable common stock of a
public company with a specified level of market capitalization; (iii) any major
recapitalization; (iv) certain amendments to shareholder rights plans; (v) any
dissolution or partial liquidation of U.S. Office Products; or (vi) any
modification to U.S. Office Products' charter or by-laws that is inconsistent
with Investor's rights under the Investment Agreement or the other agreements
described in this Proxy Statement. The effect of this provision is that so long
as Investor can nominate three directors, at least one of them must vote in
favor of any of these actions in order for it to be approved.
This table shows Investor's rights with respect to the nomination of
directors and how they will change if Investor disposes of equity securities.
This table also shows when the three-fourths majority requirement will apply.
SUMMARY OF CORPORATE GOVERNANCE PROVISIONS
<TABLE>
<CAPTION>
NUMBER OF
DIRECTORS INVESTOR THREE-FOURTHS
IS BOARD
PORTION OF SHARES ACQUIRED ENTITLED TO RIGHT TO APPROVAL FOR
AT CLOSING RETAINED BY NOMINATE DESIGNATE CERTAIN
INVESTOR (1) (OUT OF NINE) CHAIRMAN TRANSACTIONS
- ------------------------------------------------------------------- ------------------ --------- ------------
<S> <C> <C> <C>
66 2/3% to 100%.................................................... Three Yes Yes
33 1/3% to 66 2/3%................................................. Two Yes Yes
Less than 33 1/3% but Investor
holds at least 5% of the then-
outstanding voting stock......................................... One No No
Less than 5% of the then-
outstanding voting stock......................................... None No No
</TABLE>
- ------------------------------
(1) This includes shares Investor can acquire by exercising special warrants.
Investor can approve one additional nominee to the Board if the Chief
Executive Officer of U.S. Office Products is not a member of the Board or is not
a Board nominee. U.S. Office Products can increase the size of the Board of
Directors to as many as 12 persons, but the number of persons Investor can
nominate will increase at least proportionally. For example, if there are 12
members, Investor could nominate four directors (assuming it still held all of
its shares). Investor also will be entitled to at least proportionate
representation on all Board committees, unless it is precluded from such
membership by law or stock exchange rules.
All of Investor's corporate governance rights will expire on the earlier of
the fifth anniversary of closing or if Investor ever acquires more than 50% of
the voting power represented by U.S. Office Products' then-outstanding voting
securities.
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SUBSCRIPTION RIGHTS
Investor will have certain rights to maintain its percentage ownership
interest in U.S. Office Products' equity securities. Under certain
circumstances, if U.S. Office Products sells equity securities for cash, it will
have to offer Investor the right to purchase its pro rata share of the new
equity securities. Investor will be able to buy the new equity securities on the
same terms and conditions as other buyers. These subscription rights will not
apply to equity securities issued: (i) to officers, directors, or employees
pursuant to any existing employee stock options, plans or arrangements, or as
approved by any director nominated by Investor; (ii) in connection with
acquisitions by U.S. Office Products; (iii) in registered public offerings; or
(iv) to Investor or its affiliates.
STANDSTILL PROVISIONS
Investor and its affiliates may not buy more shares of U.S. Office Products'
voting stock if after the purchase they would own 25% or more of the outstanding
shares of voting stock of U.S. Office Products, unless this occurs solely
because Investor has exercised the warrants. This restriction will expire on the
earlier of the fifth anniversary of closing or if Investor ever owns more than
50% of the voting power represented by U.S. Office Products' then-outstanding
voting securities. For five years beginning January 12, 1998, neither Investor
nor its affiliates may: (i) solicit proxies, seek to influence any person with
respect to voting the shares of the common stock, or initiate, propose or
otherwise solicit stockholder proposals unless Investor is acting with the
support of the Board of Directors; (ii) deposit voting securities of U.S. Office
Products into any voting trust or otherwise become a "person" within the meaning
of Section 13(d)(3) of the Securities and Exchange Act of 1934; or (iii) make a
public request to U.S. Office Products to amend or waive any provisions of the
standstill arrangements described in this sentence. Investor may solicit proxies
in opposition to a transaction involving a sale of U.S. Office Products for cash
or equity securities, if no Investor-nominated director has voted in favor of
the transaction. The standstill restrictions also will not apply where a third
party unaffiliated with Investor is seeking to buy U.S. Office Products or if a
majority of the directors (excluding Investor's nominees) otherwise approves the
transaction.
RESTRICTIONS ON TRANSFER
Investor will not be able to transfer any common stock, warrants or special
warrants for two years after the closing.
Investor will not be able to transfer any of the shares of common stock
prior to the fifth anniversary of the closing without the approval of a majority
of the non-Investor directors, except in certain cases. The exceptions are
transfers (i) in a registered, underwritten public offering, (ii) as permitted
by Rule 144 of the Securities Act of 1933, (iii) in an exempt transaction to a
person who would not then beneficially own more than 5% of the outstanding
common shares, or in an exempt transaction to a registered investment company,
or (iv) in connection with a transaction in which all U.S. Office Products'
stockholders can sell their common stock on the same terms.
These restrictions will expire on the earlier of the fifth anniversary of
closing or if Investor ever owns more than 50% of the voting power represented
by U.S. Office Products' then-outstanding voting securities. Until the seventh
anniversary of closing, Investor may not sell more than 15% of the then
outstanding shares of common stock to any person or group without first offering
U.S. Office Products the opportunity to make an offer to purchase such shares.
This restriction also will expire if Investor owns more than 50% of the voting
power represented by U.S. Office Products' voting securities.
REGISTRATION RIGHTS
U.S. Office Products and Investor have agreed to enter into a contract that
will give Investor certain rights to require U.S. Office Products to file a
registration statement with the SEC allowing Investor to
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resell its shares. This agreement will state that upon any request by Investor,
U.S. Office Products will register either shares of common stock, the special
warrants or the common stock warrants. Investor can request registration of the
shares of common stock it buys initially, shares it buys when it exercises the
special warrants or the warrants, or other shares it buys (as long as the
Investment Agreement permits the purchase). Investor can make up to four
requests. U.S. Office Products also will grant Investor unlimited "piggy-back"
registration rights. A "piggy-back" registration right permits a person who owns
securities to request that the securities be included in a registration
statement that U.S. Office Products is otherwise filing. In certain
circumstances, U.S. Office Products may be permitted to limit the number of
securities that Investor could include in a registration, or possibly exclude
them altogether. U.S. Office Products will pay the expenses of any registration.
INDEMNITY
U.S. Office Products will indemnify Investor and its affiliates against
claims against them by any person based on the transactions under the Investment
Agreement, with certain exceptions. U.S. Office Products will also, subject to
some limitations, indemnify Investor and its affiliates against losses resulting
from U.S. Office Products' breaching its representations or warranties
(generally for one year after closing) or for breaching its covenants. U.S.
Office Products will also indemnify Investor from losses resulting from the
failure of any of the Spin-Off Companies to comply with its obligations to U.S.
Office Products in connection with the Distributions.
TRANSACTION FEE AND EXPENSES
If Investor buys the equity securities, U.S. Office Products will pay
Clayton, Dubilier & Rice a $15.0 million transaction fee and will reimburse
Investor for its reasonable expenses. Clayton, Dubilier & Rice will pay $2.0
million of the $15.0 million transaction fee to the investment firm of Merrill
Lynch & Co. for services provided to Clayton, Dubilier & Rice in connection with
the Equity Investment.
CONDITIONS TO THE EQUITY INVESTMENT
Both U.S. Office Products' and Investor's obligations are subject to certain
conditions. These include: receipt of necessary regulatory clearance; absence of
litigation that would prevent the transactions from closing; U.S. Office
Products' stockholder approval of the issuance of equity securities; completion
of the Distributions in accordance with the terms specified in the Investment
Agreement and on other terms that Investor reasonably approves; and execution of
Investor-approved agreements regarding allocation of possible tax liabilities
and certain other liabilities among U.S. Office Products and the Spin-Off
Companies.
Also, Investor will not be required to buy the equity securities unless
certain conditions in the Investment Agreement are satisfied. Investor can waive
any of these conditions. The conditions include: accuracy of U.S. Office
Products' representations and warranties and compliance by U.S. Office Products
with its obligations under the Investment Agreement; execution of documents
related to financing for the Tender Offer satisfactory in form and substance to
Investor; consummation of the Tender Offer; execution of the consulting
agreement with Clayton, Dubilier & Rice described below and the registration
rights agreement described above; absence of any development since October 25,
1997 that would have a material adverse effect on U.S. Office Products; no
person or group acquiring beneficial ownership of more than 15% of U.S. Office
Products' voting securities or entering into other transactions involving a
tender offer or exchange of shares or a sale of U.S. Office Products; and U.S.
Office Products' debt immediately following completion of the transactions
contemplated by the Strategic Restructuring Plan not exceeding $1.4 billion
(assuming conversion of the 2001 Notes) and the outstanding debt of the Spin-Off
Companies being at least $130.0 million plus all amounts (if any) that the
Spin-Off Companies spend for acquisitions that are made after January 12, 1998.
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<PAGE>
NO SOLICITATION
U.S. Office Products agreed that it will not solicit, encourage or negotiate
alternative transactions that meet certain criteria prior to closing. U.S.
Office Products may accept an alternative transaction proposal if the Board
determines (i) that the terms of the alternative transaction are superior to the
terms of Investor's proposed investment, and (ii) that failure to do so could
reasonably be expected to result in a breach of the Board's fiduciary duty to
the stockholders. In that event, U.S. Office Products would be obligated to pay
a $25.0 million termination fee to Clayton, Dubilier & Rice and to reimburse
Investor for its expenses.
TERMINATION
Investor and U.S. Office Products can terminate the Investment Agreement at
any time if they both agree in writing. Either one can terminate the agreement
if Investor has not purchased the equity securities by September 30, 1998, if
U.S. Office Products' stockholders do not approve the transaction, or if any law
or order prohibits the transaction.
In addition, Investor can terminate the Investment Agreement if:
- U.S. Office Products fails to do what it agreed to do, or if statements
U.S. Office Products made in the Investment Agreement are materially
incorrect (but U.S. Office Products will have 30 days (after being told by
Investor of the problem) to correct a situation that, when corrected,
makes the statements in the Investment Agreement accurate once again);
- the U.S. Office Products' Board of Directors withdraws, modifies, or
publicly announces the intention to withdraw or modify, its approval of
the Investment Agreement or related transactions or recommends an
alternative transaction proposal;
- the Board of Directors publicly announces that it has decided not to
complete the Distributions;
- certain conditions--including the accuracy at closing of statements made
by U.S. Office Products in the Investment Agreement--become impossible to
fulfill and Investor does not waive the conditions;
- U.S. Office Products makes substantive amendments to the agreements
setting out the terms of the Distributions as approved by Investor without
Investor's consent; or
- Investor decides in its good faith reasonable judgment not to proceed with
the transaction based on its review of the agreements relating to the
Distributions or the Tender Offer financing.
U.S. Office Products can terminate the Investment Agreement if:
- Investor fails to do what it agreed to do in the Investment Agreement, or
if statements Investor made in the Investment Agreement are materially
incorrect (but Investor will have 30 days (after being told by U.S. Office
Products of the problem) to correct a situation that, when corrected,
makes the statements in the Investment Agreement accurate once again); or
- certain conditions--including the accuracy at closing of statements made
by Investor in the Investment Agreement--become impossible to fulfill and
U.S. Office Products does not waive the conditions.
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<PAGE>
TERMINATION FEES
U.S. Office Products will reimburse Investor for its reasonable expenses and
pay a termination fee of $25.0 million to Clayton, Dubilier & Rice under certain
circumstances. These circumstances are (i) termination due to U.S. Office
Products' Board of Directors withdrawing, modifying, or publicly announcing the
intention to withdraw or modify, approval for the Investment Agreement or
related transactions or publicly announcing its determination not to effect the
Distributions; (ii) the approval or recommendation by the Board of Directors of
an alternative transaction proposal; or (iii) U.S. Office Products, without
Investor's approval, changes substantive terms of the Distribution agreements
after Investor has approved them.
Clayton, Dubilier & Rice will also be entitled to the $25.0 million
termination fee if U.S. Office Products terminates the Investment Agreement for
any other reason, or if Investor terminates the agreement because U.S. Office
Products' stockholders do not approve the transaction, and U.S. Office Products
enters into an agreement for certain alternative transactions within 12 months
after termination. If Investor terminates the Investment Agreement because U.S.
Office Products does not perform its obligations under the Investment Agreement
or because statements U.S. Office Products made in the Investment Agreement are
materially incorrect, U.S. Office Products will reimburse Investor's reasonable
expenses and pay a termination fee to Clayton, Dubilier & Rice of $10.0 million.
CLAYTON, DUBILIER & RICE CONSULTING AGREEMENT
Clayton, Dubilier & Rice and U.S. Office Products will enter into a
consulting agreement. Under that agreement, Clayton, Dubilier & Rice will
receive an annual fee of $500,000 for providing management and financial
consulting services to U.S. Office Products. These services may include
assisting U.S. Office Products in maintaining and developing effective banking
and other business relationships and assisting management in developing and
implementing strategies for improving the operational, marketing and financial
performance of U.S. Office Products. The consulting agreement also will contain
certain other provisions agreed to by the parties, including indemnities against
certain liabilities. The consulting agreement will end at the later of (i) five
years from the date of closing and (ii) the time that Investor is entitled to
nominate only one director.
USE OF PROCEEDS
Investor will pay $270.0 million for the equity securities. U.S. Office
Products will use these funds to pay a portion of the costs of the Strategic
Restructuring Plan. The costs of the Strategic Restructuring Plan include the
purchase price of the shares that U.S. Office Products buys in the Tender Offer,
Clayton, Dubilier & Rice's transaction fee and Investor's expenses, the purchase
price of the notes purchased in the 2003 Note Tender and other expenses such as
financing fees, professional fees and printing costs. U.S. Office Products
currently estimates that the expenses of the restructuring transactions
(including Clayton, Dubilier & Rice's fees and Investor's expenses) will total
approximately $75.0 million.
Investor will pay additional amounts to U.S. Office Products if it exercises
the common stock warrants or special warrants. If Investor exercises all of the
common stock warrants, it will pay an aggregate exercise price of $405.0
million. Also, Investor will pay a nominal amount upon exercise of the special
warrants. U.S. Office Products expects that it will use funds it receives upon
exercise of the common stock warrants for general corporate purposes, such as
acquisitions or repayment of debt. Investor has no obligation, however, to
exercise the warrants or pay any additional amounts to U.S. Office Products.
INFORMATION ABOUT OTHER ELEMENTS OF THE STRATEGIC RESTRUCTURING PLAN
The Strategic Restructuring Plan also includes the Tender Offer and the
Distributions. In this section of the Proxy Statement, we will summarize the
terms of the Tender Offer and the Distributions and certain financing
transactions related to the Strategic Restructuring Plan. U.S. Office Products
is distributing to its stockholders a Tender Offer Statement that has additional
information about the Tender Offer. The Spin-
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Off Companies are providing additional information about the Distributions in
Information Statements/ Prospectuses that are being distributed to stockholders
of U.S. Office Products. The section of this Proxy Statement titled "Where to
Get Additional Information" explains how to get copies of the Tender Offer
Statement and the Information Statements/Prospectuses.
THE TENDER OFFER AND NEW BORROWINGS
In the Tender Offer, U.S. Office Products will offer to purchase 37,037,037
shares of common stock (including shares that may be issued on exercise of
vested and unvested stock options) at a price of $27.00 per share (or, in the
case of shares underlying stock options, at $27.00 minus the exercise price of
the options). U.S. Office Products expects to commence the Tender Offer on May
4, 1998 and the Tender Offer will expire on June 1, 1998, unless U.S. Office
Products extends the expiration date.
The Board approved the Tender Offer--and borrowing by U.S. Office Products
to finance a substantial portion of the purchase price--to give stockholders the
opportunity to receive cash for a portion of their investment in U.S. Office
Products. The Tender Offer price of $27.00 per share represented a substantial
premium over the trading price of U.S. Office Products common stock immediately
prior to the announcement of the Strategic Restructuring Plan. The Board
subsequently decided to allow employees to tender shares underlying options to
reduce potential dilution to stockholders of U.S. Office Products and the
Spin-Off Companies as well as to permit employees to participate in the Tender
Offer without incurring the cost (and potential tax liability) of exercising
their options before they knew whether the options would be accepted in the
Tender Offer. Because shares underlying options can be tendered, U.S. Office
Products will not make any adjustments to the exercise price or number of
options that will be outstanding after the Tender Offer, to take account of the
effects of the Tender Offer. Based on information received from management and
recommendations of outside advisers, the Board concluded that after U.S. Office
Products is restructured, it would be able to generate adequate cash flow to
service the additional debt.
U.S. Office Products will not be required to purchase shares of common stock
in the Tender Offer unless the following conditions, and other standard
conditions, are satisfied:
- a minimum of 37,037,037 shares of common stock (including shares
underlying stock options) are validly tendered and not withdrawn;
- U.S. Office Products has obtained enough financing to pay for the shares
(including shares issuable upon exercise of outstanding employee stock
options) it will purchase in the Tender Offer;
- all conditions to the completion of Investor's purchase of the equity
securities have been satisfied or waived, except completion of the Tender
Offer and Distributions; and
- registration statements covering the shares of the Spin-Off Companies to
be distributed to U.S. Office Products' stockholders in the Distributions
have become effective and all other conditions to the completion of the
Distributions have been satisfied, except completion of the Tender Offer.
U.S. Office Products expects to pay for the shares with a combination of the
money it receives from Investor when Investor buys the equity securities, money
it borrows from banks, and money it receives by selling at least $400.0 million
of new senior subordinated debt securities to investors. See pages 42-43 below
for more detail on the expected financing for the Tender Offer.
In the Tender Offer, employees of U.S. Office Products may tender shares
underlying vested (but unexercised) or unvested stock options. U.S. Office
Products will allow employees to conditionally exercise unvested options to the
extent it purchases shares underlying such unvested options in the Tender Offer,
as long as the employee also tenders all of his or her vested options. In the
Tender Offer, tendered options will be prorated in the same proportion as
tendered shares. Unvested options that are not accepted for purchase in the
Tender Offer will remain unvested after the Tender Offer. U.S. Office Products
will accept for purchase in the Tender Offer shares underlying an employee's
vested options before accepting any
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shares underlying an employee's unvested options. Up to approximately 22 million
shares are issuable upon exercise of outstanding options. U.S. Office Products
will record a non-cash compensation expense to reflect the difference between
the tender offer price of $27.00 per share and the exercise price for options
that are purchased in the Tender Offer. The amount of the compensation expense
will depend on the number of shares underlying options that are accepted in the
Tender Offer and the exercise price of the associated options. If all
outstanding shares, plus all shares received in exchange for 2001 Notes (and
assuming all 2001 Notes are exchanged for shares in the 2001 Note Offer) and all
shares underlying all outstanding options are tendered, U.S. Office Products
currently estimates that the non-cash expense will be approximately $65.0
million.
DISTRIBUTIONS OF THE SPIN-OFF COMPANIES
After acceptance of shares of U.S. Office Products' common stock in the
Tender Offer, U.S. Office Products will distribute the common stock of the
Spin-Off Companies. These companies will hold substantially all of the
businesses and assets of, and will be responsible for substantially all of the
liabilities associated with, U.S. Office Products' technology solutions (Aztec
Technology Partners, Inc.), print management (Workflow Management, Inc.),
educational supplies (School Specialty, Inc.) and corporate travel services
(Navigant International, Inc.) businesses. Each of the Spin-Off Companies
intends to issue additional common stock in an underwritten public offering that
is expected to occur at approximately the same time as the Distributions. The
Distributions are intended to qualify for tax-free treatment under Section 355
of the Internal Revenue Code and will not be completed unless U.S. Office
Products receives an opinion from Wilmer, Cutler & Pickering that the
Distributions will receive tax-free treatment. See "--Tax Consequences of the
Distributions."
The Board determined that the separation of the businesses of the Spin-Off
Companies and the continuing business of U.S. Office Products as part of the
Strategic Restructuring Plan would benefit the stockholders because it would
have advantages for the Spin-Off Companies and U.S. Office Products. The
advantages that the Board considered included the following:
- The Distributions will allow each of U.S. Office Products and the Spin-Off
Companies to adopt strategies and pursue objectives that are more
appropriate to their respective industries, geographic territories and
stages of growth.
- Each will be able to pursue an independent acquisition program that allows
for a more focused use of resources and, where stock is used as
consideration, provide stock of a public company that is in the same
industry as the businesses being acquired.
- Each can be recognized by the financial community as a distinct business
that can be evaluated more readily and compared more easily to industry
peers.
- Each can implement more focused incentive compensation packages that
respond to specific industry and market conditions and enhance employee
retention objectives.
- After the Distributions, U.S. Office Products will be focused on a more
narrow, complementary group of businesses. Each of the Spin-Off Companies
will be focused primarily on their individual businesses.
In considering the Distributions, the Board also took into account that all
U.S. Office Products' stockholders remaining after the Tender Offer will receive
stock of the Spin-Off Companies. Accordingly, these stockholders will benefit
from any appreciation in value of the stocks of the Spin-Off Companies after the
Distributions. The Board also considered the diversification opportunities the
Distributions would provide stockholders. Stockholders will be able to retain an
interest in those Spin-Off Companies they want to retain and to dispose of their
interests in the others.
U.S. Office Products will distribute shares of the Spin-Off Companies to its
stockholders remaining after completion of the Tender Offer. U.S. Office
Products has not yet determined the number of shares of
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each of the Spin-Off Companies that will be distributed for each share of U.S.
Office Products common stock, but U.S. Office Products will distribute all
shares of the Spin-Off Companies it holds. The number of shares of the Spin-Off
Companies that a U.S. Office Products' stockholder receives in the Distributions
will be based on the number of shares of U.S. Office Products' common stock that
the stockholder holds after the Tender Offer but prior to the reverse stock
split. See pages 48-49 for more information about the reverse stock split.
Investor will not receive shares of the Spin-Off Companies in the
Distributions. At the same time, the Investment Agreement specifies certain
terms of the Distributions, and Investor has the right to reasonably approve
certain other terms of the Distributions. Investor may require terms of the
Distributions (such as responsibility for pre-distribution liabilities) that are
less favorable to the Spin-Off Companies than would be the case if Investor also
had an interest in the Spin-Off Companies. In addition, U.S. Office Products has
agreed to indemnify Investor and its affiliates against losses resulting from
any of the Spin-Off Companies failing to satisfy their obligations to U.S.
Office Products under certain agreements related to the Distributions.
OTHER TRANSACTIONS
U.S. Office Products also plans to enter into two other financing
transactions in connection with the Strategic Restructuring Plan:
- U.S. Office Products will make the 2003 Note Tender to purchase any and
all of the 2003 Notes for a purchase price of 94.5% of the principal
amount, plus accrued interest. U.S. Office Products will not complete this
tender offer unless it (i) obtains satisfactory financing for the 2003
Note Tender and the Tender Offer, and (ii) satisfies relevant conditions
to the Equity Investment and the Distributions. The 2003 Note Tender will
also be subject to other conditions that are customary in tender offers of
this type.
- U.S. Office Products will also make the 2001 Note Offer to exchange the
2001 Notes for common stock at an exchange rate of 61.483 shares per
$1,000 principal amount, which effectively reduces the conversion price on
the 2001 Notes from $19.00 to $16.17 while the offer is open. Holders of
the 2001 Notes who accept the offer will also receive accrued interest
through the expiration of the 2001 Note Offer. The shares of U.S. Office
Products' common stock issuable on exchange of these notes will be
eligible to be tendered in the Tender Offer and will receive the
Distributions. U.S. Office Products will not complete this offer if the
committment for its new credit facility has been terminated or if Investor
is no longer obligated to complete the Equity Investment. The 2001 Note
Offer will also be subject to other conditions.
These transactions will reduce debt that will become due before the expected due
dates for the new credit facility that U.S. Office Products plans to enter into
and the new subordinated notes that U.S. Office Products plans to issue. These
transactions are also intended to reduce the number of shares of common stock
that might be issued after completion of the Strategic Restructuring Plan. Each
of the 2001 Notes and the 2003 Notes are convertible into common stock of U.S.
Office Products. If these notes are purchased or exchanged before completion of
the Strategic Restructuring Plan, the number of shares that might be issued
after the Strategic Restructuring Plan will be less.
AGREEMENTS WITH JONATHAN LEDECKY
Jonathan J. Ledecky, the founder, Chairman of the Board and former Chief
Executive Officer of U.S. Office Products, will resign as Chairman of U.S.
Office Products when the Distributions are completed. The U.S. Office Products
Board and Mr. Ledecky concluded that it will be important for the Spin-Off
Companies to have greater access to Mr. Ledecky's skills and experience.
Accordingly, U.S. Office Products entered into an agreement with Mr. Ledecky.
This agreement will go into effect only if the Distributions are completed. It
will replace Mr. Ledecky's existing employment agreement with U.S. Office
Products. As a result of this agreement, Mr. Ledecky will remain employed with
U.S. Office Products, but
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his role with U.S. Office Products after the Distributions will be substantially
reduced. The principal terms of this agreement, as it is expected to be amended
prior to completion of the Distributions, are summarized below.
The new agreement with Mr. Ledecky governs his continuing obligations to
U.S. Office Products. Under that agreement, Mr. Ledecky will report to the U.S.
Office Products Board and will provide high-level acquisition negotiation
services and business strategic advice. Under the agreement, Mr. Ledecky will
receive an annual salary of $48,000 through June 30, 2001. Mr. Ledecky will also
retain his existing U.S. Office Products options; the number of shares subject
to these options, and their exercise price, will be adjusted to take account of
the transactions under the Strategic Restructuring Plan. As a continuing
employee, Mr. Ledecky is entitled to retain his options despite his reduction in
services to U.S. Office Products. U.S. Office Products can terminate Mr.
Ledecky's employment only for "cause." Cause consists of (i) his conviction of
or guilty or nolo contendere plea to a felony, (ii) his engaging, despite
notice, in conduct demonstrably and materially injurious to U.S. Office
Products, or (iii) his violation of the noncompetition agreement as it relates
to U.S. Office Products. If Mr. Ledecky resigns or is terminated, he will cease
to vest in his U.S. Office Products options and will have 90 days to exercise
any vested options (as under his existing options).
It is expected that each Spin-Off Company will enter into an employment
agreement with Mr. Ledecky to implement its assigned portion of the agreement.
Under each employment agreement, Mr. Ledecky will report to the respective
boards of directors and senior management of the Spin-Off Companies. Mr. Ledecky
will provide high-level acquisition negotiation services and strategic business
advice to each of the Spin-Off Companies. Each Spin-Off Company can require his
performance of such services, consistent with his other contractual employment
obligations to Consolidation Capital Corporation (of which Mr. Ledecky is the
founder, chairman and chief executive officer), U.S. Office Products and the
other Spin-Off Companies. As an employee, Mr. Ledecky will also be subject to
the generally applicable personnel policies of each company and will be eligible
for each Spin-Off Company's benefit plans in accordance with their terms. Each
Spin-Off Company is expected to pay Mr. Ledecky an annual salary of up to
$48,000 for up to two years. Each Spin-Off Company may terminate Mr. Ledecky's
employment with or without "cause," where cause has the same definition as in
the agreement with U.S. Office Products, as modified to refer to the Spin-Off
Company. If without cause, the termination would entitle Mr. Ledecky to a
severance payment equal to his salary for the lesser of 12 months or the
remainder of the contract.
The agreement with U.S. Office Products provides for non-competition and
non-solicitation restrictions that continue for four years after the
Distributions have been completed. These provisions generally restrict Mr.
Ledecky from, among other things, investing in or working for or on behalf of
any business that sells products or services in direct competition with U.S.
Office Products or the Spin-Off Companies, within 100 miles of any location
where U.S. Office Products or the Spin-Off Companies conduct business. (For this
purpose, "products or services" are those that U.S. Office Products offered on
January 13, 1998.) The agreement prohibits Mr. Ledecky from trying to hire away
managerial employees of U.S. Office Products or the Spin-Off Companies, or
calling upon customers of U.S. Office Products or the Spin-Off Companies to
solicit or sell products or services in direct competition with U.S. Office
Products or the Spin-Off Companies. Mr. Ledecky also may not hire away for
Consolidation Capital Corporation any person then or in the preceding year
employed by U.S. Office Products or the Spin-Off Companies. U.S. Office Products
is permitted to (and will) assign to the Spin-Off Companies the ability to
enforce the non-competition provisions described above as they apply to the
Spin-Off Companies' respective businesses, which will then constitute part of
his employment agreements with the Spin-Off Companies.
Mr. Ledecky will receive options from each Spin-Off Company for each of the
Spin-Off Companies' common stock on the date of the Distributions. The options
are intended to compensate Mr. Ledecky for his services to each of the Spin-Off
Companies as an employee. The options will cover up to 7.5% of each of the
Spin-Off Companies' outstanding common stock, determined as of the date of the
Distributions
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without regard to any concurrent public offerings. For each Spin-Off Company,
the options will have a per-share exercise price equal to the initial public
offering price for the Spin-Off Company. The estimated value of these options
depends on the initial public offering prices of the Spin-Off Companies and the
trading volatility of the Spin-Off Companies. U.S. Office Products cannot make a
reliable estimate of the value of these options until it obtains an estimate of
the initial public offering prices for the Spin-Off Companies. U.S. Office
Products believes that the value of these options will be substantially greater
than the annual cash compensation paid to officers of the Spin-Off Companies,
but moderate in relation to the total annual expenses of the Spin-Off Companies.
An estimate of the dollar value of the options will be included in the
information statements relating to each Distribution, which U.S. Office Products
will send to stockholders before the Distributions.
It is expected that, for each Spin-Off Company, Mr. Ledecky's options will
be fully vested when granted but will not be exercisable until 12 months after
the Distributions are completed. Mr. Ledecky's options from the Spin-Off
Companies will all become exercisable immediately if he dies before the option
expires or, in the case of a particular Spin-Off Company, if that company
accelerates the exercise schedule of options for substantially all management
option holders. (In this latter case, Mr. Ledecky's option will become
exercisable on the same accelerated schedule as the other management option
holders.) All unexercised portions of the option will expire ten years after the
date of grant of the option or, if applicable, as of the date Mr. Ledecky
violates his non-competition agreement with a Spin-Off Company.
BACKGROUND OF AND REASONS FOR THE PROPOSED SALE OF EQUITY SECURITIES
U.S. Office Products' Board of Directors and management have from time to
time considered strategic alternatives to improve U.S. Office Products'
operational performance and enhance stockholder value. In September 1997,
Clayton, Dubilier & Rice outlined to management the general terms of a possible
transaction involving the sale of common stock and warrants, a repurchase of
common stock, and the spin-off of certain businesses. The Board of Directors
decided at a special meeting on October 1, 1997 not to pursue the Clayton,
Dubilier & Rice proposal. Management advised Clayton, Dubilier & Rice of the
Board's decision, and discussions ceased.
In December 1997, Clayton, Dubilier & Rice advised U.S. Office Products'
management that it remained interested in investing in U.S. Office Products. On
December 17, 1997, the Board of Directors authorized management to undertake
discussions with Clayton, Dubilier & Rice to determine whether a transaction
could be structured on acceptable terms. Two significant developments
contributed to the Board's decision in December 1997 to pursue Clayton, Dubilier
& Rice's proposal after deciding not to pursue the transaction on October 1,
1997. First, in November 1997 Jonathan Ledecky advised the Board that he
intended to step down as Chief Executive Officer of U.S. Officer Products. The
Board of Directors decided to name Thomas Morgan as the new Chief Executive
Officer. With the change in leadership, it became apparent to the Board that
U.S. Office Products would begin more quickly to transition toward a new stage
of development, less reliant on acquisitions and more focused on operational
efficiencies and organic growth. The Board felt that Clayton, Dubilier & Rice's
operational expertise could help with this transition. Second, the price of U.S.
Office Products' common stock declined steadily from the mid-twenties in the
beginning of October, to the mid-teens by the middle of December. This happened
despite the fact that U.S. Office Products, in early December, announced record
earnings and its eleventh consecutive quarter of exceeding market estimates on
its performance. As a result, management and the directors considered whether
U.S. Office Products needed to simplify operations so that investors could more
readily value U.S. Office Products' common stock. Moreover, the Board took into
account that Clayton, Dubilier & Rice did not change the pricing of its proposal
in December, despite the drop in the price of U.S. Office Products' common
stock.
Thereafter, U.S. Office Products, with the assistance of its financial
adviser, Morgan Stanley, negotiated with Clayton, Dubilier & Rice on the terms
of the Equity Investment. They also discussed with Clayton, Dubilier & Rice the
other elements of the Strategic Restructuring Plan. As a result of this
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process, the Board of Directors approved the Strategic Restructuring Plan and
the Investment Agreement on January 12, 1998.
Following announcement of the Strategic Restructuring Plan, management, in
consultation with Clayton, Dubilier & Rice, regularly reviewed the progress of
the Strategic Restructuring Plan and issues related to the Strategic
Restructuring Plan. In February, the Board authorized management to implement
certain modifications to the Strategic Restructuring Plan, including
underwritten public offerings by the Spin-Off Companies. Based on additional
financial analysis, management also recommended that U.S. Office Products make
the 2001 Note Offer and the 2003 Note Tender. The Board subsequently decided to
make the 2001 Note Offer and the 2003 Note Tender in order to reduce the
potential dilution created by the 2001 Notes and 2003 Notes and to reduce the
need to refinance this debt before maturity of U.S. Office Products' new debt.
In addition, management, together with Clayton, Dubilier & Rice,
subsequently recommended that U.S. Office Products modify the terms of the
Tender Offer to include shares underlying stock options. The Board, after
receiving oral confirmation from Morgan Stanley that this change would not
affect their January 12, 1998 written opinion as to the fairness from a
financial point of view of the transactions comprising the Strategic
Restructuring Plan (see pages 19-23 below), decided to include shares underlying
both vested and unvested options in the Tender Offer in order to reduce the
substantial potential dilution and future claims on the equity value of U.S.
Office Products and the Spin-Off Companies represented by the employee stock
options. The Board concluded that U.S. Office Products could decline to adjust
the options for the effect of the Tender Offer if the options were included in
the Tender Offer, further reducing potential dilution. The Board also considered
Clayton, Dubilier & Rice's willingness to agree with U.S. Office Products'
proposal on the allocation of transaction expenses and certain other matters
between U.S. Office Products and the Spin-Off Companies if vested and unvested
options were included in the Tender Offer. Two directors abstained with respect
to including shares underlying options in the Tender Offer.
On April 14, 1998, a stockholder purporting to represent a class composed of
all U.S. Office Products stockholders filed an action in the Delaware Chancery
Court. The action claims that the directors breached their fiduciary duty to the
stockholders of U.S. Office Products by changing the terms of the Tender Offer
to include employee stock options. The complaint seeks injunctive relief,
damages, and attorney's fees. U.S. Office Products believes that this lawsuit is
without merit and intends to vigorously contest it.
The Board approved the Equity Investment as part of the Strategic
Restructuring Plan. In considering the Strategic Restructuring Plan, the Board
took into account a number of considerations, including the opinion of Morgan
Stanley (see Annex A); the Board's determination that there were operational
advantages to separating the businesses of the Spin-Off Companies from U.S.
Office Products' core businesses; that the recent trading prices of U.S. Office
Products' common stock did not, in the Board's view, adequately reflect the
underlying values of U.S. Office Products' businesses; and that U.S. Office
Products' remaining operations would benefit from the assistance and support of
Clayton, Dubilier & Rice.
The Board concluded that the Equity Investment would benefit U.S. Office
Products. The Board recognized that U.S. Office Products was moving into a new
stage of development, less reliant on acquisitions and more focused on growth
through improvements in and expansion of existing operations. The Board
concluded that the Equity Investment in U.S. Office Products, and Clayton,
Dubilier & Rice's support of the management of U.S. Office Products, would
contribute to U.S. Office Products' development. Clayton, Dubilier & Rice has
substantial experience in providing companies in which its affiliates invest
with financial and managerial advisory services aimed at building value and
improving operational, marketing and financial performance. Clayton, Dubilier &
Rice also has substantial experience in advising and assisting companies in
managing high levels of debt.
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The Board also considered the terms of the Equity Investment. It concluded,
based on an analysis by Morgan Stanley, that the proposed consideration of
$270.0 million was fair. The Board noted that the common stock warrants could,
if U.S. Office Products' stock were to appreciate sufficiently, provide
additional value to Investor. In that event, however, all other stockholders of
U.S. Office Products would also benefit from the appreciation. It also
considered the rights granted to Investor with respect to corporate governance.
While Investor will have certain rights to nominate directors to the Board, and
certain decisions will require a "super-majority" of the Board, Investor will
not have the power to control Board decisions. Investor will, however, have
substantial influence over the affairs of U.S. Office Products, and the fact
that certain decisions require a "super-majority" vote means that Investor may
be able to prevent some transactions from taking place. Finally, the Board
considered the limitations in the Investment Agreement on transactions by
Investor in U.S. Office Products' stock. These limitations will preclude
Investor from transferring shares in a block to a party seeking to acquire
control of U.S. Office Products, unless the Board approves.
OPINION OF FINANCIAL ADVISER
The Board retained Morgan Stanley to act as its financial adviser in
connection with the transactions comprising the Strategic Restructuring Plan
(the "Transactions") based upon Morgan Stanley's qualifications, expertise and
reputation. On January 12, 1998, Morgan Stanley delivered its opinion to the
Board that, as of such date and subject to certain considerations identified in
the written opinion of Morgan Stanley, the Transactions, taken as a whole, are
fair from a financial point of view to U.S. Office Products' stockholders.
THE FULL TEXT OF MORGAN STANLEY'S WRITTEN OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED AS ANNEX A TO THIS PROXY STATEMENT (THE "MORGAN STANLEY OPINION").
YOU ARE URGED TO, AND SHOULD, READ THE MORGAN STANLEY OPINION CAREFULLY AND IN
ITS ENTIRETY. THE MORGAN STANLEY OPINION IS DIRECTED TO THE BOARD AND RELATES TO
THE FAIRNESS OF THE TRANSACTIONS, FROM A FINANCIAL POINT OF VIEW, TO U.S. OFFICE
PRODUCTS' STOCKHOLDERS, AND IT DOES NOT CONSTITUTE A RECOMMENDATION TO YOU ABOUT
HOW TO VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE MORGAN STANLEY OPINION
SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF THE OPINION.
In arriving at its opinion, Morgan Stanley (i) reviewed certain publicly
available financial statements and other business and financial information of
U.S. Office Products; (ii) reviewed certain internal financial statements and
other financial and operating data concerning U.S. Office Products and each
Spin-Off Company prepared by the management of U.S. Office Products; (iii)
analyzed certain financial forecasts for U.S. Office Products and each Spin-Off
Company prepared by the management of U.S. Office Products; (iv) discussed the
past and current operations and financial condition and the prospects of U.S.
Office Products and each Spin-Off Company with senior executives of U.S. Office
Products; (v) reviewed the pro forma impact of the Transactions on U.S. Office
Products' and each Spin-Off Company's earnings per share, cash flow,
consolidated capitalization and financial ratios; (vi) reviewed the reported
prices and trading activity of U.S. Office Products' common stock; (vii)
compared the financial performance of each Spin-Off Company with that of certain
other companies that are comparable to each Spin-Off Company and have
publicly-traded securities; (viii) compared the financial performance of U.S.
Office Products (excluding the Spin-Off Companies) with that of certain other
comparable companies with publicly-traded securities; (ix) reviewed the
financial terms, to the extent publicly available, of certain transactions
involving minority investments in publicly traded companies; (x) reviewed and
discussed with the Board certain expertise of Clayton, Dubilier & Rice and the
strategic, financial and operational benefits anticipated from the Transactions;
(xi) participated in discussions and negotiations among representatives of U.S.
Office Products and Clayton, Dubilier & Rice and their respective legal
advisers; and (xii) performed such other analyses and considered such other
factors as Morgan Stanley deemed appropriate.
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In rendering its opinion, Morgan Stanley assumed and relied upon without
independent verification the accuracy and completeness of the information
reviewed by Morgan Stanley for the purposes of the Morgan Stanley Opinion. With
respect to the financial forecasts, including information relating to certain
strategic, financial and operational benefits anticipated from the Transactions,
Morgan Stanley assumed that they had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of U.S. Office Products and each Spin-Off Company. Morgan
Stanley did not make any independent valuation or appraisal of the assets or
liabilities of U.S. Office Products or any Spin-Off Company nor was Morgan
Stanley furnished with any such appraisal. The Morgan Stanley Opinion is
necessarily based on financial, economic, market and other conditions as in
effect on, and the information made available to Morgan Stanley as of, the date
of the Morgan Stanley Opinion. Morgan Stanley further assumed that no spin-off
will be a taxable transaction to U.S. Office Products, any Spin-Off Company or
the U.S. Office Products' stockholders under U.S. federal income tax laws
(except to the extent of any cash distributed in lieu of fractional shares of
the Spin-Off Companies). In rendering its opinion, Morgan Stanley, with the
Board's consent, did not consider the effect of any terms of any commercial,
allocation or other arrangements between U.S. Office Products and any Spin-Off
Company.
Morgan Stanley noted that trading in shares of U.S. Office Products' common
stock commencing with the public announcement of the Transactions and continuing
for a period of time following completion of the Distributions may involve a
redistribution of shares of U.S. Office Products' common stock and the shares of
the Spin-Off Companies' common stock among U.S. Office Products' stockholders
and other investors. Accordingly, during such period, U.S. Office Products'
common stock and the Spin-Off Companies' common stock may trade at prices below
those at which they would trade on a fully distributed basis after the
Distributions. In rendering its opinion, Morgan Stanley did not opine as to the
price at which U.S. Office Products' common stock or any Spin-Off Company's
common stock will trade after the Transactions are effected.
The following is a brief summary of the analyses performed by Morgan Stanley
and reviewed with the Board that were material to the preparation of the Morgan
Stanley Opinion and to its presentation to the Board:
EQUITY MARKET PERFORMANCE. Morgan Stanley presented the Board an analysis
of U.S. Office Products' common stock performance as background material to a
discussion of the Transactions. This analysis consisted of a historical analysis
of: closing prices and trading volumes from February 16, 1995, the date of the
U.S. Office Products' initial public offering ("IPO"), to January 9, 1998; U.S.
Office Products' indexed price performance from January 9, 1996 to January 9,
1998 relative to Corporate Express, Incorporated ("Corporate Express"), BT
Office Products International, Incorporated ("BT Office"), Boise Cascade Office
Products Corporation ("Boise") and Standard & Poor's industrial average of 400
stocks (the "S&P 400"); and U.S. Office Products' next twelve-month
price-to-earnings ("P/E") multiple from January 5, 1996, to January 9, 1998,
relative to Corporate Express, BT Office, Boise and the S&P 400. Morgan Stanley
observed that the high price and the low price for U.S. Office Products' common
stock from the time of the IPO to January 9, 1998, were $29.92 per share and
$6.67 per share, respectively. From January 9, 1996 to January 9, 1998, Morgan
Stanley noted that the S&P 400 increased by 51%, U.S. Office Products increased
by 7%, Boise decreased by 27%, Corporate Express decreased by 34% and BT Office
decreased by 46%. Morgan Stanley also observed that the next twelve-month P/E
multiples for U.S. Office Products, Corporate Express, BT Office and Boise
generally declined from January 5, 1996 to January 9, 1998, while the next
twelve-month P/E multiple for the S&P 400 generally increased.
COMPARABLE COMPANY ANALYSIS. Comparable company analysis examines a
company's trading performance relative to a group of publicly traded peers.
Morgan Stanley analyzed the trading performance of certain companies that may be
considered comparable to U.S. Office Products after the Transactions and each
Spin-Off Company. No company utilized in the comparable company analysis as a
comparison is identical to either U.S. Office Products after the Transactions or
the Spin-Off Companies. In evaluating the
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comparable companies, Morgan Stanley made judgments and assumptions with regard
to industry performance, general business, economic, market and financial
conditions and other matters. Mathematical analysis (such as determining the
average or median) is not in itself a meaningful method of using comparable
company data.
U.S. Office Products after the Transactions was compared to Corporate
Express, BT Office and Boise which had estimates for the calendar year 1999 P/E
multiple ranging from 10x to 12x, as of January 9, 1998. Due to the limited
universe of publicly-traded companies in its specific sector, the spin-off of
the school specialty business was compared to a group of industrial
consolidators including U.S. Office Products, White Cap Industries,
Incorporated, Industrial Distribution Group, Incorporated and U.S.A. Floral
Products, Incorporated which had estimates for the calendar year 1999 P/E
multiple ranging from 10x to 19x, as of January 9, 1998. The spin-off of the
corporate travel services business was compared to Travel Services
International, Incorporated, the most significant publicly traded company in its
sector, which had an estimate for the calendar year 1999 P/E multiple of 18x, as
of January 9, 1998. The spin-off of the print management business was compared
to American Business Products, Incorporated, Ennis Business Forms, Incorporated,
John H. Harland Company, Moore Corporation Limited, New England Business
Service, Incorporated, The Standard Register Company and Wallace Computer
Services, Incorporated which had estimates for the calendar year 1999 P/E
multiple ranging from 10x to 15x, as of January 9, 1998. The spin-off of the
technology solutions business was compared to Cambridge Technology Partners,
Incorporated, Claremont Technology Group, Incorporated, International Network
Services, Sapient Corporation, System Software Associates, Incorporated,
Technology Solutions Company, Whittman-Hart, Incorporated and XLConnect
Solutions, Incorporated which had estimates for the calendar year 1999 P/E
multiple ranging from 9x to 38x, as of January 9, 1998. Morgan Stanley indicated
to the Board that U.S. Office Products after the Transactions and the spin-off
of the print management business could trade at multiples of P/E and earnings
before interest, taxes, depreciation and amortization ("EBITDA") slightly above
U.S. Office Products' current multiples. Morgan Stanley further indicated to the
Board that the spin-offs of the school specialty business, corporate travel
services business and technology solutions business could trade at multiples of
P/E and EBITDA above U.S. Office Products' current multiples. U.S. Office
Products had an estimate for the calendar year 1999 P/E multiple of 10x, as of
January 9, 1998.
PRO FORMA ANALYSIS OF THE TRANSACTIONS. Morgan Stanley prepared an analysis
of the pro forma financial impact of the Transactions to U.S. Office Products'
stockholders. Based on financial information and projections provided to Morgan
Stanley by the management of U.S. Office Products, Morgan Stanley analyzed pro
forma projected earnings per share ("EPS"), cash flow, consolidated
capitalization and financial ratios of U.S. Office Products after the
Transactions and of each of the Spin-Off Companies. By applying the multiple
ranges identified through the comparable company analysis to the pro forma
projected EPS statistics for U.S. Office Products after the Transactions and
each of the Spin-Off Companies, Morgan Stanley was able to calculate a range of
equity values based on the assumptions in its analysis for U.S. Office Products
after the Transactions and for each of the Spin-Off Companies on a fully-
distributed basis. Morgan Stanley indicated to the Board that the value that a
U.S. Office Products' stockholder would receive in the Transactions would be
composed of equity interests in each of U.S. Office Products after the
Transactions and the four Spin-Off Companies and cash received in the Tender
Offer. Assuming each share of U.S. Office Products' common stock outstanding
after giving effect to the Tender Offer receives one share of each Spin-Off
Company and assuming that holders of U.S. Office Products' common stock
participate pro rata in the Tender Offer, subject to the qualifications and
limitations described in the next paragraph, Morgan Stanley indicated to the
Board that the weighted value of cash and equity interests in U.S. Office
Products after the Transactions and in each Spin-Off Company which a holder of a
share of U.S. Office Products' common stock would receive on a fully-distributed
basis could range from $19.78 to $23.21.
Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Furthermore, Morgan Stanley noted
that trading in shares of U.S. Office Products' common stock commencing with the
public
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announcement of the Transactions and continuing for a period of time following
completion of the Distributions may involve a redistribution of shares of U.S.
Office Products' common stock and the shares of the Spin-Off Companies' common
stock among U.S. Office Products' stockholders and other investors and
accordingly, during such period, shares of U.S. Office Products' common stock
and the shares of the Spin-Off Companies' common stock may trade at prices below
those at which they would trade on a fully distributed basis after the
Distributions. In rendering its opinion, Morgan Stanley did not opine as to the
price at which shares of U.S. Office Products' common stock or shares of each
Spin-Off Company's common stock will trade after the Transactions are effected.
ANALYSIS OF OTHER STRATEGIC ALTERNATIVES. At the Board's request, utilizing
the methodology described in Pro Forma Analysis of the Transactions, Morgan
Stanley also prepared an analysis of two alternatives to the Transactions: (i)
spin-offs without additional leverage (borrowings) or an investment by Investor
("Spin-Offs/No Leverage") and (ii) spin-offs with additional leverage but
without an investment by Investor ("Spin-Offs/Leverage/No Investor"). Morgan
Stanley assumed U.S. Office Products would use the additional leverage to
finance a tender offer to purchase a portion of its shares. Assuming each share
outstanding after giving effect to any tender offer receives one share of each
Spin-Off Company and assuming that U.S. Office Products' stockholders
participate pro rata in any tender offer, Morgan Stanley indicated to the Board
that the weighted value of cash and equity interests in U.S. Office Products
after the Transactions and in each Spin-Off Company which a holder of a share of
U.S. Office Products' common stock would receive on a fully-distributed basis
could range from $17.08 to $21.71 for the Spin-Offs/No Leverage alternative and
from $19.12 to $22.86 for the Spin-Offs/Leverage/No Investor alternative
compared to a range of $19.78 to $23.21 for the Transactions.
ANALYSIS OF EQUITY INVESTMENT. Morgan Stanley analyzed the value of the
equity securities Investor would acquire in "New USOP," that is, in U.S. Office
Products after it increased debt and used it to repurchase shares in the Tender
Offer and after it made the Distributions. Because the Transactions result in
"New USOP" being a smaller, more highly leveraged company than it was before,
the price Investor is paying for 24.9% of U.S. Office Products cannot be
compared to the consideration being paid by U.S. Office Products to repurchase a
portion of its outstanding shares in the Tender Offer.
Morgan Stanley started with the $270.0 million Investor was paying for the
equity securities. It subtracted from that amount an estimated value for the
warrants, which it determined by first calculating the theoretical option value
using the Black-Scholes model (a standard methodology for valuing warrants) and
then adjusting the theoretical Black-Scholes value downward to reflect the
likely illiquidity of the warrants in trading markets. Morgan Stanley then
estimated the per share price being paid by Investor by dividing the difference
by the number of "New USOP" shares it estimated Investor would buy. Finally,
Morgan Stanley compared this estimated per share value being paid by Investor to
possible equity values for "New USOP" common stock. As discussed above in Pro
Forma Analysis of the Transactions, Morgan Stanley developed a range of equity
values for "New USOP." It multiplied pro forma projected EPS by possible trading
multiples for "New USOP" developed in the comparable company analysis. Subject
to the qualifications and limitations described above in Pro Forma Analysis of
the Transactions, Morgan Stanley concluded that this range was lower than the
estimated per share price being paid by Investor. Accordingly, Morgan Stanley
indicated to the Board its view that Investor would be paying a mean premium of
23% for its shares of "New USOP" stock.
The preparation of a fairness opinion is a complex process and is not
susceptible to a partial analysis or summary description. In arriving at its
opinion, Morgan Stanley considered the results of all of its analyses as a whole
and did not attribute any particular weight to any particular analysis or factor
considered by it. Furthermore, a selection of any portions of Morgan Stanley's
analyses, without considering all analyses, would create an incomplete view of
the process underlying its opinion. In addition, Morgan Stanley may have deemed
various assumptions more or less probable than other assumptions, so that the
ranges of valuations resulting for any particular analysis should not be taken
to be Morgan Stanley's view of the actual value.
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In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of U.S. Office Products or
Investor. As noted above, the analyses performed by Morgan Stanley are not
necessarily indicative of actual values, which may be significantly more or less
favorable than suggested by such analyses. Such analyses were prepared solely as
a part of Morgan Stanley's analysis of the fairness of the consideration from a
financial point of view to U.S. Office Products' stockholders and were provided
to the Board in connection with the delivery of Morgan Stanley's written opinion
of January 12, 1998. The analyses do not purport to be appraisals or reflect the
prices at which U.S. Office Products might actually be sold. Because such
estimates are inherently subject to uncertainty, none of U.S. Office Products,
Investor, Morgan Stanley or any other person assumes responsibility for their
accuracy. In addition, Morgan Stanley's opinion and presentation to the Board
was one of many factors taken into consideration by the Board in making its
determination to approve the Transactions.
The Board retained Morgan Stanley based upon its experience and expertise.
Morgan Stanley is an internationally recognized investment banking and advisory
firm. Morgan Stanley, as part of its investment banking business, is
continuously engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Morgan Stanley is a
full-service securities firm engaged in securities trading and brokerage
activities, as well as providing investment banking and financial advisory
services. In the ordinary course of its trading and brokerage activities, Morgan
Stanley or its affiliates may at any time hold long or short positions, and may
trade or otherwise effect transactions, for its own account or the accounts of
customers, in debt or equity securities of U.S. Office Products. In the past,
Morgan Stanley and its affiliates have provided financial advisory and financing
services to U.S. Office Products and have received customary fees for the
rendering of these services.
Pursuant to a letter agreement, dated December 18, 1997, between U.S. Office
Products and Morgan Stanley, U.S. Office Products has agreed to pay Morgan
Stanley a transaction fee, payable upon consummation of the Transactions. At the
time of the execution of the Investment Agreement, the transaction fee payable
to Morgan Stanley was estimated at approximately $9.0 million. U.S. Office
Products has also agreed to reimburse Morgan Stanley for its expenses related to
the engagement and to indemnify and hold harmless Morgan Stanley and its
affiliates, their respective directors, officers, agents and employees and each
person, if any, controlling Morgan Stanley or any of its affiliates, against
certain liabilities and expenses, including liabilities under U.S. federal
securities laws, incurred in connection with its services. All fees will be paid
by U.S. Office Products to Morgan Stanley only after consummation of the
Transactions.
INFORMATION ABOUT INVESTOR AND CLAYTON, DUBILIER & RICE
Investor is a Delaware limited liability company formed by Clayton, Dubilier
& Rice for the purpose of making the proposed Equity Investment in U.S. Office
Products. Investor's sole member is Clayton, Dubilier & Rice Fund V Limited
Partnership ("CD&R Fund V"), a Cayman Islands exempted limited partnership that
is managed by Clayton, Dubilier & Rice. CD&R Fund V has committed to fund the
Equity Investment. Clayton, Dubilier & Rice is a private investment firm that
manages a pool of equity capital in excess of $1.5 billion. Since its founding
in 1978, Clayton, Dubilier & Rice and investment funds that it manages have
invested in 26 businesses. These businesses are primarily subsidiaries or
divisions of large, multi-business corporations.
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EFFECTS OF THE PROPOSED SALE OF EQUITY SECURITIES AND THE STRATEGIC
RESTRUCTURING PLAN
You should consider the following factors in deciding whether to vote for
the proposed sale of equity securities to Investor.
YOUR VOTING POWER AND OWNERSHIP INTERESTS WILL BE REDUCED
If you approve the proposed sale of equity securities and Investor purchases
these securities, each share of U.S. Office Products' common stock you hold will
represent a smaller portion of the total voting shares of U.S. Office Products.
The Tender Offer will offset this effect to some extent. This is because U.S.
Office Products will have fewer shares outstanding after the Tender Offer. Any
shares you own after the Tender Offer will have a smaller proportion of the vote
after the sale of common stock to Investor than they would have had if the
Tender Offer were completed and Investor did not purchase common stock. If
Investor exercises its warrants, the portion of voting power represented by one
share of common stock will be further diminished.
As part of the Strategic Restructuring Plan, the number and exercise price
of remaining stock options held by U.S. Office Products' employees will be
adjusted. In addition, the conversion prices of the 2001 Notes and 2003 Notes
that remain outstanding after the 2001 Note Offer and the 2003 Note Tender will
be adjusted. These adjustments will increase the total number of shares--and the
percentage interests-- represented by options and convertible notes outstanding
after the Tender Offer, the 2001 Note Offer and the 2003 Note Offer.
WE WILL INCREASE OUR DEBT SUBSTANTIALLY TO FINANCE THE STRATEGIC RESTRUCTURING
PLAN
The Tender Offer will occur if the conditions to the proposed sale of equity
securities to Investor and other conditions are satisfied. If the Tender Offer
is completed, U.S. Office Products will have significantly more debt. Prior to
the Strategic Restructuring Plan, U.S. Office Products had debt of $714.5
million as of January 24, 1998, which was 48.5% of U.S. Office Products'
stockholders equity. The pro forma financial statements showing adjustments
necessary to reflect the Strategic Restructuring Plan and financing transactions
as if they occurred on January 24, 1998 show debt of $1.156 billion, or 204.6%
of stockholders' equity.
Increased debt presents risks to U.S. Office Products', including the
following:
- U.S. Office Products will need to use more of its cash flow to pay debt
service, which will limit its ability to use cash flow for other purposes,
such as paying dividends, or making capital expenditures or acquisitions;
- U.S. Office Products will have to pay more interest to lenders, which will
reduce its reported earnings, and lower reported earnings may adversely
affect the trading price of U.S. Office Products' common stock;
- U.S. Office Products may not be able to obtain additional financing on
favorable terms;
- Covenants in U.S. Office Products' debt agreements may restrict its
ability to undertake transactions that management otherwise believes would
be beneficial; and
- U.S. Office Products may not be able to react as rapidly to changing
conditions as some of its competitors who have relatively less debt.
THE TRANSACTIONS WILL HAVE AN IMPACT ON TRADING PRICES IN U.S. OFFICE PRODUCTS'
STOCK
There can be no assurance about the prices at which U.S. Office Products'
common stock will trade after Investor buys the equity securities and the rest
of the Strategic Restructuring Plan is completed. The plan consists of a number
of elements that involve major changes to the assets and capital structure of
U.S. Office Products. Upon completion of these transactions, the trading price
of U.S. Office Products'
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common stock, before the effect of the reverse stock split described on pages
48-49, is likely to be lower to reflect the Tender Offer and the Distributions.
The actual adjustment that will be made by the market based on its valuation of
the parts of the Strategic Restructuring Plan cannot be predicted. U.S. Office
Products expects that an active trading market for its common stock will
continue, but the trading prices may be affected in the short or long run by a
number of factors in addition to those that typically affect the trading price
of stocks. These special factors may include trades by investors seeking to
change their relative ownership positions in the stock of U.S. Office Products
and each Spin-Off Company, uncertainty in the marketplace about the impact of
the Strategic Restructuring Plan on U.S. Office Products' future operating
results, possible trading strategies by investors seeking to arbitrage
disparities in pricing between the U.S. Office Products' common stock and the
stock of each Spin-Off Company, and increased volatility resulting from market
uncertainty or confusion about the transactions or their impact on U.S. Office
Products.
THE EQUITY INVESTMENT WILL RESULT IN CONCENTRATION OF OWNERSHIP
After the sale of common stock to Investor, Investor will hold 24.9% of the
issued and outstanding shares of U.S. Office Products' common stock. Investor
will be the largest single holder of shares of U.S. Office Products' common
stock. As a result, Investor will likely be able to influence decisions that
require stockholder votes.
The warrants will give Investor the right to acquire additional shares
beginning two years after closing. Investor's warrants, together with the rights
to purchase shares of U.S. Office Products' common stock under the special
warrants, would give it ownership of approximately 34.7% of the common stock on
a fully-diluted basis. This assumes that all currently outstanding stock options
were exercised in accordance with their existing terms, and that all 2003 Notes
were converted in accordance with their existing terms, in each case without any
adjustment for the Strategic Restructuring Plan. We expect to make adjustments
to the number and exercise price of outstanding options, and to the conversion
price of any 2003 Notes remaining after the 2003 Note Tender, on account of the
restructuring transactions; these adjustments will result in a greater number of
shares that may be issued upon exercise of the options and conversion of the
notes. Although the amount of these adjustments will not be known until after
the completion of the Strategic Restructuring Plan, the effect of these
adjustments will be to reduce Investor's fully-diluted ownership interest in
U.S. Office Products from the amount set forth above. If no currently
outstanding stock options are exercised, exercise of these warrants would give
Investor ownership of approximately 39.9% of U.S. Office Products' common stock
after implementation of the Strategic Restructuring Plan (assuming that all of
the 2001 Notes are exchanged in the 2001 Note Offer and all of the 2003 Notes
are tendered and accepted in the 2003 Note Tender).
As discussed above (see pages 7-8), Investor has the right to nominate
members of the Board, including the Chairman, and to have representation on
Board committees. As a result of these provisions, Investor will have influence
over the composition of the Board of Directors and actions taken by the Board of
Directors or its committees. In addition, some Board actions will require a
three-fourths majority vote. Thus, so long as Investor can nominate three
directors, some major actions could be precluded altogether unless one of the
Investor-nominated directors supports the action. Together, this ownership
position and the Board voting requirements may have the effect of discouraging
(or possibly preventing) a future change in control of U.S. Office Products. In
addition, the super-majority Board voting requirement may have the effect of
limiting U.S. Office Products' future use of equity to acquire businesses, raise
capital, or provide employees with long-term incentives.
U.S. OFFICE PRODUCTS MAY BE LIABLE FOR CERTAIN LIABILITIES OF THE SPIN-OFF
COMPANIES
As part of the Strategic Restructuring Plan, it is expected that the
Spin-Off Companies will indemnify U.S. Office Products for certain liabilities
that could arise as a result of the Distributions. U.S. Office Products may
nevertheless incur liability to the extent the Spin-Off Companies cannot satisfy
these
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indemnities. Furthermore, U.S. Office Products will share responsibility with
the Spin-Off Companies for certain Distributions-related liabilities. Shared
liabilities may include:
- transaction costs (including legal, accounting, investment banking, and
financial advisory fees) and other fees that the Spin-Off Companies will
incur in connection with the Strategic Restructuring Plan (all of which
will be borne by U.S. Office Products, except for $1.0 million to be
reimbursed by each Spin-Off Company);
- certain taxes (as described below);
- liabilities under the securities laws arising before the Distributions;
and
- general corporate liabilities of U.S. Office Products before the
Distributions.
U.S. Office Products will soon be entering into an agreement with the
Spin-Off Companies as to the exact portion and nature of these liabilities that
U.S. Office Products may be required to share.
THE DISTRIBUTIONS INVOLVE COMPLEX TAX CONSIDERATIONS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions stating that for U.S. federal income tax
purposes the Distributions will qualify as tax-free spin-offs under Section 355
of the Internal Revenue Code of 1986, as amended (the "Code"), and will not be
taxable under Section 355(e) of the Code. U.S. Office Products will not complete
the Distributions unless it receives the Tax Opinion. The Tax Opinion will be
based on the accuracy as of the time of the Distributions of factual
representations made by U.S. Office Products, the Spin-Off Companies and
Investor, and certain other information, data, documentation and other materials
that Wilmer, Cutler & Pickering has deemed necessary. See "Tax Consequences of
the Distributions" below on pages 27-29.
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the Tax Opinion is not binding on the Internal
Revenue Service ("IRS") or the courts. A ruling has not been, and will not be,
sought from the IRS with respect to the U.S. federal income tax consequences of
the Distributions. Accordingly, the IRS and/or a court could reach a conclusion
that differs from the conclusions in the Tax Opinion.
If a Distribution fails to qualify as a tax-free spin-off under Section 355,
U.S. Office Products will recognize gain equal to the difference between the
fair market value of the common stock of the Spin-Off Company and U.S. Office
Products' adjusted tax basis in the common stock of the Spin-Off Company. In
addition, you will be treated as having received a taxable corporate
distribution in an amount equal to the fair market value of the common stock of
the Spin-Off Company that you receive in the Distribution. If U.S. Office
Products were to recognize gain on one or more Distributions, such gain would
likely be substantial.
If any Distribution is taxable under Section 355(e), but otherwise qualifies
as a tax-free spin-off, U.S. Office Products will recognize gain equal to the
difference between the fair market value of the common stock of the Spin-Off
Company and U.S. Office Products' adjusted tax basis in the common stock of the
Spin-Off Company. However, no gain or loss will be attributable to you as a
holder of U.S. Office Products' common stock as the result of the Distribution
being taxable under Section 355(e). If U.S. Office Products were to recognize
gain on one or more Distributions, such gain would likely be substantial.
WE MAY BE UNABLE TO ISSUE ADDITIONAL STOCK IN SOME CIRCUMSTANCES
Certain limitations under Section 355 of the Code may restrict U.S. Office
Products' ability to issue capital stock after the Distributions. As described
below on pages 27-29 under "Tax Consequences of the Distributions," these
limitations will generally prevent U.S. Office Products from issuing capital
stock to the extent the issuance is part of a plan, which includes a
Distribution, pursuant to which one or more people or organizations acquire
capital stock of U.S. Office Products that represents 50% or more of the voting
power or 50% or more of the value of U.S. Office Products' capital stock. These
limitation may
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restrict U.S. Office Products' ability to undertake transactions involving
issuances of capital stock of U.S. Office Products that management otherwise
believes would be beneficial.
WE COULD BE REQUIRED TO PAY A SUBSTANTIAL FEE TO CLAYTON, DUBILIER & RICE
If the Investment Agreement is terminated or U.S. Office Products does not
sell the equity securities to Investor, then, under certain circumstances, U.S.
Office Products will be obligated to pay to Clayton, Dubilier & Rice certain
fees and to reimburse Investor's expenses. For example, Clayton, Dubilier & Rice
will be entitled to a $25.0 million fee, and Investor will be entitled to
reimbursement for expenses, if stockholders do not approve the sale of equity
securities to Investor, and U.S. Office Products enters into another transaction
involving sale of 20% of U.S. Office Products' voting securities or 20% of its
assets.
TAX CONSEQUENCES OF THE DISTRIBUTIONS
Wilmer, Cutler & Pickering expects to deliver an opinion at the time of the
Distributions stating that for U.S. federal income tax purposes the
Distributions will qualify as tax-free spin-offs under Section 355 of the Code
and will not be taxable under Section 355(e) of the Code. U.S. Office Products
will not complete the Distributions unless it receives the Tax Opinion. The Tax
Opinion will be based on the accuracy at the time of the Distributions of
factual representations made by U.S. Office Products, the Spin-Off Companies and
Investor and certain other information, data, documentation and other materials
that Wilmer, Cutler & Pickering has deemed necessary.
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the Tax Opinion is not binding upon either the
IRS or any court. A ruling has not been, and will not be, sought from the IRS
with respect to the U.S. federal income tax consequences of the Distributions.
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e), no gain or loss for U.S. federal
income tax purposes will be attributed to U.S. Office Products, and no gain or
loss will be attributed to you as holders of U.S. Office Products' common stock
(except with respect to cash received in lieu of fractional shares), as a result
of the Distributions.
As noted above, the Tax Opinion is not binding on the IRS or the courts. You
should be aware that the requirements of Section 355 pertaining to business
purpose, active trade or business, and absence of a device for distribution of
earnings and profits, as well as the requirements of Section 355(e) pertaining
to a plan or series of related transactions to acquire 50% or more by vote or
value of a company, are highly dependent on factual interpretations, are to a
significant extent subjective in nature, and have a relative absence of
authority addressing their application to the particular facts presented by the
Distributions. Accordingly, the IRS and/or a court could reach a conclusion that
differs from the conclusions in the Tax Opinion.
BUSINESS PURPOSE. In order for a Distribution to qualify as a tax-free
spin-off under Section 355, it must be motivated, in whole or substantial part,
by one or more corporate business purposes. U.S. Office Products will represent
that the Distributions were motivated, in whole or substantial part, to allow
U.S. Office Products and the Spin-Off Companies to adopt strategies and pursue
objectives that are more appropriate to their respective industries and stages
of growth; to allow the Spin-Off Companies to pursue independent acquisition
programs with a more focused use of resources and, where stock is used as
consideration, to allow the Spin-Off Companies to provide stock of a public
company that is in the same industry as the business being acquired; to allow
U.S. Office Products and the Spin-Off Companies to offer their respective
employees more focused compensation packages; and to make possible the Equity
Investment, which the Board of Directors of U.S. Office Products concluded would
contribute to U.S. Office Products' development, based on the skills and
experience of Clayton, Dubilier & Rice. Based on these representations and
certain other information, data, documentation and other materials, Wilmer,
Cutler & Pickering expects to deliver an opinion at the time of the
Distributions that each of the Distributions will satisfy the business purpose
requirement. However, although similar rationales have been accepted by the IRS
in other circumstances as sufficient to meet the business purpose requirement of
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Section 355, there can be no assurance that the IRS will not assert that the
business purpose requirement is not satisfied.
ACTIVE TRADE OR BUSINESS. In order for the distribution of the stock of a
Spin-Off Company (other than Navigant International, Inc. ("Navigant")) to
qualify as a tax-free spin-off under Section 355, both the Spin-Off Company and
U.S. Office Products must be engaged in an active trade or business that has
been actively conducted for the five-year period preceding the Distribution,
taking into account only businesses that have been acquired in transactions in
which no gain or loss was recognized. In order for the distribution of the stock
of Navigant to qualify as a tax-free spin-off under Section 355, substantially
all of the stock of Navigant must consist of the stock of Professional Travel
Corporation ("Professional Travel"), and Professional Travel and U.S. Office
Products must meet the requirements described in the preceding sentence. Whether
current and historical business activity constitutes an active trade or
business, and whether any gain or loss should have been recognized in an
acquisition structured and reported as a nontaxable transaction, turn in some
instances on the application of subjective legal standards and on factual
determinations, such as intentions of the parties involved. Based on the
representations of U.S. Office Products and the Spin-Off Companies, Wilmer,
Cutler & Pickering expects to deliver an opinion at the time of the
Distributions that each Distribution will satisfy the active trade or business
requirement. However, because of the inherently subjective nature of important
elements of the active trade or business requirement, and because the IRS may
challenge the representations upon which Wilmer, Cutler & Pickering relies,
there can be no assurance that the IRS will not assert that the active trade or
business requirement is not satisfied.
ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. A
Distribution will not qualify as a tax-free spin-off under Section 355 if the
Distribution was used principally as a device for the distribution of the
earnings and profits of U.S. Office Products or the Spin-Off Company. Treasury
regulations provide that this test is applied based on all the facts and
circumstances, including the presence or absence of factors described in the
Regulations as "device factors" and "nondevice factors." Application of this
test is uncertain in part because of its subjective nature. Based on the
representations of U.S. Office Products and the Spin-Off Companies, Wilmer,
Cutler & Pickering expects to deliver an opinion at the time of the
Distributions that none of the Distributions is a transaction used principally
as a device for the distribution of earnings and profits of either U.S. Office
Products or any of the Spin-Off Companies. However, because of the inherently
subjective nature of the device test (including the subjectivity involved in
assigning weight to various factors), and because the IRS may challenge the
representations upon which Wilmer, Cutler & Pickering relies, there can be no
assurance that the IRS will not assert that any or all of the Distributions are
transactions used principally as a device for the distribution of earnings and
profits.
If a Distribution fails to qualify as a tax-free spin-off under Section 355,
U.S. Office Products will recognize gain equal to the difference between the
fair market value of the common stock of the Spin-Off Company and U.S. Office
Products' adjusted tax basis in the common stock of the Spin-Off Company. In
addition, you will be treated as having received a taxable corporate
distribution in an amount equal to the fair market value of the common stock of
the Spin-Off Company that you receive in the Distribution. If U.S. Office
Products were to recognize gain on one or more Distributions, such gain would
likely be substantial.
Section 355(e), which was added in 1997, generally provides that a company
that distributes shares of a subsidiary in a spin-off that is otherwise tax-free
will incur U.S. federal income tax liability if 50% or more, by vote or value,
of the capital stock of either the company making the distribution or the
subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that includes the spin-off. Stock acquired by
certain related persons is aggregated in determining whether the 50% test is
met. There is a presumption that any acquisition of 50% or more, by vote or
value, of the capital stock of the company or the subsidiary occurring two years
before or after the spin-off is pursuant to a plan that includes the spin-off.
However, the presumption may be rebutted by establishing that the spin-off and
the acquisition are not part of a plan or series of related transactions. Based
on the representations of U.S.
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Office Products, the Spin-Off Companies and Investor, and the assumption that no
Distribution is part of a plan that is outside the knowledge of U.S. Office
Products and the Spin-Off Companies pursuant to which one or more persons will
acquire directly or indirectly 50% or more by vote or value of the capital stock
of U.S. Office Products or of any Spin-Off Company, Wilmer, Cutler and Pickering
expects to deliver an opinion at the time of the Distributions that the
Distributions will not be taxable under Section 355(e). However, there can be no
assurance that the IRS will not assert that any or all of the Distributions are
taxable under Section 355(e).
If a Distribution is taxable under Section 355(e), U.S. Office Products will
recognize gain equal to the difference between the fair market value of the
common stock of the Spin-Off Company and U.S. Office Products' adjusted tax
basis in the common stock of the Spin-Off Company. However, no gain or loss will
be attributable to you as a holder of U.S. Office Products' common stock (except
with respect to cash received in lieu of fractional shares). If U.S. Office
Products were to recognize gain on one or more Distributions, such gain would
likely be substantial.
U.S. Office Products and the Spin-Off Companies will enter into an agreement
to allocate responsibility for the possible tax burden to U.S. Office Products
(we will call this agreement the "Tax Allocation Agreement"). However, U.S.
Office Products and the Spin-Off Companies have not agreed to indemnify you for
any taxes resulting from the Distributions' failing to qualify for tax-free
treatment under the Code. The Tax Allocation Agreement will provide that the
Spin-Off Companies will jointly and severally indemnify U.S. Office Products for
any losses associated with taxes related to the Distributions if any Spin-Off
Company does or fails to do something that materially contributes to a final
determination that any or all of the Distributions are taxable. Under the Tax
Allocation Agreement, if any or all of the Distributions are found to be
taxable, but neither U.S. Office Products nor any Spin-Off Company has done
anything to cause that finding, U.S. Office Products and each Spin-Off Company
will be liable for its pro rata portion of those taxes based on the value of
each company's common stock after the Distributions. You should consult your tax
adviser about the tax consequences of the Distributions.
THE BUSINESS OF U.S. OFFICE PRODUCTS AFTER THE RESTRUCTURING
After the Distributions, U.S. Office Products will continue to conduct its
office supply, office furniture, and office coffee, beverage and vending
services businesses (which will operate as the North American Office Products
Group), its Mail Boxes Etc. business, and its New Zealand and Australia
operations. U.S. Office Products also will continue to own its 49% interest in
Dudley Stationery Limited (a U.K. contract stationer). The Spin-Off Companies
will operate U.S. Office Products' educational supplies, corporate travel
services, print management, and technology solutions businesses.
We describe below the businesses that U.S. Office Products will operate
after it completes that Strategic Restructuring Plan. We also have attached to
this Proxy Statement pro forma financial information that gives effect to the
transactions contemplated by the Strategic Restructuring Plan, as well as
management's discussion and analysis of U.S. Office Products' financial
condition and results of operations.
COMPANY OVERVIEW
U.S. Office Products is one of the world's leading suppliers of a broad
range of office products and business services to corporate customers. Through
its North American Office Products Group ("NAOPG"), U.S. Office Products
provides office supplies, office furniture and office coffee, beverage and
vending services primarily to middle market companies (25 to 500 employees).
Based on current sales, NAOPG is one of the largest contract stationers in the
United States. Outside North America, U.S. Office Products' Blue Star Group
Limited ("Blue Star") is a leading supplier of office products and services in
New Zealand and Australia, and U.S. Office Products owns a 49% interest in
Dudley Stationery Limited ("Dudley"), the second largest contract stationer in
the United Kingdom. With its November 1997 acquisition of Mail Boxes Etc.
("MBE"), U.S. Office Products has expanded into the high growth small
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office and home office ("SOHO") market. MBE is the world's largest franchisor of
local postal, packaging, business and communications service centers with
approximately 3,600 outlets worldwide. U.S. Office Products had pro forma
revenues and EBITDA of approximately $2.8 billion and $201.0 million,
respectively, for the twelve-month period ended January 24, 1998.
Since its founding in October 1994, U.S. Office Products has grown primarily
through an aggressive acquisition program, which has included the purchase of
more than 230 businesses in the United States and internationally. U.S. Office
Products has focused on acquiring successful, established companies with
experienced management and sales presence in specific geographic, product or
service markets. It adheres to a rigorous due diligence and financial review
process in acquiring target companies.
U.S. Office Products is now transitioning into a new stage of development,
less reliant on acquisitions and more focused on operational efficiencies,
organic growth and improved profit margins. To execute this new strategy U.S.
Office Products is implementing new product, sales and marketing programs to
leverage its extensive sales force and existing distribution channels. U.S.
Office Products continues to pursue strategic alliances with well-known
companies to enable U.S. Office Products to increase sales by offering a broader
selection of services and products, such as its arrangement to distribute
Starbucks-Registered Trademark- coffee in the North American office market. In
addition, U.S. Office Products is centralizing a number of common business
functions, such as purchasing, distribution, inventory management and
information systems. Furthermore, U.S. Office Products is systematically
consolidating the operations of businesses located within the same geographic
areas into large, centrally-located regional warehouses known as district
fulfillment centers ("DFCs"). Through DFCs, U.S. Office Products believes it can
achieve greater regional efficiencies and economies of scale in purchasing,
distribution and asset utilization. At the same time, U.S. Office Products
continues to encourage entrepreneurial innovation and management of customer
relationships at the local level. U.S. Office Products believes that its
organizational structure combines the best elements of both centralized and
decentralized management for its business.
MARKET OVERVIEW
UNITED STATES
The office products and business services market in the United States
includes office supplies, office furniture, and office coffee, beverage and
vending services. Business customers can be generally divided into three
segments: (i) large corporate (more than 500 employees), (ii) middle market (25
to 500 employees) and (iii) SOHO (fewer than 25 employees). Set forth below is
an overview of the major business products supplied by U.S. Office Products and
the customer segments for which it competes.
OFFICE SUPPLIES. According to independent research reports, the office
supplies market in the United States generates over $60 billion in annual sales.
Office supplies include a broad array of products including desktop accessories,
writing instruments, paper products, computer consumables and business machines.
Historically, office supplies have been sold through three distribution
channels: (i) traditional retailers (which now include discount superstores);
(ii) mail order (or direct mail) marketers; and (iii) direct-to-business
suppliers ("contract stationers" such as U.S. Office Products' NAOPG).
Independent estimates indicate that retailers generate approximately $30.0
billion in annual revenues, and contract stationers generate approximately $30.0
billion in annual revenues.
In recent years, as industry participants have sought to take advantage of
economies of scale, the retail and contract stationer distribution channels have
undergone significant consolidation with several large companies emerging in
each channel. Additionally, while most office supply businesses traditionally
operated in just one of the three distribution channels, more recently U.S.
Office Products and many of its large competitors have sought to enter more than
one of these channels as a way of expanding their revenues and customer bases.
Despite recent consolidation and "cross channel" activity, the office supplies
market remains highly fragmented, with more than 4,300 independent suppliers
representing approximately 50% of the U.S. market. With pro forma revenues of
$1.1 billion in office supplies for the twelve
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month period ended January 24, 1998, U.S. Office Products has approximately 4.0%
of the approximately $30 billion U.S. contract stationer market.
OFFICE FURNITURE. The U.S. office furniture market generates approximately
$12.0 billion in annual revenues and can be divided into three segments:
catalog, middle market and contract furniture. Catalog furniture items include
such office commodities as low-priced chairs, file cabinets and computer stands.
Such furniture is sold by direct marketers, retailers and contract stationers
through catalog mailings. Middle-market furniture is of higher quality and
functionality than commodity furniture items and is available through retailers
and contract stationers. Contract furniture is high quality, includes customized
office configurations, often involves a service component and is usually
purchased on a project basis when offices are opened or remodeled. Contract
furniture is typically sold through dealers affiliated with furniture
manufacturers. U.S. Office Products believes that thousands of companies sell
office furniture to the corporate market. With pro forma revenues of
approximately $570.0 million in office furniture for the twelve-month period
ended January 24, 1998, U.S. Office Products has approximately a 4.0% share of
the U.S. market.
OFFICE COFFEE, BEVERAGE AND VENDING SERVICES. U.S. Office Products believes
that the office coffee services industry in the United States generates
approximately $3.0 billion in annual sales and is highly fragmented. U.S. Office
Products had pro forma revenues in this segment for the twelve-month period
ended January 24, 1998 of approximately $110.0 million (including approximately
$30.0 million in vending services revenues), giving it approximately a 3.7%
share of this market.
BUSINESS RELATED SERVICES. Superstores and a variety of specialty companies
provide business-related services such as copying, graphic arts, printing,
packaging, delivery, fax and computer services. The business services market,
targeted mainly at middle market and SOHO customers, is highly fragmented and
includes many medium- to small-sized independent outlets.
BUSINESS CUSTOMERS. Customers for office supplies, office furniture and
office coffee can be divided into three segments: middle market corporate, large
corporate and SOHO.
The middle market corporate segment has been the primary focus of NAOPG's
sales efforts because U.S. Office Products believes that it offers greater
growth potential and higher margins than the large corporate segment. U.S.
Office Products believes that, as compared to large corporate customers, middle
market companies place a relatively higher value on the quality of service,
including order fill rates and dependable delivery.
Historically, contract stationers have been the primary providers of office
supplies to middle market customers, with mail order marketers and traditional
retail dealers playing secondary roles. Superstore chains and mail order
marketers have attempted to gain market share in this segment by providing
delivery services and allowing credit card purchases. However, U.S. Office
Products believes that superstores and mail order marketers have achieved only
limited penetration because they do not provide the level of service often
requested by customers in this segment.
Businesses in the large corporate segment often negotiate contract pricing
on many of the office products they routinely purchase, and U.S. Office Products
believes that this segment places a relatively higher value on low product
pricing. As a result, the large corporate segment tends to generate lower gross
profit margins for suppliers. The large corporate segment has historically been
served by contract stationers, and U.S. Office Products believes that this
segment is currently the primary focus of several of its largest competitors.
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The SOHO segment consists of home offices, telecommuters and small
businesses. The SOHO market has grown from 25 million people in 1993 to
approximately 47 million people in 1997. According to the U.S. Bureau of Labor
Statistics, the SOHO market for office supplies and related business services is
currently a $54.0 billion market, and is expected to continue to grow. In
addition to office supplies, SOHO customers purchase a variety of business
services such as printing, packaging, fax and computer services. This market is
highly fragmented with products and services offered by superstores, mail order
marketers, medium to small independent outlets, and specialty service providers
such as copy centers and quick print centers. MBE specifically targets this high
growth customer segment.
INTERNATIONAL
U.S. Office Products has operations in New Zealand and Australia and a 49%
ownership interest in Dudley in the United Kingdom. The business products market
is more consolidated in New Zealand and Australia than in the United States.
Additionally, given the relatively small size of these economies, suppliers of
business products often offer a broader range of complementary products and
services than in the United States. Blue Star is the largest office products
supplier in New Zealand and the second largest in Australia. With pro forma
revenues of approximately $1.0 billion for the twelve-month period ended January
24, 1998, Blue Star has a significant share of the office products market in New
Zealand and Australia. In the United Kingdom, contract stationers offer a
similar product offering to that of their counterparts in the United States.
Office products superstores in the United Kingdom have a relatively smaller
share of the office products market than do office products superstores in the
United States. As a result of several recent acquisitions, Dudley currently has
annualized revenues of over $200.0 million, and U.S. Office Products believes
that Dudley is the second largest contract stationer in the United Kingdom.
BUSINESS STRATEGIES
U.S. Office Products' goal is to be the leading provider of office products
and business services in the United States and select international markets with
an emphasis on serving middle market businesses and expanding its role in
serving the high-growth SOHO market. Key elements of U.S. Office Products'
strategies in pursuit of this goal include the following:
IMPROVE PROFIT MARGINS AND ASSET UTILIZATION. To achieve greater operating
efficiencies, profit margins and asset utilization, U.S. Office Products intends
to:
- Consolidate and eliminate redundant facilities, operating systems and
business functions by developing DFCs to service defined geographic
territories; rationalize overlapping operations; and combine general and
administrative corporate functions.
- Develop and implement strategic pricing plans and improve inventory
selection and turnover, control and distribution systems to reduce
handling, storage and overhead costs.
- Integrate operating, distribution and information systems among business
entities through continued implementation of U.S. Office Products'
proprietary Trinity 2.0 software and other information technology
improvements.
- Continue to seek additional volume discounts and rebates from third-party
vendors through increased sales.
- Dispose of or sublease surplus real estate and fixed assets.
FOCUS ON ORGANIC GROWTH. U.S. Office Products intends to pursue
aggressively the following initiatives to increase sales through organic growth:
- Expand U.S. Office Products' product lines and services in certain markets
through broadened catalog offerings and development of "greenfield"
(start-up) operations.
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- Develop customized catalogs, target product offerings and expand catalog
distribution to promote overall revenue growth and the sale of higher
margin products.
- Pursue cross-selling opportunities both within and across business groups
through customer referrals and marketing programs.
- Promote widespread use of U.S. Office Products' trade name, both
exclusively and in conjunction with its subsidiaries' local and regional
trade names, to realize the full benefits of a national identity and
reputation.
- Pursue additional strategic alliances with third-party vendors as a way of
enhancing U.S. Office Products' product offerings and fostering additional
cross-selling opportunities.
PURSUE TARGETED ACQUISITIONS AND EXPAND MBE NETWORK. U.S. Office Products
will continue to:
- Grow NAOPG by selectively acquiring additional businesses, focusing
primarily on smaller companies that provide competitive benefits.
- Evaluate and pursue select international acquisition opportunities to
increase its international presence.
- Grant additional MBE master licenses in foreign countries and expand the
MBE network in the United States.
NORTH AMERICAN OFFICE PRODUCTS GROUP
NAOPG is a leading supplier of office supplies, office furniture, and office
coffee, beverage and vending services to corporate customers in the United
States. NAOPG's pro forma revenues for the twelve-month period ended January 24,
1998 were approximately $1.7 billion, accounting for the largest portion of U.S.
Office Products' revenues among its business groups. NAOPG has focused primarily
on middle market businesses which it believes tend to place relatively greater
value on the quality of service than large corporate businesses.
In late 1997, NAOPG was reorganized into 29 districts divided among four
geographic regions. A district president oversees each district and reports to a
regional vice president who manages each region. NAOPG has continued to
centralize common business functions and has accelerated its efforts to
implement a hybrid organizational structure that uses centralized and
decentralized management. Management believes that this structure allows U.S.
Office Products to achieve certain economies of scale associated with a large
organization while maintaining the kind of flexible and responsive level of
service to its customers that is characteristic of a smaller organization.
Through U.S. Office Products' centralized management (located at corporate
headquarters, larger operating subsidiaries or within the DFCs), U.S. Office
Products can leverage its size and scale in the areas of purchasing, inventory
management and distribution, accounting, human resources and management
information systems. Customer-oriented functions, including sales, marketing,
customer service, credit and collections, are decentralized and managed locally.
PRODUCTS AND SERVICES
NAOPG offers the following categories of products:
OFFICE SUPPLIES. In the contract stationery market, NAOPG offers over 33,000
different items such as desktop accessories, writing instruments, paper
products, computer consumables and business machines. U.S. Office Products
believes that it offers a broader assortment of office supplies than any of its
contract stationer competitors. NAOPG also operates approximately 30 retail
outlets, primarily in Northern California under the McWhorter's name, that sell
office supplies, gifts and related products, primarily to consumers and to the
SOHO market.
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U.S. Office Products generally provides next-day delivery of ordered items
and, on request, same-day delivery. This "just in time" service enables
customers to reduce overhead cost by reducing inventory and associated personnel
and space requirements. U.S. Office Products obtains office products from many
sources, including manufacturers and wholesalers, and maintains and warehouses
certain frequently ordered items.
OFFICE FURNITURE. NAOPG sells catalog, middle-market, contract and
remanufactured furniture and provides other related furniture services. Both
contract stationer businesses and specialized dealers principally serve the
office furniture market. NAOPG focuses on products and services that
traditionally have higher profit margins, such as middle-market furniture,
refurbished and remanufactured furniture, moving and storage services, furniture
installation services, furniture rentals and asset management. In 1997, NAOPG
initiated an office furniture rental program which offers customers a limited
catalog selection of lower to medium-priced furniture for rental. This program
is currently being implemented in test markets and is expected to be expanded
nationwide within approximately 12 months.
OFFICE COFFEE, BEVERAGE AND VENDING SERVICES. NAOPG provides and installs
coffee brewing equipment in a customer's office at no charge but requires
customers to purchase, on an ongoing basis, a minimum volume of coffee and
related items. NAOPG generally also offers a wide assortment of both coffee and
related products, including creamers, sugar, stirrers, teas, sodas, juices and
bottled waters, as well as snack items and all other items that are likely to be
found in an employee "breakroom" or lunch room, including plastic flatware,
napkins, paper cups, straws and similar items. NAOPG also installs, stocks and
maintains a variety of food and beverage vending machines for business
customers.
In September 1996, U.S. Office Products signed an agreement with Starbucks
to act as a major distributor of Starbucks-Registered Trademark- coffee in the
North American office coffee and beverage services market for five years subject
to, among other things, satisfaction of certain minimum purchase requirements.
U.S. Office Products has developed promotional materials (including materials
for its office products catalogs), and its employees have received training from
Starbucks in connection with this strategic alliance. U.S. Office Products
believes that this strategic alliance strengthens its position in the office
coffee and beverage services market and will enhance its ability to cross-sell
products and services to its clients.
SALES AND MARKETING
NAOPG sells primarily through direct contact with customers through its
approximately 2,200 sales representatives. U.S. Office Products generally
establishes and maintains its relationships with customers by assigning a sales
representative to each customer. Many of U.S. Office Products' representatives
conduct targeted, business segment-specific marketing in their respective sales
areas. U.S. Office Products intends to leverage the skills and relationships of
its sales representatives by encouraging them to cross-sell multiple product
lines to customers.
U.S. Office Products' catalog is a primary marketing tool used by U.S.
Office Products' sales representatives. U.S. Office Products distributed over
1.4 million catalogs in fiscal 1997. Sales materials, including certain
catalogs, are tailored to address customer and market requirements and to take
advantage of pricing and marketing programs intended to maximize gross margins
by product type. U.S. Office Products does not conduct significant mass-market
advertising.
Customer orders are received by U.S. Office Products' sales personnel
primarily by telephone or facsimile. In addition, U.S. Office Products uses an
electronic data interchange ("EDI") system between U.S. Office Products and
certain of its customers. U.S. Office Products has recently developed OFIS NET,
which includes data order capabilities through its web site on the Internet.
Using such systems, customers are able to place orders directly into U.S. Office
Products' computer systems, manage their own inventory and generate customized
usage reports and invoices. Orders to be filled are routed electronically to
either U.S. Office Products' local warehouse or, if the ordered item is not
stocked by U.S. Office Products at its local warehouse, to a wholesaler.
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OPERATING AND GROWTH STRATEGIES
NAOPG's operating and growth strategies include: (i) integrating and
consolidating business operations through establishment of DFCs; (ii) installing
operating and technology systems designed to improve its operations; (iii)
implementing cross-selling programs to leverage its 2,200 person national sales
force, (iv) continuing to pursue targeted acquisitions; and (v) developing
"greenfield" (or start-up) operations.
DFCS. DFCs are large centralized warehouses conducting operations that
service entire geographic territories previously served by multiple smaller
business operations. U.S. Office Products believes that the establishment of
DFCs will improve profit margins and asset utilization. U.S. Office Products'
first DFC, opened in Orlando, Florida in late 1997, supports ten NAOPG operating
companies. Within the next 12 months, U.S. Office Products plans to open and/or
reconfigure at least six new DFCs to support multiple operating units.
Ultimately, U.S. Office Products expects to establish approximately 24 DFCs.
DFCs will enhance U.S. Office Products' ongoing efforts to rationalize redundant
facilities and functions, thereby improving profit margins. Additionally,
through proprietary information systems which are being introduced throughout
its operations, U.S. Office Products will be able to identify high-turnover
items and optimize inventory management on a regional basis at DFCs. By using
DFCs and relying on wholesalers to stock and supply slower moving items, U.S.
Office Products believes it can continue to offer the broadest merchandise
assortment in the industry while also reducing inventories of low turnover
products and increasing profit margins on high turnover products.
TECHNOLOGY. The Systems House, Inc. subsidiary of U.S. Office Products has
developed proprietary operating and technology systems including computerized
inventory management and order processing systems, computerized quotation and
job costing systems and computerized logistics and distribution systems. U.S.
Office Products is currently installing Trinity 2.0, an operating system
developed by Systems House, and management expects that by the end of fiscal
1999, more than half of the 29 NAOPG districts will be connected to this common
operating system. NAOPG is also incorporating industry-standard technology
platforms, including frame relay networks, bar coding and radio frequency
technologies, at its existing and planned DFCs. Trinity 2.0 and other
technologies will allow U.S. Office Products to process orders and track
inventory and order fulfillment on a real-time basis, forecast demand by
specific inventory item or stock keeping unit and generate customized usage and
billing reports for its customers. Management believes that implementation of
these systems throughout U.S. Office Products' operations will significantly
increase the speed and accuracy of order processing and fulfillment, thereby
improving customer satisfaction, while also increasing inventory turns.
CROSS-SELLING. U.S. Office Products expects that its "cross-selling"
program will generate internal growth by increasing sales to existing NAOPG
customers. "Cross-selling" is the practice of having different businesses sell
their products and services to each other's customers. For example, office
supply companies within NAOPG encourage their customers to buy office furniture
and office coffee, beverage, and vending services from other NAOPG companies and
vice-versa. Within NAOPG, management is implementing programs to encourage
customers to buy a full range of products and services from NAOPG companies.
NAOPG programs include customer referrals, joint marketing efforts, and other
efforts designed to demonstrate to customers the advantages of purchasing
multiple lines of products and services from NAOPG companies. At the end of
1997, U.S. Office Products introduced an expanded catalog that promotes
cross-selling and is part of an overall marketing strategy to offer customers a
broader selection of products. NAOPG's cross-selling efforts also include
providing sales representatives with training and selling tools to help them
introduce customers to the broad line of products that is available through U.S.
Office Products.
ACQUISITIONS. U.S. Office Products has historically grown through
acquisitions. Management believes that the vast majority of companies now
available to be acquired are relatively small, with annual revenues of $20.0
million or less. While U.S. Office Products intends to continue to expand NAOPG
by acquiring additional businesses, in the United States it expects to target
primarily smaller companies that are
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profitable and desirable because of their geographic location, their customer
base, or their management or sales personnel. Substantially all of NAOPG's
operations are in the United States with the exception of three vending
operations in Canada. Although U.S. Office Products does not expect to acquire
significant additional businesses in Canada in the near future, it will evaluate
other opportunities for expansion in other parts of North America, such as
Mexico.
GREENFIELD OPERATIONS. U.S. Office Products also expects to continue to
develop "greenfield" operations where management believes an attractive
acquisition target does not exist to enter a strategic geographic market or
where management believes it can expand sales in an existing market by adding a
new line of business (such as opening a coffee and beverage operation in a
market where U.S. Office Products already has a successful office supply
company). Management believes that this second approach is consistent with, and
will be supported by, U.S. Office Products' cross-selling efforts. U.S. Office
Products expects to continue to focus its greenfield efforts in the office
coffee and beverage operations and the new furniture rental program. As of
January 24, 1998, U.S. Office Products had opened approximately 20 office coffee
and beverage greenfield operations serving approximately 25 markets in the
United States and Canada.
OPERATIONS OUTSIDE OF NORTH AMERICA
U.S. Office Products' operations outside of North America accounted for
approximately 35% of its pro forma revenues in the 12 months ended January 24,
1998. U.S. Office Products sells office products and business services and
certain other products and services in New Zealand and Australia through Blue
Star and its subsidiaries. U.S. Office Products acquired 51% of Blue Star in
February 1996 and the remaining 49% in June 1996. Since its acquisition by U.S.
Office Products, Blue Star has completed 37 acquisitions to become the largest
office products company in New Zealand and the second largest in Australia. In
addition to Blue Star, U.S. Office Products acquired its interest in Dudley in
November 1996.
PRODUCTS AND SERVICES--BLUE STAR
OFFICE SUPPLIES AND FURNITURE. Blue Star sells office supplies, office
furniture, stationery, packaging supplies and similar products to corporate,
commercial and SOHO customers in New Zealand and Australia. In addition to its
corporate contract stationery business, Blue Star operates more than 250 retail
book and stationery stores throughout New Zealand and Australia (approximately
90 of which are franchises). These stores operate primarily under the Whitcoulls
and Angus & Robertson brand names.
BUSINESS MACHINES AND PERSONAL COMPUTERS. Blue Star's Business Solutions
Group offers a range of office automation products, such as personal computers
and servers, telephone systems, fax machines and photocopiers, as well as
office-related services such as systems integration, project management and
consulting. U.S. Office Products believes that Blue Star is one of New Zealand's
leading direct sellers of personal computers, with Blue Star's consumer market
accounting for the largest portion of sales. Blue Star expects to rationalize
its product offerings in this part of its business and to focus on services and
solutions-based products that respond to customers' particular needs.
COMMERCIAL PRINTING. Blue Star's Print Group has a large commercial print
company in New Zealand. It offers a range of printed products and related
services, including commercial sheet-fed and offset printing, label
manufacturing, and digital and reprographic printing. The group also provides
specialized products and services for certain large customers, such as printing
all of New Zealand's telephone directories and handling the pre-press printing
and distribution of bills, acts and other legislative materials for the New
Zealand Parliament.
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PRODUCTS AND SERVICES--DUDLEY
OFFICE SUPPLIES. Dudley sells office products and related business services
throughout the United Kingdom. With annualized revenues of over $200.0 million,
Dudley is the second largest contract stationer in the United Kingdom. Dudley
serves as stationer to Her Majesty the Queen and the Prince of Wales.
SALES AND MARKETING
Blue Star currently employs approximately 2,100 sales representatives in New
Zealand and Australia. Blue Star promotes sales primarily through direct
marketing by its sales representatives. Blue Star is actively pursuing
cross-selling initiatives to increase product sales across business groups.
OPERATING AND GROWTH STRATEGIES
Blue Star intends to leverage its sales force to cross-sell products to its
corporate and consumer customer base. To service its large corporate customers,
Blue Star is establishing a unit to fulfill the single-point procurement
requirements of such customers. Blue Star also will evaluate business
opportunities with governments and additional large corporate accounts. Blue
Star also expects to expand its retail store business through a variety of
strategies, including opening new stores in selected locations, re-branding
certain businesses, refurbishing certain outlets, expanding product offerings,
and introducing coffee shops in selected store locations. Blue Star management
expects that in the near term it will focus primarily on integrating the
operations of several recent acquisitions, expanding product offerings, and
developing joint marketing plans across business units.
U.S. Office Products expects to continue to make strategic acquisitions in
New Zealand and Australia and to evaluate opportunities to enter other foreign
markets. Dudley is continuing to expand through acquisitions in the United
Kingdom, using the funds invested by U.S. Office Products.
MAIL BOXES ETC.
MBE is the world's largest franchisor of local postal, packaging, business
and communication retail service centers ("MBE Centers"). With approximately
3,600 MBE Centers in 55 countries, MBE's network is approximately ten times
larger than the network of its next largest competitor. MBE's primary sources of
revenues are (i) royalty and marketing fees paid by existing franchisees, (ii)
fees paid by buyers of new franchises, and (iii) sales of supplies and equipment
to MBE Centers.
There are approximately 3,000 MBE Centers operating throughout the United
States and approximately 600 MBE Centers serving customers outside the United
States. MBE has granted master licenses in more than 55 countries abroad which
allow the licensee to control the development of MBE franchises in designated
territories in those countries. MBE's global network of MBE Centers sold a total
of approximately $1.3 billion of products and services during fiscal 1997, a
substantial amount of which was generated by SOHO customers. While MBE's
revenues include only a small percentage of this amount (in the form of royalty
and marketing fees paid to MBE on the sale of products and services), U.S.
Office Products believes that the volume of business which MBE transacts and its
extensive distribution network make it an important supplier to the SOHO market.
FRANCHISE ARRANGEMENTS
MBE offers both individual franchises and area franchises in the United
States and master licenses in foreign countries. U.S. area franchisees are
granted the exclusive right to sell individual MBE franchises in their
respective areas and also provide start-up assistance and continuing support for
such individual franchisees. Master licenses in foreign countries provide the
licensee with the exclusive right to develop and operate MBE Centers in
designated territories in those countries and the right to sell individual MBE
franchises to others. MBE provides its franchisees and licensees valuable
services including, among other
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things, instruction at MBE University, operational guidance, assistance in site
selection, marketing, and advertising programs.
PRODUCTS AND SERVICES
A typical MBE Center offers mail and parcel receiving, packaging, and
shipping services through a number of carriers and provides small businesses
with a wide range of products and services. These products and services
generally include telephone message service, word processing, copying and
printing, office supplies and communication services. Communications services
typically include fax, voice mail, pagers, and wire transfers of funds. In
addition, MBE Centers usually offer convenience items such as stamps, packaging
supplies, stationery supplies, notary, passport photos, and money orders. Large
corporations that need a national distribution system use MBE as communication
centers for their field-based employees.
SALES AND MARKETING
MBE conducts national advertising campaigns that are designed to market the
MBE brand, including televised ad campaigns during three consecutive Super Bowls
(1996-1998). MBE's marketing strategies are based upon extensive market research
and include campaigns directed at both the consumer and business-to-business
markets. MBE is also developing programs to encourage existing MBE franchisees
to acquire additional MBE franchises. U.S. Office Products is also developing a
program to offer MBE Center customers the convenience of on-site ordering of
office supplies from NAOPG catalogs.
OPERATING AND GROWTH STRATEGIES
MBE's operating and growth strategies include: (i) broadening its product
and services offerings; (ii) growing organically through additional
strategically-located express service centers and improved technology systems to
better serve customers; and (iii) increasing its franchise base both
domestically and internationally.
PRODUCTS AND SERVICES. MBE is pursuing several new programs to increase
same-store sales in MBE Centers. First, MBE is developing with NAOPG a special
office products catalog for use in MBE Centers and by MBE customers. Customers
will be able to use the catalog to order office products for delivery to their
local MBE Center, to their offices, or to their homes. Second, MBE is developing
a series of new products related to computer and Internet technology. MBE
expects that these products will have applications both within MBE Centers and
in customers' homes and offices and that they can be developed without material
expense. Third, MBE is pursuing a program that will allow franchise owners to
purchase office supplies, copy paper and other consumables more efficiently.
Management believes this program will allow MBE franchisees to offer their
customers a broader range of competitively priced office products. Fourth, MBE
has entered into strategic alliances with United Parcel Service, Spiegel,
Microsoft and Bank/ One to offer MBE Center customers a broader range of
products and services. MBE receives fees directly from strategic partners or
from franchisees (in the form of a royalty on sales of products and services
offered as a result of the strategic alliances).
EXPRESS SERVICE CENTERS. MBE has recently introduced MBE Business
Express-TM- sites, which are 24-hour self-serve, credit card-activated business
centers designed to serve customers in hotels and hospitality centers, airports,
convention centers, military retail outlets, and academic settings. The MBE
Business Express sites include computer (including Internet access), copying,
printing, and facsimile services. The sites also will allow users to connect
with MBE Centers via direct-dial telephone to order or arrange for additional
services such as package receipt or delivery or document reproduction.
FRANCHISE BASE. The global network of MBE Centers has grown dramatically,
with the number of MBE Centers in the United States increasing by 250 to 300
each year since 1991. MBE has implemented
38
<PAGE>
several new programs to market its franchises. These programs include the
Conversion Store Program, which targets potential independent operators in the
industry to convert to a MBE franchise; the Host Store concept, which locates
MBE Centers within another retail environment; the Corporate Tour Program, in
which potential franchise owners are invited to attend a tour of MBE's
headquarters in San Diego and receive formal presentations by key departments;
and a multiple center ownership program which is designed to encourage existing
successful MBE franchisees to purchase additional centers.
INTERNATIONAL EXPANSION. MBE plans to continue to expand the number of
master licensees outside of the United States, and it continues to explore
opportunities for new relationships in other countries. MBE expects that
international growth will account for an increasingly significant proportion of
the total growth of MBE Centers. Approximately 600 MBE Centers are currently
open outside the United States, with another 40 MBE Centers under contract as
new foreign outlets.
COMPETITION
NAOPG
NAOPG operates in a highly competitive market. U.S. Office Products
estimates that its NAOPG contract stationery operations have attained
approximately a 3.7% share of the $30 billion of annual sales of all contract
stationers in the United States. U.S. Office Products believes that it has five
major competitors and that the combined market share of all five of these
competitors is less than 35%. U.S. Office Products' five major competitors
include: Boise Cascade Office Products Corporation; Corporate Express, Inc.;
Office Depot; BT Office Products International, Inc.; and Staples, Inc. Two of
these five competitors are divisions of discount superstore chains and two
others are primarily owned by large manufacturers of office products. As the
office products industry has undergone rapid consolidation, many smaller office
supply companies have been acquired by larger companies or have closed.
Nevertheless, the market remains highly fragmented, with more than 4,300
independent suppliers representing approximately 50% of the U.S. market.
In the contract stationery market, as well as the other markets that it
serves or may in the future seek to serve, U.S. Office Products believes that
customers not only are concerned with the overall reduction of their office
products costs, but also place an emphasis on dependability, superior levels of
service and flexible delivery capabilities. U.S. Office Products believes that
it competes favorably with its five largest competitors in the contract
stationery market on the basis of service and price. However, some of these
companies have greater financial resources than U.S. Office Products.
INTERNATIONAL
The markets in which Blue Star operates are extremely competitive. In New
Zealand, U.S. Office Products believes that its three main competitors are
Corporate Express, Warehouse and Office Products Depots, which together with
Blue Star serve the vast majority of the market. Independent operators and
retail bookstore chains are the primary outlets serving the remaining market.
In Australia, Corporate Express, Boise Cascade and Viking Office Products,
Inc. are Blue Star's major competitors. However, the market remains highly
fragmented with a large number of independent operators.
39
<PAGE>
MAIL BOXES ETC.
The market for ancillary services and products served by MBE, including
office supplies, telecopy and copying services, is highly fragmented with
products and services being provided by national chains, medium to small
independent outlets, and specialty service providers such as copy centers, quick
print centers and office supply companies. In the United States, the U.S. Postal
Service is the primary competitor in the SOHO market for mailing and packaging,
particularly its postal service centers located in shopping centers and other
locations. A growing segment of other domestic business is also being captured
by discount outlets such as Staples and Office Depot. In addition, approximately
10,000 other independent or franchised postal and business service centers are
operating in the United States and compete with MBE.
EMPLOYEES
Upon completion of the Strategic Restructuring Plan, U.S. Office Products
will have more than 15,000 full-time employees, a small number of which are
members of labor unions. In general, U.S. Office Products considers its
relations with its employees to be satisfactory.
PROPERTIES
Upon completion of the Strategic Restructuring Plan, U.S. Office Products
will operate 801 facilities in various states and in New Zealand, Australia and
Canada, including one facility located in Washington, D.C. for its corporate
headquarters. Of these facilities, 753 are leased and 48 are owned. The
facilities are used for retail, warehouse and office purposes, or a combination
of these functions. The aggregate square footage for all facilities is
approximately 9.4 million square feet, consisting of approximately 2.1 million
square feet for retail use, approximately 5.5 million square feet for warehouse
use and approximately 1.8 million square feet for office use.
The terms on U.S. Office Products' leases are from one month to 20 years,
with the majority of the terms ranging from five to ten years. U.S. Office
Products generally pays market rates for its leases. U.S. Office Products leases
approximately 7.7 million square feet and owns approximately 1.7 million square
feet. Approximately 280 leases, representing approximately 29% of the U.S.
Office Products' total leased space, will expire in the next 12 months. Many of
these leases contain renewal options. Where necessary, U.S. Office Products
intends to seek to renew or extend such expiring leases, and U.S. Office
Products believes that it will be able to do so on terms that are acceptable to
it. When no renewal option exists or the property is no longer a desirable
location for operational purposes, U.S. Office Products will evaluate the local
real estate market and seek to identify alternative space in sufficient time to
negotiate an acceptable lease agreement prior to the expiration of the existing
lease. U.S. Office Products has generally been able to renew or extend its
expiring leases, and enter into new leases where necessary, on acceptable terms.
U.S. Office Products believes that its facilities are and will be suitable
for their respective purposes and have adequate productive capacity for U.S.
Office Products' present and anticipated needs.
RELATIONSHIP WITH SPIN-OFF COMPANIES
Before the Distributions, the Spin-Off Companies will be wholly-owned
subsidiaries of U.S. Office Products comprising U.S. Office Products' print
management, technology solutions, educational supplies and corporate travel
businesses. In order to define the relationships between U.S. Office Products
and the Spin-Off Companies after the Distributions, U.S. Office Products and the
Spin-Off Companies will enter into various agreements. These agreements include:
- a distribution agreement that allocates the assets and liabilities of U.S.
Office Products' businesses to the Spin-Off Companies;
40
<PAGE>
- a Tax Allocation Agreement that provides for sharing certain tax
liabilities (see page 29); and
- an employee benefits agreement to allow for orderly transition of benefits
coverage between U.S. Office Products and the Spin-Off Companies.
Additional information about each of these agreements is available in the
Information Statements/ Prospectuses of each of the Spin-Off Companies that we
expect to mail to you no later than May 17, 1998.
ADJUSTMENT TO EMPLOYEE STOCK OPTIONS
U.S. Office Products has previously granted stock options to management and
employees. We expect that the number and exercise price of these options will be
adjusted following completion of the Strategic Restructuring Plan to take
account of the effects of the Distributions on the underlying value of the
common stock. Options held after the Tender Offer and Distributions by employees
who remain with U.S. Office Products will remain exercisable for shares of U.S.
Office Products common stock. Options held after the Tender Offer and
Distributions by employees who will become employees of a Spin-Off Company will
be converted into options exercisable for shares of that particular Spin-Off
Company. The adjustments will be made by a formula that takes account of the
difference between the price of U.S. Office Products' common stock before and
after the Distributions have been completed (and, in the case of options for
Spin-Off Company shares, the price of Spin-Off Company shares in the public
offerings expected to be completed by the Spin-Off Companies (the "Spin-Off
Company Offering Price")). The formula will not affect when the options vest or
when employees can exercise the options. The respective option exercise prices
will be adjusted by this formula:
<TABLE>
<S> <C> <C>
Trading Price
Post-Distributions
Exercise Price (New) = Exercise Price X ---------------------------
(Old) Trading Price
Pre-Distributions
</TABLE>
The respective numbers of shares subject to option will be adjusted by this
formula:
<TABLE>
<S> <C> <C>
Trading Price
Pre-Distributions
Option Shares (New) = Option Shares (Old) X ---------------------------
Trading Price
Post-Distributions
</TABLE>
For all optionees, the "Trading Price Pre-Distributions" will be the average
closing price of U.S. Office Products' common stock for the lesser of ten
business days preceding the Distributions or the business days falling between
the expiration of the Tender Offer and the completion of the Distributions. For
continuing employees of U.S. Office Products, the "Trading Price
Post-Distributions" will be the average closing price of U.S. Office Products'
common stock for the ten business days after and including the date on which the
Distributions are completed. For employees of a Spin-Off Company, the "Spin-Off
Company Offering Price" will be substituted for "Trading Price
Post-Distributions" in this formula. The exercise price and number of options
will not be adjusted as a result of the Tender Offer, but instead are adjusted
solely for the Distributions and the reverse stock split.
The number of shares underlying options for continuing employees of U.S.
Office Products will also be adjusted to take account of the reverse stock
split; that is, the new number of shares underlying options will be divided by
four and the new exercise price will be multiplied by four. The number of shares
underlying options for employees of a Spin-Off Company will also be adjusted for
the distribution ratio applied in the Spin-Off Company Distributions; that is,
the new number of shares underlying options in the Spin-Off Company will be
divided by the distribution ratio and the exercise price will be multiplied by
the distribution ratio. The intrinsic value of the adjusted options will be no
greater than the intrinsic value of the options immediately before the
Distributions and the reverse stock split, and the ratio of exercise price to
market price will be no less than the ratio immediately before the Distributions
and the reverse stock split.
41
<PAGE>
As a result of the adjustments, employee stock options will likely represent
a greater percentage interest in U.S. Office Products after these transactions
than they did before. At April 20, 1998, U.S. Office Products management and
employees held options to purchase a total of approximately 22.0 million shares,
of which approximately 3.7 million were held by employees that are expected to
be employees of a Spin-Off Company. The number of options that will be
outstanding after the Strategic Restructuring Plan will depend on the number of
shares subject to options that are accepted in the Tender Offer and also on the
trading prices of U.S. Office Products' common stock around the time of the
Distributions and the offering prices of the Spin-Off Companies' common stock.
As a result, the ultimate number of such options cannot be determined at this
time. The fair value of the options may also change as a result of these
adjustments, but the fair value as measured by standard models will depend on
the adjusted exercise price, the adjusted number of shares, and the trading
prices and volatility of U.S. Office Products' common stock after completion of
the Strategic Restructuring Plan. Because the adjustments are designed to
compensate for the effects of the transactions in the Strategic Restructuring
Plan, U.S. Office Products does not currently expect that the adjustments will
have a significant effect on the fair value of the options, but cannot assure
stockholders that the change will not be significant.
INDEBTEDNESS OF U.S. OFFICE PRODUCTS AFTER THE RESTRUCTURING
In connection with the Strategic Restructuring Plan, U.S. Office Products
expects to refinance its existing senior bank debt and to borrow additional
funds to help finance the cost of purchasing shares in the Tender Offer. At
March 20, 1998, U.S. Office Products had borrowed approximately $362.0 million
under the terms of its existing bank loan arrangement.
NEW CREDIT FACILITY. U.S. Office Products has agreed to and accepted a
commitment letter from The Chase Manhattan Bank, Bankers Trust Company, and
Merrill Lynch Capital Corporation, as agents, and Chase Securities Inc., BT
Alex. Brown Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated,
as co-arrangers, for a new bank loan facility that will provide for an aggregate
principal amount of $1.225 billion consisting of (i) seven-year term loan
facilities totaling up to $300.0 million, (ii) an eight-year term loan in the
principal amount of $675.0 million, and (iii) a revolving credit facility in the
principal amount of $250.0 million. U.S. Office Products and the banks may agree
to alter the allocated principal amount of two or more of the loan facilities
before signing definitive documents depending on market conditions. The loan
facilities will be guaranteed by U.S. Office Products' material domestic
subsidiaries and secured by substantially all assets of U.S. Office Products and
its material domestic subsidiaries. Each loan will bear interest, at U.S. Office
Products' option, at a short-term Eurodollar rate plus a margin of 2.25% or
2.50% (in the case of the eight-year term loan) or a floating alternate base
rate plus a margin of 1.25% or 1.50% (in the case of the eight-year term loan).
The applicable margins will be subject to agreed upon reductions in the future
based on U.S. Office Products' financial performance. U.S. Office Products will
be required to enter into arrangements to insure that the effective interest
rate paid by U.S. Office Products on at least 50% of its outstanding term debt
and subordinated debt will not go above a certain rate. The loan documents
likely will include financial and other covenants. These will include, among
others, restrictions of U.S. Office Products' ability to incur additional
indebtedness, sell assets, pay dividends or engage in certain other
transactions, and requirements that U.S. Office Products maintain certain
financial ratios, and other provisions customary for loans to highly leveraged
companies, including representations by U.S. Office Products, conditions to
funding, cost and yield protections, restricted payment provisions, transfer
provisions, amendment provisions and indemnification provisions. The loan
facilities will be subject to mandatory prepayment in a variety of
circumstances, including upon certain asset sales and financing transactions.
The commitment will terminate unless definitive loan documents are entered into,
and the Strategic Restructuring Plan and financing transactions are completed,
by June 30, 1998. No assurance can be given that the credit facility will be
completed as contemplated.
SENIOR SUBORDINATED NOTES. U.S. Office Products also expects to issue
senior subordinated notes in a principal amount of at least $400.0 million. The
notes will be subordinated in right of payment to the new
42
<PAGE>
bank loans. U.S. Office Products expects to offer these notes in a private
placement. The notes will not be registered under the Securities Act of 1933 and
may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. The availability of
subordinated debt financing will depend on a number of factors, including market
conditions and interest rates.
2001 AND 2003 NOTES. The indebtedness of U.S. Office Products after the
Strategic Restructuring Plan will also include (i) any 2001 Notes that are not
exchanged for common stock in the 2001 Note Offer and (ii) any 2003 Notes that
are not purchased in the 2003 Note Tender.
INFORMATION ABOUT THE BOARD OF DIRECTORS
AFTER THE PROPOSED SALE OF EQUITY SECURITIES
As described above (see pages 7-8), Investor has the right to designate
three members of the Board of Directors of U.S. Office Products who will serve
beginning at closing until the next Annual Meeting of Stockholders. In addition,
the Chief Executive Officer of U.S. Office Products, Thomas Morgan, will be a
director. Two of the remaining directors at closing must be satisfactory to
Investor. Investor has informed U.S. Office Products that it intends to
designate Charles P. Pieper, Kevin J. Conway and Brian D. Finn as the three
directors it is entitled to designate. Investor has the right to designate the
Chairman of the Board so long as it retains a specified percentage of shares it
acquires in the Equity Investment. Mr. Pieper will serve as Chairman of the
Board after closing. In addition, Michael Dooling, Timothy J. Flynn, Jonathan J.
Ledecky, Clifton B. Phillips and John A. Quelch have advised the Board that they
intend to resign as directors effective as of closing. The Board intends to
appoint Frank P. Doyle and L. Dennis Kozlowski as two new independent directors,
and Investor has advised U.S. Office Products that it approves of them. Milton
H. Kuyers, Allon H. Lefever, Edward J. Mathias and Thomas Morgan will remain as
directors of U.S. Office Products after closing.
Here is information about the directors of U.S. Office Products after
closing who have been identified to date:
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- ------------------------- -------------------------- ----------- -------------------------------------------------------
<S> <C> <C> <C>
Kevin J. Conway Director 39 Mr. Conway will be named a director of U.S. Office
Products effective upon completion of the Strategic
Restructuring Plan. Mr. Conway has been a principal and
a director of Clayton, Dubilier & Rice since 1994 and
March 1998, respectively. Prior to joining Clayton,
Dubilier & Rice in 1994, Mr. Conway worked for 10 years
at Goldman, Sachs & Co., an investment banking firm. He
also serves as a director of Riverwood International
Corporation and North American Van Lines, Inc.,
companies in which CD&R Fund V has an investment. Mr.
Conway is a graduate of Amherst College, Columbia
University School of Business and Columbia Law School.
Frank P. Doyle Director 66 Mr. Doyle will be named a director of U.S. Office
Products effective upon completion of the Strategic
Restructuring Plan. Mr. Doyle is a private consultant
who retired from his position as Executive Vice
President of General Electric Company on January 1,
1996. As Executive Vice President,
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- ------------------------- -------------------------- ----------- -------------------------------------------------------
he was one of a three member Corporate Executive Office
to which all of GE's operating businesses and staff
reported. Mr. Doyle served as Executive Vice President
of GE from 1991, and prior to that time he was Senior
Vice President at GE with responsibility for Corporate
Marketing and Advertising from 1981. Mr. Doyle is a
director of Digital Equipment Corporation, Paine Webber
Group, Roadway Express and Educational Testing
Services.
<S> <C> <C> <C>
L. Dennis Kozlowski Director 51 Mr. Kozlowski will be named a director of U.S. Office
Products effective upon completion of the Strategic
Restructuring Plan. Mr. Kozlowski is Chairman and Chief
Executive Officer of Tyco International Ltd., a
multinational company involved in manufacturing,
distribution and servicing of fire protection and
security systems, disposable medical products, flow
control and electronic products worldwide. He has
served as Chief Executive Officer of Tyco since July 1,
1992 and as Chairman since January 1, 1993. Prior to
July 1992, he was President and Chief Operating Officer
of Tyco since 1989 and a director of Tyco since 1987.
Mr. Kozlowski is a director of RJR Nabisco, Applied
Power and Raytheon Corp.
Brian D. Finn Director 37 Mr. Finn will be named a director of U.S. Office
Products effective upon completion of the Strategic
Restructuring Plan. Mr. Finn has been a principal and a
director of Clayton, Dubilier & Rice since June 1997
and March 1998, respectively. Prior to joining Clayton,
Dubilier & Rice in 1997, Mr. Finn worked for 15 years
at Credit Suisse First Boston, an investment banking
firm, most recently as co-head of the Mergers and
Acquisitions division. He holds a B.S. in Economics
from the University of Pennsylvania's Wharton School.
Milton H. Kuyers Director 60 Mr. Kuyers has been a director of U.S. Office Products
since April 1995. He is a part owner and executive
officer of a number of privately held companies,
including: Zero Zone, Inc., a manufacturer of
commercial refrigeration units; Desert Air Corp., a
manufacturer of commercial dehumidification equipment;
Northwest Coatings, Inc., a manufacturer of coating
products; Grayline, Inc., a manufacturer of tubing used
in the appliance and electrical industries; Digicorp
Inc., a distributor of business telephone systems and
cellular telephones; and Faustel, Inc., a manufacturer
of custom coating equipment. Prior to 1993, Mr. Kuyers
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- ------------------------- -------------------------- ----------- -------------------------------------------------------
served as the President of Star Sprinkler Corp., a
manufacturer of sprinkler heads for fire protection
systems. Mr. Kuyers previously served on the board of
Medical Advances, Inc., a manufacturer of parts for
medical diagnostic applications, until its sale in
March 1997. Prior to its acquisition by the Company,
Mr. Kuyers also served as a director of The H.H. West
Company, a wholly owned subsidiary of U.S. Office
Products. Mr. Kuyers holds an undergraduate degree in
business administration and an M.B.A. from the
University of Michigan.
<S> <C> <C> <C>
Allon H. Lefever Director 50 Mr. Lefever has been as a director of U.S. Office
Products since February 1995. He has been Vice
President of the Affiliated Companies for High
Industries, Inc., since April 1988. From 1988 until its
acquisition by the Company, Mr. Lefever served as the
Chairman of the Board and Chief Executive Officer of
The Office Works, Inc., and he currently serves on the
boards of directors of several private companies. In
addition, he is a director of Red Rose SuperNet and
Goodville Insurance Co. and serves on the Business
Advisory Board of Millersville State University. Mr.
Lefever received his undergraduate degree from Millers-
ville State University and a Masters in Economics from
Pennsylvania State University.
Edward J. Mathias Director 55 Mr. Mathias has been a director of U.S. Office Products
since February 1995. Currently, Mr. Mathias is a
Managing Director of The Carlyle Group, a merchant bank
based in Washington, D.C. From 1971 through 1993, Mr.
Mathias was employed by T. Rowe Price Associates, Inc.,
a major investment management organization, most
recently as a Managing Director. Mr. Mathias presently
serves on the boards of directors of Sirrom Capital
Corporation, Pathogenesis and The Fortress Group, Inc.
as well as on the boards of directors of several
private companies. Mr. Mathias holds an undergraduate
degree from The University of Pennsylvania and an
M.B.A. from Harvard Business School.
Thomas Morgan President, Chief 44 Mr. Morgan joined U.S. Office Products in February 1997
Executive Officer, as President of U.S. Office Products' North American
and Director Office Products Group. He was promoted to Chief
Operating Officer in June 1997 and to Chief Executive
Officer in November 1997. Before joining U.S. Office
Products, he spent more than 20 years with Genuine
Parts Company
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- ------------------------- -------------------------- ----------- -------------------------------------------------------
where he was most recently Executive Vice President of
S.P. Richards Company, a national office products
wholesaler.
<S> <C> <C> <C>
Charles P. Pieper Chairman of the Board of 51 Mr. Pieper will be named Chairman of U.S. Office
Directors Products effective upon completion of the Strategic
Restructuring Plan. Mr. Pieper has been a principal and
a director of Clayton, Dubilier & Rice since March 1997
and March 1998, respectively. Previously, Mr. Pieper
was President and Chief Executive Officer of GE
Lighting Europe and GE Japan, GE Korea, GE Taiwan, GE
Medical Systems Asia, Yokogawa Medical Systems and GE
Trading Co. Mr. Pieper is Chairman of North American
Van Lines, Inc., a corporation in which CD&R Fund V has
an investment, and a director of Alliant Foodservice,
Inc. and its parent CDRF Holding, Inc., a corporation
in which a Clayton, Dubilier & Rice-managed investment
fund has an investment.
</TABLE>
46
<PAGE>
INFORMATION ABOUT U.S. OFFICE PRODUCTS STOCK OWNERSHIP
There were 133,225,298 shares of common stock of U.S. Office Products issued
and outstanding on March 26, 1998. The following table shows how many shares
were owned by each person who owned more than 5% of the issued and outstanding
shares on that date, based on filings these persons have made with the SEC.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES SHARES
- ---------------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
FMR Corp.
82 Devonshire Street
Boston, MA 02109 15,754,406 11.7%
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116 8,262,886 6.2%
</TABLE>
The following table shows how many shares were owned on March 26, 1998 (the
record date for the Special Meeting) by each of (1) the directors of U.S. Office
Products, (2) the Chief Executive Officer of U.S. Office Products and (3) the
four other most highly paid officers of U.S. Office Products. The table also
shows how many shares were owned by all of the directors and executive officers
of U.S. Office Products together.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OF
NAME OF BENEFICIAL OWNER SHARES SHARES
- ------------------------------------------------------------------------------- ------------------------ ---------
<S> <C> <C>
Jonathan J. Ledecky............................................................ 3,385,699(1) 2.5%
Clifton B. Phillips............................................................ 1,781,385(2) 1.3%
Timothy J. Flynn............................................................... 1,018,055(3) *
Michael J. Barnell............................................................. 512,049(4) *
Edward J. Mathias.............................................................. 333,750(5) *
Milton H. Kuyers............................................................... 152,781(6) *
Donald H. Platt................................................................ 312,757(7) *
Allon H. Lefever............................................................... 87,285(8) *
Mark D. Director............................................................... 170,021(9) *
John A. Quelch................................................................. 63,485(10) *
Thomas Morgan.................................................................. 159,775(11) *
Michael Dooling................................................................ 1,051,898(12) *
All current executive officers and directors as a group........................ 9,028,940 6.8%
</TABLE>
- ------------------------
* Less than 1%
(1) Includes 956,250 shares subject to options which are exercisable currently
or exercisable within 60 days.
(2) Includes 315,304 shares held by three grantor retained annuity trusts for
which Mr. Phillips' children are the beneficiaries. Also includes 150,000
shares held by C.B. Phillips Limited Partnership, of which Mr. Phillips is
the managing general partner.
(3) Includes 391,875 shares subject to options which are exercisable currently
or exercisable within 60 days.
(4) Includes 242,620 shares held indirectly by the Michael J. Barnell Trust of
which Mr. Barnell is trustee and beneficiary, 153,319 shares held indirectly
by MVB Investments, L.P., of which the Michael J. Barnell Trust is the
general partner and a limited partner and 78,049 shares owned by Mr.
Barnell's wife. Also includes 37,500 shares subject to options which are
exercisable currently or exercisable within 60 days. Mr. Barnell was
appointed President of the North American Office Products Group effective
August 1, 1997.
(5) Includes 61,875 shares subject to options which are exercisable currently or
exercisable within 60 days.
47
<PAGE>
(6) Shares held in an irrevocable trust by Mr. Kuyers and his wife. Includes
45,000 shares subject to options which are exercisable currently or
exercisable within 60 days.
(7) Includes 309,675 shares subject to options which are exercisable currently
or exercisable within 60 days.
(8) Includes 61,875 shares subject to options which are exercisable currently or
exercisable within 60 days.
(9) Includes 168,750 shares subject to options which are exercisable currently
or exercisable within 60 days.
(10) Includes 61,875 shares subject to options which are exercisable currently
or exercisable within 60 days.
(11) Includes 200 shares owned by Mr. Morgan's wife. Also includes 159,375
shares subject to options which are exercisable currently or exercisable
within 60 days.
(12) Includes 611,453 shares held by the Dooling Family Trust and 413,465 shares
held by Jacaranda Partners, of which Mr. Dooling is the General Partner.
Also includes 26,980 shares subject to options which are exercisable
currently or exercisable within 60 days.
Charles P. Pieper, who will become Chairman of the Board upon completion of
the Equity Investment, and Kevin J. Conway, Frank P. Doyle, Brian D. Finn, and
L. Dennis Kozlowski, who will become directors upon completion of the Equity
Investment, do not beneficially own any U.S. Office Products' common stock.
THE SECOND PROPOSAL--REVERSE STOCK SPLIT
We are asking you to approve a one-for-four reverse stock split of U.S.
Office Products' common stock, which will be effective upon completion of all of
the other elements of the Strategic Restructuring Plan. We will do this, subject
to your approval, by amending Article Four of U.S. Office Products' certificate
of incorporation. The amendment will provide that each four shares of common
stock outstanding will be reclassified and converted into one share of new
common stock. The text of this proposed amendment is in Annex C. The proposed
reverse stock split will reduce the total number of shares of common stock
outstanding. However, the number of authorized shares of common stock will still
be 500.0 million. The par value of the common stock will remain $.001 per share.
The reverse stock split will have the effect of reducing the number of
shares owned by each stockholder, while proportionately increasing the per share
price. Accordingly, the aggregate value of your stock ownership (number of
shares multiplied by market price) immediately before and after the reverse
split will not change as a result of the split. In addition, because the reverse
split will apply to all stockholders, it will not alter your percentage
ownership interest in U.S. Office Products (except to the extent you receive
cash for fractional shares).
The Board believes the reverse stock split is in the best interests of all
stockholders. The trading price of U.S. Office Products' common stock likely
will be lower after the Tender Offer and the Distributions than it was
immediately prior to these transactions. The Board expects this to occur because
a significant portion of U.S. Office Products' assets will have been distributed
to stockholders through the repurchase of shares in the Tender Offer and the
distribution to stockholders of the shares of the Spin-Off Companies in the
Distributions. As a result of these transactions, shares of U.S. Office Products
will not give you any ownership interest in either the cash that is distributed
through the Tender Offer or the businesses of the Spin-Off Companies. (Stock of
the Spin-Off Companies that you receive in the Distributions will give you an
ownership interest in these businesses.) In addition, as discussed above on page
24, the cost of paying interest on the additional money that U.S. Office
Products will borrow to help finance the Tender Offer will reduce its reported
earnings. Lower reported earnings are expected to reduce the trading price of
U.S. Office Products shares.
48
<PAGE>
The Board believes that U.S. Office Products' visibility in the marketplace
and attractiveness to investors will be better maintained if its stock price
trades, at least initially after completing the Strategic Restructuring Plan, at
a level of at least $12.00 per share. The reverse stock split, by reducing the
number of shares outstanding, will have the effect of proportionately increasing
the price at which the stock will trade relative to what it would if the split
did not occur. However, there can be no assurance as to the price at which the
common stock will trade after giving effect to the reverse stock split or any of
the other transactions contemplated by the Strategic Restructuring Plan.
After the reverse split, U.S. Office Products expects that it will have
approximately 36.6 million shares outstanding (assuming all 2001 Notes are
exchanged for common stock). Thus, the Board does not believe that the reverse
split will materially harm the liquidity of your investment in U.S. Office
Products' common stock. However, the Board cannot predict whether the trading
market for U.S. Office Products' common stock will be more or less active after
the restructuring transactions have been completed.
Because the number of authorized shares of common stock will remain 500.0
million after the reverse split, additional shares will become available for
issuance as a result of the reverse split. The availability of the additional
shares could discourage or frustrate an attempt to effect a change in control of
U.S. Office Products. The additional shares could be used to dilute the stock
ownership of a person seeking to obtain control of U.S. Office Products.
The reverse stock split will occur automatically upon the filing of the
amendment to the certificate of incorporation with the Delaware Secretary of
State. U.S. Office Products currently expects this to occur promptly after the
record date for the Distributions. The number of shares of the Spin-Off
Companies that a U.S. Office Products' stockholder receives in the Distributions
will be based on the number of shares of common stock that a U.S. Office
Products' stockholder holds prior to the reverse stock split. See pages 14-15
for more information about the Distributions. U.S. Office Products' transfer
agent will send to each stockholder of record on the effective date of the
reverse stock split information about replacement of old stock certificates with
stock certificates stating the new number of shares held by such holder after
the split.
U.S. Office Products will not issue fractional shares as a result of the
split. In lieu of fractional shares, U.S. Office Products will pay in cash the
fair market value of the fractional share, based on the closing sale price of
common stock on the last trading day immediately preceding the effective date of
the reverse stock split (after giving effect to the other transactions
contemplated in the Strategic Restructuring Plan).
The reverse stock split will not be taxable to you except that the receipt
of cash in lieu of a fractional share will be taxable as if the fractional share
had been issued and then redeemed for cash. You will have capital gain or loss
in an amount equal to the difference between the amount of cash received for the
fractional share and your tax basis allocable to the fractional share.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE PROPOSED REVERSE STOCK SPLIT
49
<PAGE>
WHERE TO GET ADDITIONAL INFORMATION
Additional information about the Distributions is set forth in the
Information Statement/Prospectuses that have been prepared by the Spin-Off
Companies. Every person who is a stockholder of U.S. Office Products when these
statements are distributed will receive all four Information
Statement/Prospectuses before the completion of the Tender Offer. We currently
expect that these statements will be mailed no later than May 17, 1998.
Preliminary copies of the Information Statement/Prospectuses have been filed
with the SEC as part of registration statements on Form S-1 filed by each of the
Spin-Off Companies. You can obtain copies of the registration statements as
described below.
Additional information about the Tender Offer is set forth in a Tender Offer
Statement. The Tender Offer Statement is being distributed at approximately the
same time as this Proxy Statement. Every person who is a stockholder of U.S.
Office Products when the Tender Offer Statement is distributed will receive a
copy of the Tender Offer Statement. The Tender Offer Statement is part of a
statement on Schedule 13E-4 which will be filed by U.S. Office Products upon
commencement of the Tender Offer. You can obtain copies of the statement on
Schedule 13E-4 as described below.
U.S. Office Products files, annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information U.S. Office Products files (including
the statement on Schedule 13E-4 described above) at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. You may
also read and copy the registration statements filed by the Spin-Off Companies
at the SEC's public reference rooms. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. The SEC filings of U.S.
Office Product and the Spin-Off Companies are also available to the public from
commercial document retrieval services and through the website maintained by the
SEC at "http://www.sec.gov." The filings of U.S. Office Products are also
available through our website at "http://www.usop.com."
The SEC allows U.S. Office Products to "incorporate by reference" the
information it files with the SEC. This means that U.S. Office Products can
disclose important information to you by referring you to those documents. The
information incorporated by reference is considered to be a part of this Proxy
Statement, and later information filed with the SEC will update and supersede
this information. U.S. Office Products incorporates by reference any future
filings made with the SEC under Section 13(a), 13(c), 14, or 15(d) of the
Securities Exchange Act of 1934 until the vote is taken at the Special Meeting.
If this Proxy Statement was delivered to you by U.S. Office Products, U.S.
Office Products will provide you without charge a copy of any document
incorporated by reference that you request (excluding exhibits, unless they are
specifically incorporated by reference). Written requests for such copies should
be sent to Mark D. Director, Executive Vice President--Administration, General
Counsel and Secretary of U.S. Office Products, at 1025 Thomas Jefferson Street,
N.W., Suite 600 East, Washington, D.C. 20007. Telephone requests for copies can
be made to (202) 339-6700.
50
<PAGE>
ANNEX A--OPINION OF MORGAN STANLEY & CO. INCORPORATED
MORGAN STANLEY
MORGAN STANLEY & CO.
INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4000
January 12, 1998
Board of Directors
U.S. Office Products Company
1025 Thomas Jefferson Street, NW
Suite 600 East
Washington, DC 20007
Members of the Board:
We understand that U.S. Office Products Company (the "Company"), proposes to
engage in a series of transactions (collectively, the "Transactions") in which
the Company will:
(i) distribute 100% of the common stock of each of the newly formed
subsidiaries of the Company (each distribution, a "Spin-Off") which will
hold, respectively, the Company's education, travel, technology and
printing divisions (each, a "Spin-Off Company") to the holders of shares
of common stock, par value $.001 per share (the "Shares"), of the
Company, on a pro rata basis;
(ii) offer to purchase up to 37.0 million of the currently outstanding
Shares at a price of $27 per Share (the "Tender Offer"); and
(iii) sell to Clayton, Dubilier & Rice Inc. (the "Investor"), upon the terms
and subject to the conditions set forth in the Agreement dated January
12, 1998 between the Investor and the Company, (a) newly issued Shares
representing 24.9% of the outstanding Shares immediately following
consummation of the Transactions (the "Originally Issued Shares") and
warrants to purchase a number of Shares equal to the difference between
(i) the Originally Issued Shares and (ii) 24.9% of the Shares
outstanding immediately following consummation of the Transactions
(assuming conversion of all of the Company's 5 1/2% Convertible
Subordinated Notes due 2001) (the "Special Warrant Issued Shares") and
(b) warrants to purchase that number of Shares equal to the number of
Originally Issued Shares and Special Warrant Issued Shares.
You have asked for our opinion as to whether the proposed Transactions, taken as
a whole, are fair, from a financial point of view, to the holders of the Shares.
A-1
<PAGE>
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
business and financial information of the Company;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning the Company and each Spin-Off Company
prepared by the management of the Company;
(iii) analyzed certain financial forecasts for the Company and each Spin-Off
Company prepared by the management of the Company;
(iv) discussed the past and current operations and financial condition and
the prospects of the Company and each Spin-Off Company with senior
executives of the Company;
(v) reviewed the pro forma impact of the Transactions on the Company's and
each of the Spin-Off Company's earnings per share, cash flow,
consolidated capitalization and financial ratios;
(vi) reviewed the reported prices and trading activity for the Shares;
(vii) compared the financial performance of each Spin-Off Company with that
of certain other companies that are comparable to each Spin-Off Company
and have publicly-traded securities;
(viii) compared the financial performance of the Company (excluding the
Spin-Off Companies) with that of certain other comparable companies
with publicly-traded securities;
(ix) reviewed the financial terms, to the extent publicly available, of
certain transactions involving minority investments in publicly traded
companies;
(x) reviewed and discussed with the Board of Directors certain expertise of
the Investor and the strategic, financial and operational benefits
anticipated from the Transactions;
(xi) participated in discussions and negotiations among representatives of
the Company and the Investor and their respective legal advisors; and
(xii) performed such other analyses and considered such other factors as we
have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial forecasts, including information relating
to certain strategic, financial and operational benefits anticipated from the
Transactions, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of the Company and each Spin-Off Company. We have not made
any independent valuation or appraisal of the assets or liabilities of the
Company or each Spin-Off Company, nor have we been furnished with any such
appraisals. Our opinion is necessarily based on financial, economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. We have further assumed that no Spin-Off will be a taxable
transaction to the Company, any Spin-Off Company or the holders of the Shares
under federal income tax laws (except to the extent of any cash distributed in
lieu of fractional shares of each Spin-Off Company). In rendering our opinion,
we have, with your consent, not considered the effect of any terms of any
commercial, allocation or other arrangements between the Company and any
Spin-Off Company.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition, business
combination or other extraordinary transaction, involving the Company, nor did
we negotiate with any party, other than the Investor, with respect to any such
transaction.
We note that trading in Shares commencing with the public announcement of the
Transactions and continuing for a period of time following completion of the
Spin-Offs may involve a redistribution of the Shares and the shares of the
Spin-Off Companies among the Company's stockholders and other investors
A-2
<PAGE>
and, accordingly, during such period, the Shares and the shares of the Spin-Off
Companies may trade at prices below those at which they would trade on a fully
distributed basis after the Spin-Offs. In rendering our opinion, we are not
opining as to the price at which the common stock of the Company or each Spin-
Off Company will trade after the Transactions are effected.
We have acted as financial advisor to the Board of Directors of the Company in
connection with this transaction and will receive a fee for our services,
including a fee contingent upon the completion of the Transactions. In the past,
Morgan Stanley & Co. Incorporated and its affiliates have provided financial
advisory and financing services for the Company and have received fees for the
rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company with the Securities and Exchange Commission
with respect to the Transactions. In addition, we express no opinion and make no
recommendation as to how the holders of the Shares should vote at the
stockholders' meeting held in connection with the Transactions.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the proposed Transactions, taken as a whole, are fair from a
financial point of view to the holders of the Shares.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ R. Bradford Evans
R. Bradford Evans
Managing Director
A-3
<PAGE>
ANNEX B
INVESTMENT AGREEMENT
DATED AS OF JANUARY 12, 1998
AMENDED AS OF FEBRUARY 3, 1998
BETWEEN
U.S. OFFICE PRODUCTS COMPANY
AND
CDR-PC ACQUISITION, L.L.C.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE I
Purchase and Sale of Shares, Special Warrants and Warrants................................................. B-2
1.01 Purchase and Sale of Shares, Special Warrants and Warrants.......................................... B-2
1.02 Time and Place of the Closing....................................................................... B-3
1.03 Transactions at the Closing......................................................................... B-3
ARTICLE II
Covenants.................................................................................................. B-3
2.01 Covenants of the Company............................................................................ B-3
ARTICLE III
Representations and Warranties............................................................................. B-4
3.01 Representations and Warranties of the Company....................................................... B-4
3.02 Representations and Warranties of Purchaser......................................................... B-14
ARTICLE IV
Corporate Governance....................................................................................... B-15
4.01 Composition of the Board of Directors............................................................... B-16
4.02 Supermajority Voting Provisions..................................................................... B-16
4.03 Committees.......................................................................................... B-17
4.04 By-laws............................................................................................. B-17
4.05 Termination of Article IV........................................................................... B-17
ARTICLE V
Equity Purchases from the Company.......................................................................... B-17
5.01 Subscription Rights................................................................................. B-17
5.02 Issuance and Delivery of New Securities and Voting Stock............................................ B-18
ARTICLE VI
Limitations on Purchases of Additional Equity Securities................................................... B-18
6.01 Purchases of Equity Securities...................................................................... B-18
6.02 Additional Limitations.............................................................................. B-18
ARTICLE VII
Transfer of Common Stock................................................................................... B-19
7.01 Transfer of Common Stock............................................................................ B-19
ARTICLE VIII
Covenants and Additional Agreements........................................................................ B-20
8.01 Covenants of the Company............................................................................ B-20
8.02 Transaction Proposals............................................................................... B-22
8.03 Modification of Transaction Agreements; Abandonment of Distributions................................ B-23
8.04 Transaction Agreements and Schedules................................................................ B-23
8.05 Company Stockholder Approval; Proxy Statement....................................................... B-24
8.06 Retained Companies Financing........................................................................ B-24
8.07 Tender Offer........................................................................................ B-25
8.08 Information Statements.............................................................................. B-25
8.09 [Intentionally omitted.]............................................................................ B-26
8.10 Tax Standstill...................................................................................... B-26
</TABLE>
B-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
8.11 Access and Information.............................................................................. B-26
8.12 Further Actions..................................................................................... B-26
8.13 Further Assurances.................................................................................. B-27
ARTICLE IX
Conditions Precedent....................................................................................... B-27
9.01 Conditions to Each Party's Obligations.............................................................. B-27
9.02 Conditions to the Obligations of the Company........................................................ B-28
9.03 Conditions to the Obligations of Purchaser.......................................................... B-29
ARTICLE X
Termination................................................................................................ B-30
10.01 Termination........................................................................................ B-30
10.02 Effect of Termination.............................................................................. B-31
ARTICLE XI
Indemnification............................................................................................ B-31
11.01 Indemnification of Purchaser....................................................................... B-31
11.02 Indemnification Procedures......................................................................... B-32
ARTICLE XII
Interpretation; Definitions................................................................................ B-33
12.01 Interpretation..................................................................................... B-33
12.02 Definitions........................................................................................ B-33
ARTICLE XIII
Miscellaneous.............................................................................................. B-39
13.01 Severability....................................................................................... B-39
13.02 Specific Enforcement............................................................................... B-39
13.03 Entire Agreement................................................................................... B-39
13.04 Counterparts....................................................................................... B-39
13.05 Notices............................................................................................ B-39
13.06 Amendments......................................................................................... B-40
13.07 Cooperation........................................................................................ B-40
13.08 Successors and Assigns............................................................................. B-41
13.09 Expenses and Remedies.............................................................................. B-41
13.10 Transfer of Shares and Warrants.................................................................... B-41
13.11 Governing Law...................................................................................... B-42
13.12 Publicity.......................................................................................... B-42
13.13 No Third Party Beneficiaries....................................................................... B-42
13.14 Consent to Jurisdiction............................................................................ B-42
EXHIBITS
Exhibit 1 Terms of Special Warrants B-46
Exhibit 2 Terms of Warrants B-47
Exhibit 3 Terms of Registration Rights Agreement B-48
Schedule 8.07 B-49
</TABLE>
B-iii
<PAGE>
THIS INVESTMENT AGREEMENT (this "Agreement"), dated as of January 12, 1998,
amended as of February 3, 1998, is entered into between CDR-PC Acquisition,
L.L.C., a Delaware limited liability company ("Purchaser"), and U.S. Office
Products Company, a Delaware corporation (the "Company").
WHEREAS the Board of Directors of the Company has approved a series of
transactions pursuant to which:
(a) the Company will conduct a tender offer (the "Tender Offer") to
repurchase 37,037,037 shares of common stock, par value $.001 per share, of
the Company (the "Common Stock"), at $27 per share,
(b) the Company will enter into arrangements for new high-yield and bank
financing in connection with the Tender Offer and the other transactions
contemplated hereby (the "Proposed Financings"),
(c) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's education division ("School"), to the
holders of record of the Common Stock after completion of the Tender Offer
on a pro rata basis (the "School Distribution"),
(d) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's corporate travel services division
("Travel"), to the holders of record of the Common Stock after completion of
the Tender Offer on a pro rata basis (the "Travel Distribution"),
(e) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's technology solutions division
("Technology"), to the holders of record of the Common Stock after
completion of the Tender Offer on a pro rata basis (the "Technology
Distribution"), and
(f) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's print management division ("Print"), to the
holders of record of the Common Stock after completion of the Tender Offer
on a pro rata basis (the "Print Distribution", and, together with the School
Distribution, the Travel Distribution and the Technology Distribution, the
"Distributions");
WHEREAS, in connection with the Distributions, the Company expects:
(a) (i) to execute and deliver a distribution agreement to effect the
School Distribution (the "School Distribution Agreement"), (ii) to cause
School to execute and deliver the School Distribution Agreement, and (iii)
after the satisfaction or waiver of all of the conditions to the Company's
obligation to consummate the School Distribution set forth in the School
Distribution Agreement, and pursuant to the terms of the School Distribution
Agreement, to effect the School Distribution,
(b) (i) to execute and deliver a distribution agreement to effect the
Travel Distribution (the "Travel Distribution Agreement"), (ii) to cause
Travel to execute and deliver the Travel Distribution Agreement, and (iii)
after the satisfaction or waiver of all of the conditions to the Company's
obligation to consummate the Travel Distribution set forth in the Travel
Distribution Agreement, and pursuant to the terms of the Travel Distribution
Agreement, to effect the Travel Distribution,
(c) (i) to execute and deliver a distribution agreement to effect the
Technology Distribution (the "Technology Distribution Agreement"), (ii) to
cause Technology to execute and deliver the Technology Distribution
Agreement, and (iii) after the satisfaction or waiver of all of the
conditions to the Company's obligation to consummate the Technology
Distribution set forth in the Technology
<PAGE>
Distribution Agreement, and pursuant to the terms of the Technology
Distribution Agreement, to effect the Technology Distribution,
(d) (i) to execute and deliver a distribution agreement to effect the
Print Distribution (the "Print Distribution Agreement", and, together with
the School Distribution Agreement, the Travel Distribution Agreement and the
Technology Distribution Agreement, the "Distribution Agreements"), (ii) to
cause Print to execute and deliver the Print Distribution Agreement, and
(iii) after the satisfaction or waiver of all of the conditions to the
Company's obligation to consummate the Print Distribution set forth in the
Print Distribution Agreement, and pursuant to the terms of the Print
Distribution Agreement, to effect the Print Distribution, and
(e) to execute and deliver, and to cause each of School, Travel,
Technology and Print (together, the "Distributed Companies") to execute and
deliver, a tax allocation agreement (the "Tax Allocation Agreement") and
certain other Transaction Agreements;
WHEREAS, prior to the Distributions and pursuant to the terms of the
Distribution Agreements, the Company and the Distributed Companies will
consummate the Pre-Distribution Transactions (as herein defined);
WHEREAS, following the Pre-Distribution Transactions and the record date for
the Distributions:
(a) Purchaser wishes to purchase from the Company, and the Company
wishes to sell to Purchaser, shares of Common Stock and warrants having the
terms and conditions set forth in Exhibit 1 (the "Special Warrants")
entitling the holder thereof to purchase shares of Common Stock together
representing 24.9% of the shares of Common Stock as of the Closing Date (as
herein defined) that would be outstanding after giving effect to the
issuance of such shares (and assuming the conversion into Common Stock of
all of the Company's issued and outstanding 5 1/2% Convertible Subordinated
Notes Due 2001 issued pursuant to an Indenture, dated as of February 7,
1996, between the Company and State Street Bank and Trust Company (the "2001
Notes") that are outstanding on the Closing Date, and after giving effect to
the issuance of any Contingent Stock (as defined herein)), and warrants
entitling the holder thereof to purchase one share of Common Stock for each
share and Special Warrant so purchased on the terms and subject to the
conditions set forth in Exhibit 2 (the "Warrants"), and
(b) the Company and Purchaser wish to enter into a registration rights
agreement (the "Registration Rights Agreement"), the principal terms of
which are attached hereto as Exhibit 3;
WHEREAS Purchaser and the Company are entering into this Agreement to
provide for such purchase and sale and to establish various rights and
obligations in connection therewith;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein set forth, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES, SPECIAL WARRANTS AND WARRANTS
SECTION 1.01 PURCHASE AND SALE OF SHARES, SPECIAL WARRANTS AND
WARRANTS. Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell to Purchaser and Purchaser agrees to purchase from the
Company for an aggregate purchase price of $270 million (the "Purchase Price")
(a) shares of Common Stock representing 24.9% of the outstanding shares of
Common Stock as of the Closing Date after giving effect to the issuance of such
shares (the "Shares"), (b) Special Warrants representing the right to acquire a
number of shares of Common Stock equal to the difference between (i) 24.9% of
the sum of (A) the outstanding shares of Common Stock as of the Closing Date
after giving effect to the issuance of the Shares and the exercise of the
Special Warrants, and assuming the conversion
B-2
<PAGE>
into Common Stock of all the 2001 Notes outstanding on the Closing Date at the
conversion price resulting from adjustments made as a result of the Tender Offer
and the Distributions and (B) the number of any shares of Contingent Stock that
are issued, and (ii) 24.9% of the outstanding shares of Common Stock as of the
Closing Date after giving effect to the issuance of the Shares and (c) Warrants
to purchase one share of Common Stock for each Share so purchased and for each
share into which the Special Warrants become exercisable.
SECTION 1.02 TIME AND PLACE OF THE CLOSING. The closing (the "Closing")
shall take place at the offices of Debevoise & Plimpton, 875 Third Avenue, New
York, New York, 10022, at 10:00 A.M., New York time, on the third Business Day
following the first date on which the conditions to Closing set forth in Article
IX have first been satisfied or waived, or at such other place, time and date as
the parties may agree. The Company shall give Purchaser ten Business Days prior
written notice of the date the Closing is scheduled to occur. The "Closing Date"
shall be the date the Closing occurs.
SECTION 1.03 TRANSACTIONS AT THE CLOSING. At the Closing, subject to the
terms and conditions of this Agreement, (a) the Company shall issue and sell to
Purchaser and Purchaser shall purchase the Shares, the Special Warrants and the
Warrants; (b) the Company shall deliver to Purchaser a certificate representing
the Shares and certificates representing the Special Warrants and the Warrants,
in each case registered in the name of Purchaser against payment of the Purchase
Price with respect thereto by wire transfer of immediately available funds to an
account or accounts previously designated by the Company; and (c) the Company
and Purchaser shall enter into the Registration Rights Agreement.
ARTICLE II
COVENANTS
SECTION 2.01 COVENANTS OF THE COMPANY.
(a) FINANCIAL STATEMENTS AND OTHER REPORTS. The Company covenants that it
will deliver to Purchaser so long as Purchaser's Percentage Interest exceeds
10%:
(i) as soon as practicable and in any event within 45 days after the end of
each quarterly period (other than the last quarterly period) in each fiscal
year, a consolidated statement of income and a consolidated statement of cash
flow of the Retained Companies for the period from the beginning of the then
current fiscal year to the end of such quarterly period, and a consolidated
balance sheet of the Retained Companies as of the end of such quarterly period,
setting forth in each case in comparative form figures for the corresponding
period or date in the preceding fiscal year, all in reasonable detail and
certified by the principal financial officer of the Company as presenting
fairly, in accordance with GAAP applied (except as specifically set forth
therein) on a basis consistent with such prior fiscal period, the information
contained therein, subject to changes resulting from year-end closing and audit
adjustments; provided, however, that delivery pursuant to clause (iii) below of
a copy of the Quarterly Report on Form 10-Q of the Company for such quarterly
period filed with the SEC shall be deemed to satisfy the requirements of this
clause (i);
(ii) as soon as practicable and in any event within 90 days after the end of
each fiscal year, a consolidated statement of income, a consolidated statement
of cash flow and a consolidated statement of stockholders equity of the Retained
Companies for such year, and a consolidated balance sheet of the Retained
Companies as of the end of such year, setting forth in each case in comparative
form the corresponding figures from the preceding fiscal year, all in reasonable
detail and examined and reported on by independent public accountants of
recognized national standing selected by the Company, which report shall state
that such consolidated financial statements present fairly the financial
position of the Retained Companies as at the dates indicated and the results of
their operations and changes in their financial position for the periods
indicated in conformity with GAAP applied on a basis consistent with
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prior years (except as otherwise specified in such report) and that the audit by
such accountants in connection with such consolidated financial statements has
been made in accordance with generally accepted auditing standards; provided,
however, that delivery pursuant to clause (iii) below of a copy of the Annual
Report on Form 10-K of the Company for such fiscal year filed with the SEC shall
be deemed to satisfy the requirements of this clause (ii);
(iii) promptly upon transmission thereof, copies of all such financial
statements, proxy statements, notices and reports as it shall send to its
stockholders and copies of all such registration statements (without exhibits),
and all such regular and periodic reports as it shall file with the SEC;
(iv) promptly upon receipt thereof, copies of all reports submitted to the
Retained Companies by independent public accountants in connection with each
annual, interim or special audit of the books of the Retained Companies made by
such accountants, including the comment letter submitted by such accountants to
management in connection with their annual audit; and
(v) with reasonable promptness, such other financial data of the Retained
Companies as Purchaser may reasonably request.
(b) INSPECTION OF PROPERTY. The Company covenants that so long as
Purchaser's Percentage Interest exceeds 10%, it will permit representatives of
Purchaser to visit and inspect, at Purchaser's expense, any of the properties of
the Retained Companies, to examine the corporate books and make copies or
extracts therefrom and to discuss the affairs, finances and accounts of the
Retained Companies with the officers and employees of the Retained Companies and
independent public accountants (and by this provision the Company authorizes
such accountants to discuss with such representatives the affairs, finances and
accounts of the Retained Companies), all at such reasonable times and as often
as Purchaser may reasonably request. Purchaser agrees not to disclose to any
Person any information or data obtained by it pursuant to this Section 2.01(b)
or Section 2.01(a)(iv) or (a)(v) until such information or data otherwise
becomes publicly available or except pursuant to a valid subpoena, judicial
process or its equivalent or in connection with a claim against the Company;
provided that Purchaser shall have used its reasonable best efforts to give the
Company advance notice of such subpoena or judicial process so that the Company
may seek an appropriate protective order. Purchaser acknowledges that
information obtained pursuant to the rights granted hereby may constitute
material non-public information and agrees that it will comply with all
applicable laws relating to the purchase or sale of securities of the Company
while in possession of such information.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to Purchaser as follows:
(a) CORPORATE ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Each Retained Subsidiary having assets or annual revenues of $500,000 or more or
which is otherwise material to the Retained Business (each a "Material
Subsidiary") is duly organized and validly existing and, if applicable, except
as set forth in Schedule 3.01(a), is in good standing, under the laws of the
jurisdiction of its incorporation or organization.
Each of the Retained Companies is duly qualified or licensed and, if
applicable, is in good standing as a foreign corporation, in each jurisdiction
in which the properties owned, leased or operated, or the business conducted, by
it require such qualification or licensing, except for any such failure so to
qualify or be in good standing which, individually or in the aggregate, would
not have a Material Adverse Effect on the Retained Companies, taken as a whole.
Each of the Material Subsidiaries has the requisite power and authority to carry
on its businesses as they are now being or will be (immediately after the
Distributions)
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conducted. The Company has heretofore made available to Purchaser complete and
correct copies of the Certificate of Incorporation of the Company (the "Company
Charter") and the By-laws of the Company (the "Company By-laws") and the
certificate of incorporation and by-laws, or the comparable organizational
documents, of each of the Material Subsidiaries, each as amended to date and
currently in full force and effect.
(b) CORPORATE AUTHORITY. Each of the Company, School, Travel, Technology
and Print has (or will have at the time of such act) the requisite corporate
power and authority to execute, deliver and perform each Transaction Agreement
to which it is or will be a party and to consummate the transactions
contemplated thereby other than, with respect to the Distributions, formal
declaration of the Distributions by the Company's Board of Directors (provided
that, with respect to the issuance and sale by the Company of the Shares, the
Special Warrants and the Warrants, the Company shall obtain pursuant to Nasdaq
Stock Market rules the approval of such issuance and sale by the affirmative
vote of the holders of a majority of the shares of Common Stock represented at
the Company Meeting and entitled to vote thereon (the "Company Stockholder
Approval")). The execution, delivery and performance of each Transaction
Agreement by the Company and the consummation by the Company of the
Pre-Distribution Transactions, the Distributions, the Proposed Financings, the
Tender Offer and the issuance and sale by the Company of the Shares, Special
Warrants and Warrants and of the other transactions contemplated by the
Transaction Agreements have been duly authorized (or will have been duly
authorized at the time of such act) by the Company's Board of Directors, and no
other corporate proceedings on the part of the Company are necessary to
authorize any Transaction Agreement or for the Company to consummate the
Transactions so contemplated (other than, with respect to the issuance and sale
by the Company of the Shares, the Special Warrants and the Warrants, the Company
Stockholder Approval and, with respect to the Distributions, formal declaration
of the Distributions by the Company's Board of Directors). The execution,
delivery and performance by each of School, Travel, Technology and Print of each
Transaction Agreement to which it will be party and the consummation by it of
the Transactions contemplated thereby will be duly authorized at the time of
such act by the Board of Directors and the stockholders of each, if required,
and no other corporate proceedings on the part of School, Travel, Technology or
Print will be necessary to authorize the execution, delivery and performance of
any Transaction Agreement to which they will be a party or for them to
consummate the Transactions so contemplated. Each Transaction Agreement to which
the Company, School, Travel, Technology or Print is or will be a party is, or
when executed and delivered will be, a valid and binding agreement of such
party, enforceable against such party in accordance with the terms thereof,
assuming (in the case of this Agreement and the Registration Rights Agreement)
that each Transaction Agreement to which Purchaser is a party is a valid and
binding agreement of Purchaser.
(c) NO VIOLATIONS; CONSENTS AND APPROVALS. (i) None of the execution,
delivery or performance by the Company, School, Travel, Technology or Print of
each Transaction Agreement to which any of them is or will be a party or the
consummation by the Company or School, Travel, Technology or Print of the
transactions contemplated thereby (A) will result in a violation or breach of
the Company Charter or the Company By-laws, the articles of incorporation or
by-laws of School, Travel, Technology or Print or the organizational documents
of any of the Retained Subsidiaries or (B) will result in a violation or breach
of (or give rise to any right of termination, revocation, cancellation or
acceleration under or increased payments under), or constitute a default (with
or without due notice or lapse of time or both) under, or result in the creation
of any lien, charge, encumbrance or security interest of any kind (a "Lien")
upon any of the properties or assets of the Retained Companies under, (1)
subject to the governmental filings and other matters referred to in clause (ii)
below, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, contract, agreement, obligation, instrument, offer, commitment,
understanding or other arrangement (each a "Contract") or of any license,
waiver, exemption, order, franchise, permit or concession (each a "Permit") to
which any of the Retained Companies is a party or by which any of their
properties or assets may be bound (except for the Company's credit facility with
Bankers Trust Company in effect on the date hereof), or (2) subject to the
governmental filings and other matters referred to in clause (ii) below, any
judgment, order, decree, statute, law, regulation or rule applicable to the
Retained
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Companies, except, in the case of clause (B), for violations, breaches,
defaults, rights of cancellation, termination, revocation or acceleration or
Liens that would not, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole.
(ii) Except for consents, approvals, orders, authorizations, registrations,
declarations or filings as may be required under, and other applicable
requirements of, the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), filings under state securities or "blue sky" laws and filings or consents
referred to in Schedule 3.01(c)(ii), no consent, approval, order or
authorization of, or registration, declaration or filing with, any government or
any court, administrative agency or commission or other governmental authority
or agency, federal, state or local or foreign (a "Governmental Entity"), is
required with respect to the Company, School, Travel, Technology or Print or any
of their respective Subsidiaries, in connection with the execution, delivery or
performance by each of the Company, School, Travel, Technology and Print of each
Transaction Agreement to which any of them is or will be a party or the
consummation by the Company and School, Travel, Technology and Print of the
Transactions contemplated thereby (except where the failure to obtain such
consents, approvals, orders or authorizations, or to make such registrations,
declarations, filings or agreements would not, individually or in the aggregate,
have a Material Adverse Effect on the Retained Companies, taken as a whole).
(d) CAPITAL STOCK. As of the date hereof, the authorized capital stock of
the Company consists of (i) 500,000,000 shares of Common Stock, of which an
aggregate of 132,958,606 shares of Common Stock were issued and outstanding as
of the close of business on January 9, 1998, and (ii) 500,000 shares of
preferred stock, $.001 par value per share, of which none were issued and
outstanding as of the close of business on January 9, 1998. As of the close of
business on January 9, 1998, there were outstanding under the Company's 1994
Long-Term Incentive Plan, the 1994 Amended and Restated Long-Term Incentive
Plan, the 1996 Non-Employee Directors' Stock Plan, the 1997A Stock Option Plan
for Employees of Mail Boxes Etc., the 1997B Stock Option Plan for Employees of
Mail Boxes Etc. and the 1997 Stock Option Plan for former Non-Employee Directors
of Mail Boxes Etc. (collectively, the "Company Stock Plans") options to acquire
an aggregate of 21,236,778 shares of Common Stock (subject to adjustment on the
terms set forth therein) of which 706,778 are subject to allocation pursuant to
option pools, as set forth on Schedule 3.01(d)(ii). As of the close of business
on January 9, 1998, there were outstanding under the Company Stock Plans no
shares of restricted stock and 3,220 deferred shares had been reserved for
issuance pursuant to the 1996 Non-Employee Directors Stock Plan. As of the close
of business on January 9, 1998, the Company had no shares of Common Stock
reserved for issuance of restricted stock. All of the outstanding shares of
Common Stock have been duly authorized and validly issued, and are fully paid
and nonassessable. As of the date hereof the Company has outstanding
$230,000,000 in 5 1/2% Convertible Subordinated Notes Due 2003 issued pursuant
to an Indenture, dated as of May 22, 1996, between the Company and The Chase
Manhattan Bank, N.A. (the "2003 Notes") and $143,750,000 in 2001 Notes,
convertible into shares of Common Stock at any time prior to maturity at a
conversion price of $31.60 and $19.00 per share, respectively. Except as set
forth on Schedule 3.01(d), there are no preemptive or similar rights on the part
of any holders of any class of securities of the Company or of any of the
Retained Subsidiaries. Except for the Common Stock, the 2003 Notes and the 2001
Notes, as set forth above, the Company has outstanding no bonds, debentures,
notes or other obligations or securities the holders of which have the right to
vote (or are convertible or exchangeable into or exercisable for securities
having the right to vote) with the stockholders of the Company on any matter.
Except as set forth above or on Schedule 3.01(d), as of the date of this
Agreement, there are no securities convertible into or exchangeable for, or
options, warrants, calls, subscriptions, rights, contracts, commitments,
arrangements or understandings of any kind to which the Company or any of its
Subsidiaries is a party or by which any of them is bound obligating the Company
or any of its Subsidiaries contingently or otherwise to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock or
other voting securities of the Company or of any of the Retained Subsidiaries.
Except (y) with respect to the withholding of
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exercise price or withholding taxes under any Company Stock Plan or (z) pursuant
to the Tender Offer, there are no outstanding Contracts of the Company or any of
its Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of the Company or of any of the Retained Subsidiaries.
(e) SUBSIDIARIES. (i) Schedule 3.01(e) contains a complete and correct
description of the shares of stock or other equity interests that are
authorized, or issued and outstanding, of each of the Retained Companies (other
than the Company). Except for Subsidiaries that will not be Subsidiaries of the
Company after the Distributions, the Company has no equity interests with a
value of $500,000 or more in any Person other than the Retained Companies, and
there are no commitments on the part of the Company or any Material Subsidiary
to contribute additional capital in respect of any equity interest in any
Person. Each of the outstanding shares of capital stock of each of the Retained
Subsidiaries has been duly authorized and validly issued, and is fully paid and
nonassessable. Except as set forth on Schedule 3.01(e)(i), all of the
outstanding shares of capital stock of each Retained Subsidiary are owned,
either directly or indirectly, by the Company free and clear of all Liens.
(ii) Schedule 3.01(e)(ii) contains a complete and correct list of all
Material Subsidiaries of the Company.
(iii) Schedule 3.01(e)(iii) contains a complete and correct list setting
forth the respective Material Subsidiaries of each of the Company, School,
Travel, Technology and Print immediately following the Distributions.
(f) SEC FILINGS. The Company has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the
SEC under the Securities Act and the Exchange Act since June 30, 1995 (the
"Company SEC Documents"). As of its filing date, each Company SEC Document
filed, as amended or supplemented, if applicable, (i) complied in all
material respects with the applicable requirements of the Securities Act or
the Exchange Act, as applicable, and the rules and regulations thereunder
and (ii) did not, at the time it was filed, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(g) RETAINED BUSINESS FINANCIAL STATEMENTS. (i) Attached hereto as
Annex A(i) are a consolidated balance sheet as of April 26, 1997 (the
"Balance Sheet") and a consolidated balance sheet as of April 30, 1996 and
consolidated statements of income, consolidated statements of cash flow and
consolidated statements of stockholders' equity for the years ended April
30, 1995 and 1996 and April 26, 1997, in each case for the Company (such
financial statements, including the notes thereto, the "Company Business
Financial Statements"), together with the report of the Company's
independent accountants thereon. Each of the Balance Sheet and the
consolidated balance sheet as of April 30, 1996 (including any related notes
and schedules) presents fairly in all material respects the consolidated
financial position of the Company as of their respective dates, and each of
the consolidated statements of income, consolidated statements of cash flow
and consolidated statements of stockholders' equity included in the Company
Business Financial Statements (including any related notes and schedules)
fairly presents in all material respects the income, cash flows and
stockholders equity, as the case may be, of the Company for the periods set
forth therein, in each case in accordance with GAAP applied on a consistent
basis throughout the periods presented therein except as indicated in the
notes thereto, prior to the announcement of the Transactions. Upon
announcement of the Transactions, the Company Business Financial Statements
will require adjustment to reflect (i) the change in the accounting
treatment of certain acquisitions from the pooling-of-interests method to
the purchase method; (ii) the treatment of certain of the Distributions as
discontinued operations, and (iii) certain footnote disclosure regarding the
Transactions.
(ii) Attached hereto as Annex A (ii) are the unaudited consolidated
balance sheet for the Company as of October 25, 1997 and the unaudited
consolidated statement of income of the Company for the six months then
ended (such financial statements, including the notes thereto, the
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"Unaudited Company Business Financial Statements"). The Unaudited Company
Business Financial Statements have been prepared in all material respects in
accordance with GAAP consistently applied and on that basis fairly present
the consolidated financial condition and results of operations of the
Company as of the date thereof and for the period indicated, except that the
Company Business Financial Statements omit footnote disclosures required by
GAAP and are subject to normal, recurring year-end closing and audit
adjustments, prior to the announcement of the Transactions. Upon
announcement of the Transactions, the Unaudited Company Business Financial
Statements will require adjustment to reflect (i) the change in the
accounting treatment of certain acquisitions from the pooling-of-interests
method to the purchase method; (ii) the treatment of certain of the
Distributions as discontinued operations, and (iii) certain footnote
disclosure regarding the Transactions.
(iii) Attached hereto as Annex A(iii) are the unaudited pro forma
combined balance sheet for the Retained Business as of October 25, 1997 (the
"Pro Forma Balance Sheet"), the unaudited pro forma combined statement of
income for the Retained Business for the fiscal year ended April 26, 1997
and the six month period ended October 25, 1997 (the "Pro Forma Income
Statements"), and the notes to such unaudited pro forma financial statements
(the "Notes to Pro Forma Financial Statements", and, together with the Pro
Forma Balance Sheet and the Pro Forma Income Statements, the "Pro Forma
Retained Business Financial Statements"). The Pro Forma Retained Business
Financial Statements have been prepared in accordance with Article 11 of
Regulation S-X; reflect the adjustments necessary to change accounting
treatment for certain past acquisitions from the pooling of interests method
to the purchase method; and give effect to the Proposed Financings, the
Tender Offer, the Distributions and the purchase of the Shares, Special
Shares and Warrants by Purchaser. The Pro Forma Income Statements have been
prepared as if all such Transactions had occurred at the beginning of fiscal
1997 and the Pro Forma Balance Sheet has been prepared as if all such
transactions had occurred as of October 25, 1997.
(iv) Attached hereto as Annex A(iv) are a consolidated balance sheet for
the Retained Business as of April 26, 1997 (the "Audited Balance Sheet") and
the consolidated statements of income of the Retained Business for the
fiscal year then ended (such financial statements, including the notes
thereto, the "Audited Retained Business Financial Statements"), together
with the report of the Company's independent accountants thereon. The
Audited Retained Business Financial Statements (including any related notes
and schedules) will fairly present in all material respects the consolidated
financial position of the Retained Business as of the date thereof, and
fairly present in all material respects the income of the Retained Business
for the period set forth therein, in accordance with GAAP applied on a
consistent basis throughout the periods presented therein except as
indicated in the notes thereto.
(v) The balance sheets included in the Pro Forma Retained Business
Financial Statements do not include any material assets or liabilities not
intended to constitute a part of the Retained Business after giving effect
to the Transactions. The statements of income, statements of stockholders
equity and statements of cash flows included in the Pro Forma Retained
Business Financial Statements do not reflect the operations of any entity or
business not intended to constitute a part of the Retained Business after
giving effect to all such Transactions. The statements of income included in
the Pro Forma Retained Business Financial Statements reflect all of the
material costs and expenses incurred in connection with the Retained
Business, including those incurred in generating the revenues reflected in
the Pro Forma Retained Business Financial Statements, in each case, for the
periods covered thereby, that would be required to be so reflected under
GAAP in consolidated financial statements of the Retained Business prepared
on a pro forma basis after giving effect to all such transactions.
(h) UNDISCLOSED LIABILITIES. Except (i) for the items listed in Schedule
3.01(h) hereto, (ii) as and to the extent disclosed or reserved against on the
Balance Sheet, the Pro Forma Balance Sheet and the Audited Balance Sheet or in
the footnotes thereto and (iii) as incurred after the date of the Pro Forma
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Balance Sheet in the ordinary course of the Retained Business consistent with
prior practice and not prohibited by this Agreement, the Retained Companies do
not have any liabilities or obligations of any nature, whether known or unknown,
absolute, accrued, contingent or otherwise and whether due or to become due,
that, individually or in the aggregate, are or would be material to the Retained
Companies, taken as a whole.
(i) ABSENCE OF CERTAIN EVENTS AND CHANGES. Except as disclosed in the
Company SEC Documents filed with the SEC and publicly available prior to the
date hereof and any amendments filed with respect thereto prior to the date
hereof (the "Filed Company SEC Documents") or as otherwise contemplated or
permitted by this Agreement or the other Transaction Agreements, and except for
any items referred to in Schedule 3.01(i), since October 25, 1997, the Company
and its Subsidiaries have conducted the Retained Business in the ordinary course
consistent with past practice and there has not been any event, change or
development which, individually or in the aggregate, would have a Material
Adverse Effect on the Retained Companies, taken as a whole.
(j) COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed in the Filed
Company SEC Documents, each of the Retained Companies is in compliance with all
statutes, laws, regulations, rules, judgments, orders and decrees of all
Governmental Entities applicable to it that relate to the Retained Business, and
neither the Company nor any of the Retained Companies has received any notice
alleging noncompliance except, with reference to all the foregoing, where the
failure to be in compliance would not, individually or in the aggregate, have a
Material Adverse Effect on the Retained Companies, taken as a whole. This
Section 3.01(j) does not relate to employee benefits matters (for which Section
3.01(o) is applicable), environmental matters (for which Section 3.01(p) is
applicable) or tax matters (for which Section 3.01(n) is applicable). Each of
the Retained Companies has all Permits that are required in order to permit it
to carry on its business as it is presently conducted, except where the failure
to have such Permits or rights would not, individually or in the aggregate, have
a Material Adverse Effect on the Retained Companies, taken as a whole. All such
Permits are in full force and effect and the Retained Companies are in
compliance with the terms of such Permits, except where the failure to be in
full force and effect or in compliance would not, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies, taken as a
whole.
(k) TITLE TO ASSETS. (i) Except as set forth in Schedule 3.01(k)(i), each
of the Retained Companies owns and has good and valid title to, or a valid
leasehold interest in, or otherwise has sufficient and legally enforceable
rights to use, all of the properties and assets (real, personal or mixed,
tangible or intangible), used by the Retained Business or held for use by the
Retained Business in connection with the conduct of, or otherwise material to,
the Retained Business (the "Assets"), including Assets reflected on the Balance
Sheet or acquired since the date thereof, except for Assets disposed of in the
ordinary course of business consistent with past practice and in accordance with
this Agreement and except for such defects in title which, individually or in
the aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole, in each case free and clear of any Liens except for
Permitted Liens. This Section 3.01(k) does not relate to intellectual property
(for which Section 3.01(s) is applicable). A list of all owned real property and
leased real property having an annual base rental of more than $20,000 or having
square footage in excess of 5,000 square feet relating to the Retained Business
is set forth on Schedule 3.01(k) and such owned and leased real property
constitutes all the fee and leasehold interests meeting such description held by
the Retained Companies, except for any such fee or leasehold interests acquired
or disposed of in the ordinary course of business consistent with past practice
after the date hereof and in accordance with this Agreement, and constitutes all
the fee and leasehold interests meeting such description used by the Retained
Business or held for use by the Retained Business in connection with the conduct
of the Retained Business.
(ii) Except as referred to in Schedule 3.01(k)(ii), each Retained
Company has (A) good and insurable title to its owned real properties and
(B) valid and subsisting leasehold interests in its leased real properties,
in each case, free and clear of any Liens, except for (1) Permitted Liens
and (2) easements,
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covenants, rights-of-way, other matters of record and other matters subject
to which the leases of the Retained Companies' real properties are granted.
(l) LITIGATION. Except as disclosed in the Filed Company SEC Documents or
referred to on Schedule 3.01(l), as of the date hereof there are no civil,
criminal or administrative actions, suits or proceedings pending or, to the
knowledge of the Company, threatened, against any of the Retained Companies
that, individually or in the aggregate, are likely to have a Material Adverse
Effect on the Retained Companies, taken as a whole. Except as disclosed in the
Company SEC Documents, there are no outstanding judgments, orders, decrees, or
injunctions of any Governmental Entity against any of the Retained Companies
that, insofar as can reasonably be foreseen, individually or in the aggregate,
in the future would have a Material Adverse Effect on the Retained Companies,
taken as a whole.
(m) CONTRACTS. (i) Schedule 3.01(m) contains a complete and correct list,
as of the date hereof, of all Contracts that are of the types listed in clauses
(A) through (G) below to which any of the Retained Companies is a party (the
"Material Contracts"):
(A) employment, consulting, severance, and other material Contracts
relating to or for the benefit of current, future or former employees,
officers or directors (excluding sales persons) of the Retained Business
requiring annual base payments going forward in excess of $250,000;
(B) Contracts relating to the borrowing of money or obtaining of or
extension of credit (other than in the ordinary course of business),
including letters of credit, guarantees and material security agreements;
(C) joint venture, partnership and similar Contracts (excluding joint
purchasing arrangements with no minimum purchase requirements), involving a
sharing of profits or expenses, that are material or involve any obligation
on the part of the Company to commit capital (excluding commitments not
exceeding $100,000 in the aggregate);
(D) Contracts prohibiting or materially restricting the ability of any
Retained Company to conduct its business, to engage in any business or
operate in any geographical area or to compete with any Person;
(E) Contracts that are material to the business, operations, results of
operations, condition (financial or otherwise), assets or properties of the
Retained Companies taken as a whole;
(F) any employment agreement (and any other agreement involving annual
payments in excess of $150,000) with change of control or "event risk"
provisions relating to the Company; and
(G) any employment agreement or other agreement requiring the Company to
compensate any employee for any tax imposed as a result of any excess
parachute payment under Section 280G of the Code.
(ii) All Material Contracts are legal, valid, binding, in full force and
effect and enforceable against each party thereto, except to the extent that
any failure to be enforceable, individually and in the aggregate, would not
reasonably be expected to have or result in a Material Adverse Effect on the
Retained Companies, taken as a whole, provided that no representation is
made as to the enforceability of any non-competition provision in any
employment agreements. Except as set forth in Schedule 3.01(n), there does
not exist under any Material Contract any violation, breach or event of
default, or event or condition that, after notice or lapse of time or both,
would constitute a violation, breach or event of default thereunder, on the
part of any of the Retained Companies or, to the knowledge of the Company,
any other Person, other than such violations, breaches or events of default
as would not, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole. Except as set forth in
Schedule 3.01(m), the enforceability of all Material Contracts will not be
adversely affected in any manner by the execution, delivery or performance
of this Agreement or the consummation of the Transactions, and no Material
Contract contains any change in control or other terms or conditions that
will become applicable or inapplicable as a result of the consummation of
the Transactions.
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(n) TAXES. (i) Except as set forth on Schedule 3.01(n), (A) all Tax
Returns required to be filed by or on behalf of each of the Company and the
Retained Subsidiaries have been filed except to the extent that a failure to
file, individually or in the aggregate, would not have a Material Adverse Effect
on the Retained Companies, taken as a whole; (B) all such Tax Returns filed are
complete and accurate in all respects, other than any incompleteness or any
inaccuracy that would not, individually or in the aggregate, have a Material
Adverse Effect on the Retained Companies taken as a whole, and all Taxes shown
to be due on such Tax Returns have been paid; (C) no written claim (other than a
claim that has been finally settled) has been made by a taxing authority that
any of the Company or the Retained Subsidiaries is subject to an obligation to
file Tax Returns or to pay or collect Taxes imposed by any jurisdiction in which
such Retained Company does not file Tax Returns or pay or collect Taxes, other
than any such claim that would not have a Material Adverse Effect on such
Retained Company or for which adequate reserves have been provided on the
balance sheet contained in the Unaudited Company Business Financial Statements
and the Pro Forma Balance Sheet; (D) there is no deficiency with respect to any
Taxes which would, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole, other than any such
deficiency for which adequate reserves have been provided on the balance sheet
contained in the Unaudited Company Business Financial Statements and the Pro
Forma Balance Sheet; and (E) all material assessments for Taxes due with respect
to completed and settled examinations or concluded litigation have been paid
which, individually or in the aggregate (with respect to any Retained Company),
exceed $100,000. As used in this Agreement, "Taxes" shall include all federal,
state, local and foreign income, franchise, property, sales, excise and other
taxes, tariffs or governmental charges of any nature whatsoever, including
interest and penalties, and additions thereto; and "Tax Returns" shall mean all
federal, state, local and foreign tax returns, declarations, statements,
reports, schedules, forms and information returns relating to Taxes.
(ii) Except as set forth in Schedule 3.01(n), each of the Company and
the Retained Subsidiaries has duly and timely withheld all Taxes required to
be withheld in connection with its business and assets, and such withheld
Taxes have been either duly and timely paid to the proper governmental
authorities or properly set aside in accounts for such purpose, except to
the extent that any failure to do so would not have a Material Adverse
Effect on the Retained Companies, taken as a whole.
(iii) Except as set forth in Schedule 3.01(n), (A) none of the Company
and the Retained Subsidiaries is a party to or bound by or has any
obligation under any Tax allocation, sharing, indemnification or similar
agreement or arrangement (other than any agreement for the acquisition of
one or more of the Retained Subsidiaries) with any Person other than any of
the Retained Companies, which might result in a Material Adverse Effect to
the Retained Company which entered into such agreement or arrangement; and
(B) none of the Company and the Retained Subsidiaries is or has been at any
time a member of any group of companies filing a consolidated, combined or
unitary income tax return other than any such group (1) the common parent of
which is the Company or any Retained Subsidiary or (2) the common parent of
which has not held any asset other than shares of one or more of the
Retained Subsidiaries.
(iv) Except as set forth in Section 3.01(n) of the Disclosure Schedule,
(A) all taxable periods of each of the Company and the Retained Subsidiaries
ending before December 31, 1993 are closed or no longer subject to audit;
(B) none of the Company and the Retained Subsidiaries is currently under any
audit by any taxing authority as to which such taxing authority has asserted
in writing any claim which, if adversely determined, could have a Material
Adverse Effect on such Retained Company; and (C) no waiver of the statute of
limitations is in effect with respect to any taxable year of the Company or
any of the Retained Subsidiaries.
(o) EMPLOYEE BENEFIT PLANS AND RELATED MATTERS; ERISA. (i) Employee
Benefit Plans. Each Employee Benefit Plan that provides for equity-based
compensation or that has associated costs that are expected to be material to
the Company or the Retained Companies in the aggregate and that is expected to
provide for contributions to be made by any of the Retained Companies or their
Employees after the date hereof or to permit the accrual of additional benefits
by any Employee of the Retained Companies after the date hereof is either listed
on Schedule 3.01(o) or has been filed with the SEC as a material contract
(collectively, the
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"Retained Plans"). Except as set forth on Schedule 3.01(o), neither the Company
nor any of its Subsidiaries has communicated to any Employee any intention or
commitment to modify any Retained Plan or to establish or implement any other
employee or retiree benefit or compensation plan or arrangement which would, if
it existed on the date hereof, be a Retained Plan.
(ii) QUALIFICATION. Except to the extent that failure to meet the
requirements of section 401(a) of the Code would not result in any material
liability as to which adequate reserves have not been established, each Employee
Benefit Plan intended to be qualified under section 401(a) of the Code, and the
trust (if any) forming a part thereof, (A) has received a favorable
determination letter from the IRS as to its qualification under the Code and to
the effect that each such trust is exempt from taxation under section 501(a) of
the Code, and nothing has occurred since the date of such determination letter
that could adversely affect such qualification or tax-exempt status or (B) a
timely application for such a favorable determination letter was filed and the
Company has no reason to believe that such a favorable determination letter will
not be granted.
(iii) COMPLIANCE; LIABILITY. (A) No liability has been or is reasonably
expected to be incurred under or pursuant to Title I or IV of ERISA or the
penalty, excise Tax or joint and several liability provisions of the Code
relating to employee benefit plans that is or would be material to the Company
or, following the Closing, to the Retained Companies in the aggregate.
(B) Each of the Employee Benefit Plans has been operated and
administered in all respects in compliance with its terms, all applicable
laws and all applicable collective bargaining agreements, except for any
failure so to comply that, individually and in the aggregate, could not
reasonably be expected to result in a material liability or obligation on
the part of the Retained Companies in the aggregate. There are no pending or
threatened claims by or on behalf of any of the Employee Benefit Plans, by
any Employee or otherwise involving any such Employee Benefit Plan or the
assets of any Employee Benefit Plan (other than routine claims for benefits,
all of which have been fully reserved for on the regularly prepared balance
sheets of the Company) which would reasonably be expected to result in any
material liability to the Retained Companies in the aggregate.
(C) Except to the extent that it would not give rise to a material
liability or obligation on the part of the Company or the Retained
Companies, no Employee is or will become entitled to post-employment
benefits of any kind by reason of employment with the Company or its
Subsidiaries, including, without limitation, death or medical benefits
(whether or not insured), other than (x) coverage mandated by section 4980B
of the Code, (y) retirement benefits payable under any Plan qualified under
section 401(a) of the Code or (z) accrued deferred compensation. The
consummation of the Transactions will not result in an increase in the
amount of compensation or benefits or the acceleration of the vesting or
timing of payment of any compensation or benefits payable to or in respect
of any Employee by any of the Retained Companies.
(iv) Employees, Labor Matters, etc. Except as set forth on Schedule 3.01(o),
neither the Company nor any of its Subsidiaries is a party to or bound by any
collective bargaining agreement, and there are no labor unions or other
organizations representing, purporting to represent or attempting to represent
any employees employed by the Company or any of its Subsidiaries.
Since April 26, 1997, there has not occurred or been threatened any strike,
slowdown, picketing, work stoppage, concerted refusal to work overtime or other
similar labor activity with respect to any employees of the Company or any of
its Subsidiaries. Except as set forth on Schedule 3.01(o), there are no labor
disputes currently subject to any grievance procedure, arbitration or litigation
and there is no petition pending or threatened with respect to any employee of
any the Company or its Subsidiaries. The Company and its Subsidiaries has
complied with all applicable Laws pertaining to the employment or termination of
employment of their respective employees, including, without limitation, all
such laws relating to labor relations, equal employment opportunities, fair
employment practices, prohibited discrimination or distinction and other similar
employment activities, except for any failure so to comply that, individually
and in the aggregate, could not result in any material liability to the Retained
Companies in the aggregate.
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(p) ENVIRONMENTAL MATTERS. Except as disclosed in the Filed Company SEC
Documents or as set forth on Schedule 3.01(p) and except for such matters that,
individually or in the aggregate, would not have a Material Adverse Effect on
the Retained Companies, taken as a whole, (i) the Retained Companies are in
compliance with all applicable Environmental Laws (as defined below), (ii) the
Retained Companies have all Permits required under Environmental Laws for the
operation of the Retained Business as presently conducted ("Environmental
Permits"), (iii) none of the Retained Companies has received notice from any
Governmental Entity asserting that any of the Retained Companies may be in
violation of, or liable under, any Environmental Law, and (iv) there are no
actions, proceedings or claims pending (or, to the knowledge of the Retained
Companies, threatened) seeking to impose any liability on the Retained Companies
in respect of any Environmental Laws, Environmental Permits or Hazardous
Substances.
For purposes of this Agreement, "Environmental Law" means any federal,
state, local or foreign law, statute, regulation or decree relating to (x) the
protection of the environment or (y) the use, storage, treatment, generation,
transportation, processing, handling, release or disposal of Hazardous
Substances, in each case as in effect on the date hereof. "Hazardous Substance"
means any waste, substance, material, pollutant or contaminant listed, defined,
designated or classified as hazardous, toxic or radioactive, or otherwise
regulated, under any Environmental Law.
(q) DELAWARE LAW. The Company has taken all action necessary to ensure
that the provisions of Section 203 of the Delaware General Corporation Law (the
"DGCL") will not be applicable to Purchaser or its Affiliates as a result of the
transactions contemplated by this Agreement.
(r) STATUS OF SHARES. The Shares being issued at the Closing have been
duly authorized by all necessary corporate action on the part of the Company,
and at Closing such Shares will have been validly issued and, assuming payment
therefor has been made, will be fully paid and nonassessable, and the issuance
of such Shares will not be subject to preemptive rights of any other stockholder
of the Company. The Warrant Shares and the Special Warrant Shares have been duly
authorized by all necessary corporate action on the part of the Company, and
such shares of Common Stock have been validly reserved for issuance, and,
assuming payment therefor has been made, upon issuance and exercise of the
Warrants or the Special Warrants, as the case may be, will be validly issued and
outstanding, fully paid and nonassessable. Assuming the Company Stockholder
Approval has been obtained, the Shares, Warrants and Special Warrants will be
eligible for listing on the Nasdaq Stock Market.
(s) INTELLECTUAL PROPERTY. The Intellectual Property that is owned by the
Retained Companies constitutes all of the Intellectual Property that is material
to the Retained Companies as a whole, except for Intellectual Property subject
to written or oral licenses, agreements or arrangements pursuant to which the
use of Intellectual Property by any Retained Company is permitted by any Person
(the "Company Intellectual Property"). The Company Intellectual Property that is
owned by the Retained Companies is owned free from any Liens (other than
Permitted Liens). Except as set forth in Schedule 3.01(s), all material
Intellectual Property Licenses are in full force and effect in accordance with
their terms, and are free and clear of any Liens (other than Permitted Liens).
Except as set forth in Schedule 3.01(s), immediately after the Closing, the
Retained Companies will own or have the right to use all the Company
Intellectual Property, in each case free from Liens (except for Permitted Liens
incurred in the ordinary course of business) and on the same terms and
conditions as in effect prior to the Closing. Except as set forth in Schedule
3.01(s), the conduct of the Retained Business does not infringe or conflict with
the rights of any third party in respect of any Intellectual Property, except
where such conduct would not materially affect the ability of the Retained
Companies to conduct their business as presently conducted. Except as set forth
in Schedule 3.01(s), to the knowledge of the Company, none of the Company
Intellectual Property is being infringed by any third party except where such
infringement would not have a Material Adverse Effect on the Retained Companies
taken as a whole. Except as set forth in Schedule 3.01(s), there is no claim or
demand of any Person pertaining to, or any proceeding which is pending or, to
the knowledge of the Company, threatened, that challenges the rights of any of
the Retained Companies in respect of any Company Intellectual Property, or that
claims that any default exists under any Intellectual
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Property License, except where such claim, demand or proceeding would not
materially affect the ability of the Retained Companies to conduct their
business as presently conducted. Except as set forth in Schedule 3.01(s), none
of the Company Intellectual Property is subject to any outstanding order,
ruling, decree, judgment or stipulation by or with any court, tribunal,
arbitrator, or other Governmental Entity materially adverse to the Company.
Except as set forth in Schedule 3.01(s), the Intellectual Property owned by the
Retained Companies and material to the Retained Companies taken as a whole has
been duly registered with, filed in or issued by, as the case may be, the
appropriate filing offices, domestic or foreign, to the extent necessary or
desirable to ensure usual and customary protection for the Company Intellectual
Property in the relevant jurisdiction under any applicable law, and the same
remain in full force and effect. The Retained Companies have taken all necessary
actions to ensure usual and customary protection for the Company Intellectual
Property in the relevant jurisdiction of the Company Intellectual Property
(including maintaining the secrecy of all confidential Intellectual Property)
under any applicable law.
(t) Guarantees. Except as set forth on Schedule 3.01(t), none of the
obligations or liabilities of any of the Distributed Companies will be
guaranteed by or subject to a contingent obligation of any of the Retained
Companies following the Distributions (excluding lease guarantees involving
obligations in an aggregate amount not to exceed $100,000).
(u) Brokers or Finders. Except as set forth on Schedule 3.01(u), no agent,
broker, investment banker or other firm is or will be entitled to any broker's
or finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement.
(v) Acquisitions. Schedule 3.01(v) sets forth a true and correct list of the
25 largest acquisitions (in terms of aggregate consideration) of businesses made
by the Company since its inception. The Company has provided Purchaser with
copies of the acquisition agreements and all schedules thereto for each
acquisition listed on Schedule 3.01(v).
(w) Disclosure. No representation or warranty by the Company contained in
this Agreement or in any certificate to be furnished by or on behalf of the
Company pursuant hereto contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein, in light of the circumstances under
which they were made, not misleading with respect to the Retained Business as a
whole or the transactions contemplated by this Agreement.
(x) Fairness Opinion. The Board of Directors of the Company has received a
fairness opinion, customary in form and substance, from Morgan, Stanley & Co.,
Incorporated.
SECTION 3.02 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
represents and warrants as of the date hereof as follows:
(a) ORGANIZATION. Purchaser is a limited liability company duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, with all requisite power and authority to
own, lease and operate its properties and to conduct its business as now
being conducted.
(b) AUTHORITY. Purchaser has the requisite limited liability company
power and authority to execute, deliver and perform each Transaction
Agreement to which it is a party and to consummate the Transactions. All
necessary action required to have been taken by or on behalf of Purchaser by
applicable law, its limited liability company agreement or otherwise to
authorize the approval, execution, delivery and performance by Purchaser of
this Agreement and the consummation by it of the Transactions have been duly
authorized, and no other proceedings on its part are or will be necessary to
authorize this Agreement or for it to consummate the Transactions. This
Agreement is a valid and binding agreement of Purchaser, enforceable against
Purchaser in accordance with the terms hereof, assuming that this Agreement
is a valid and binding agreement of the Company.
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(c) CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the execution
and delivery of this Agreement nor the performance by Purchaser of its
obligations hereunder will conflict with, result in a breach of the terms,
conditions or provisions of, constitute a default under, result in the
creation of any mortgage, security interest, encumbrance, lien or charge of
any kind upon any of the properties or assets of Purchaser pursuant to, or
require any consent, approval or other action by or any notice to or filing
with any court or administrative or governmental body pursuant to, the
organizational documents or agreements of Purchaser or any agreement,
instrument, order, judgment, decree, statute, law, rule or regulation by
which Purchaser is bound (assuming that the Company shall have made or
obtained all consents, approvals, orders, authorizations, registrations,
declarations or filings referred to in Section 3.01(c)(ii)), except for
filings after the Closing under Section 13(d) of the Exchange Act and
filings under the HSR Act.
(d) ACQUISITION FOR INVESTMENT. Purchaser is acquiring the Shares,
Warrants and Special Warrants being purchased by it for its own account for
the purpose of investment and not with a view to or for sale in connection
with any distribution thereof, and Purchaser has no present intention or
plan to effect any distribution of Shares, Warrants, Special Warrants,
Warrant Shares or Special Warrant Shares; provided that the disposition of
such Purchaser's property shall at all times be and remain within its
control and subject to the provisions of this Agreement and the Registration
Rights Agreement. Purchaser has delivered to the Company a complete and
correct copy of a commitment letter from the Fund for $270 million of common
equity financing. The Fund constitutes a "venture capital operating company"
within the meaning of Section 2510.3-101(d) of the regulations promulgated
under ERISA and the transactions contemplated by this Agreement shall not
adversely affect such status.
(e) OWNERSHIP OF SECURITIES. At the date hereof Purchaser does not
Beneficially Own, directly or, to the knowledge of Purchaser, indirectly (or
have any option or other right to acquire), any securities of the Company
other than the Shares, Warrants and Special Warrants being purchased by it
hereunder.
(f) BROKERS OR FINDERS. Except as set forth in Schedule 3.02(f), no
agent, broker, investment banker or other firm is or will be entitled to any
broker's or finder's fee or any other commission or similar fee from
Purchaser in connection with any of the transactions contemplated by this
Agreement.
(g) FUTURE ACQUISITIONS. Purchaser has no present plan or intention to
acquire, directly or indirectly, shares of capital stock comprising 50% or
more of the Total Voting Power or 50% or more of the total fair market value
of all shares of outstanding capital stock of the Company.
ARTICLE IV
CORPORATE GOVERNANCE
SECTION 4.01 COMPOSITION OF THE BOARD OF DIRECTORS.
(a) At and after the Closing, the Board of Directors of the Company shall
consist of nine directors (subject to the right to increase the Board of
Directors pursuant to Section 4.01(b)(iii)). Three members of the Board of
Directors shall initially be designated by the Purchaser (the "Investor
Directors"). Six members of the Board (the "Non-Investor Directors") shall
initially be designated by the Company, subject to the conditions set forth in
Section 9.03(l), and shall include the chief executive officer of the Company.
So long as Purchaser shall have the right to nominate at least two directors
pursuant to clause (i) below, Purchaser shall be entitled to designate the
Chairman of the Board of Directors, provided that the Chairman of the Board, if
designated by Purchaser, shall be an Investor Director.
(b) Purchaser shall be entitled to nominate three directors for election,
provided:
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(i) if the total number of shares of Common Stock represented by the Shares,
the Special Warrants and the Warrants ("Purchaser's Total Securities") declines
by more than 33 1/3% but less than 66 2/3% from Purchaser's Total Securities at
Closing by reason of sales or other dispositions of Common Stock, Warrants or
Special Warrants by Purchaser, Purchaser shall have the right to nominate two
directors;
(ii) if Purchaser's Total Securities declines by 66 2/3% or more from
Purchaser's Total Securities at Closing, but Purchaser's Percentage Interest
remains at least 5% of the outstanding Voting Securities, by reason of sales or
other dispositions of Common Stock, Warrants or Special Warrants by Purchaser,
Purchaser shall have the right to nominate one director;
(iii) in the event that the size of the Board of Directors shall be
increased, Purchaser shall have the right to at least proportionate
representation on the Board following such increase based on the composition of
the Board as between Investor Directors and Non-Investor Directors immediately
prior to such increase; provided that in no event shall the Board consist of
more than 12 directors; and
(iv) if the chief executive officer of the Company is not then a member of
the Board of Directors or a nominee for membership thereon, the Purchaser shall
be entitled to approve an additional nominee to the Board of Directors.
(c) The Company shall not, and shall not permit its Affiliates to, solicit
proxies (as such terms are used in the proxy rules of the SEC) of the
stockholders of the Company to vote against any of the nominees selected by the
Purchaser or for the approval of any stockholder or other proposals that are
inconsistent with the rights afforded the Purchaser pursuant to this Agreement
and the other Transaction Agreements.
SECTION 4.02 SUPERMAJORITY VOTING PROVISIONS. So long as Purchaser has the
right to designate at least two nominees to the Board of Directors of the
Company pursuant to Section 4.01(b):
(a) neither the Company nor the Board of Directors shall cause or permit to
occur any of the following events without the affirmative vote of not less than
three-fourths of the members of the Board of Directors of the Company:
(i) any issuance of Equity Securities other than (A) issuances pursuant to
employee stock option or incentive compensation plans of Equity Securities
(other than in respect of options outstanding as of the date hereof) in an
aggregate amount not to exceed 5% of the Common Stock outstanding immediately
following the Closing on a fully diluted basis ("Permitted Options"), or (B)
issuances pursuant to acquisitions or in public offerings, such issuances not to
exceed 5% of the Common Stock outstanding immediately following the Closing on a
fully diluted basis in any one issuance or 20% in the aggregate, provided,
however, that no such issuance shall be permitted if as a result thereof any
Person would own 10% of the Common Stock outstanding immediately following such
issuance on a fully diluted basis;
(ii) (A) any merger, consolidation or other business combination to which
the Company is a party or any decision whether to approve a tender offer
involving the Company's Equity Securities, in any case other than a Cash
Transaction (as defined in Section 4.02(b)(i) below) or a Permitted Securities
Transaction (as defined in Section 4.02(b)(ii)) below, or (B) any amendment of
any shareholder rights plan (or "poison pill") maintained by the Company and any
redemption of the rights issued thereunder, except to permit a Cash Transaction
or a Permitted Securities Transaction;
(iii) any sale, lease, transfer or other disposition in one transaction or a
series of related transactions of all or substantially all the assets of the
Company, in any case other than a Cash Transaction or Permitted Securities
Transaction; or
(iv) any major recapitalization or similar transaction or series of
transactions involving the Company;
(v) any dissolution or complete or partial liquidation of the Company; or
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(vi) any amendment or modification of the Company Charter or the Company
By-laws that is inconsistent with the provisions of this Agreement and the
rights afforded to Purchaser hereunder.
(b) For purposes of this Agreement:
(i) "Cash Transaction" means any merger, consolidation or other business
combination or sale of all or substantially all the assets of the Company to
which the Company is a party or any decision whether to approve a tender offer
for all of the Company's Equity Securities, in any case if the consideration
involved in such transaction is all cash;
(ii) "Permitted Securities Transaction" means any merger, consolidation or
other business combination to which the Company is a party or any decision
whether to approve a tender or exchange offer for all of the Company's Equity
Securities, in any case if all consideration involved in such transaction is
cash and/ or shares of a registered, freely tradeable, listed common equity
security for which there was an aggregate public market capitalization equal to
at least the greater of $5 billion or the market capitalization of the Company's
Equity Securities, in each case determined immediately prior to the approval of
such transaction by the Board of Directors of the Company.
SECTION 4.03 COMMITTEES. Subject to any law or stock exchange rule
prohibiting committee membership by Affiliates of the Company, Purchaser shall
be entitled to at least proportionate representation by Investor Directors on
any committee of the Board of Directors, based on the composition of the Board
as between Investor Directors and Non-Investor Directors.
SECTION 4.04 BY-LAWS. The Company and Purchaser shall take or cause to be
taken all lawful action necessary to ensure at all times as of and following the
Closing Date that the Company By-laws are not inconsistent with the provisions
of this Agreement or the transactions contemplated hereby.
SECTION 4.05 TERMINATION OF ARTICLE IV. This Article IV shall terminate and
be of no further force or effect on the earlier to occur of (a) the fifth
anniversary of the Closing and (b) the date on which the percentage of the Total
Voting Power represented by the aggregate voting power of all Voting Securities
then owned by Purchaser (other than any Voting Securities acquired in violation
of this Agreement) is greater than 50%.
ARTICLE V
EQUITY PURCHASES FROM THE COMPANY
SECTION 5.01 SUBSCRIPTION RIGHTS. So long as Purchaser has the right to
nominate an Investor Director pursuant to Section 4.01, if the Company's Board
of Directors shall authorize the issuance of New Securities for cash (other than
any New Securities issued (i) to officers, employees or directors of the Company
or any of its Subsidiaries pursuant to any employee stock offering, plan or
arrangement (x) in effect on the date hereof, (y) which constitutes Permitted
Options or (z) approved by any Investor Director, (ii) in connection with any
acquisition transaction, (iii) in any public offering registered under the
Securities Act or in any financing transaction in which sales or resales are
effected through Rule 144A or Regulation S under the Securities Act or any
successor or comparable provisions thereto and (iv) to Purchaser or its
Affiliates (other than the Company and its Subsidiaries)), then, prior to each
such issuance of New Securities, the Company shall offer to Purchaser a Pro Rata
Share of such New Securities. Any offer of New Securities made to Purchaser
under this Section 5.01 shall be made by notice in writing (the "Subscription
Notice") at least 10 Business Days prior to the date on which the meeting of the
Company's Board of Directors is held to authorize the issuance of such New
Securities. The Subscription Notice shall set forth (i) the number of New
Securities proposed to be issued to Persons other than Purchaser and the terms
of such New Securities, (ii) the consideration (or manner of determining the
consideration), if any, for which such New Securities are proposed to be issued
and the terms of payment, (iii) the number of
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New Securities offered to Purchaser in compliance with the provisions of this
Section 5.01 and (iv) the proposed date of issuance of such New Securities. Not
later than 20 Business Days after its receipt of a Subscription Notice,
Purchaser shall notify the Company in writing whether it elects to purchase all
or any portion of the New Securities offered to Purchaser pursuant to the
Subscription Notice. If Purchaser shall elect to purchase any such New
Securities, the New Securities which it shall have elected to purchase shall be
issued and sold to Purchaser by the Company at the same time and on the same
terms and conditions as the New Securities are issued and sold to third parties.
If, for any reason, the issuance of New Securities to third parties is not
consummated, Purchaser's right to its Pro Rata Share of such issuance shall
lapse, subject to Purchaser's ongoing subscription right with respect to
issuances of New Securities at later dates or times.
SECTION 5.02 ISSUANCE AND DELIVERY OF NEW SECURITIES AND VOTING STOCK. The
Company represents and covenants to Purchaser that (i) upon issuance, all the
shares of New Securities sold to Purchaser pursuant to this Article V shall be
duly authorized, validly issued, fully paid and nonassessable and will be
approved (if outstanding securities of the Company of the same type are at the
time already approved) for listing on the Nasdaq Stock Market or for quotation
or listing on the principal trading market for the securities of the Company at
the time of issuance, (ii) upon delivery of such shares, they shall be free and
clear of all claims, Liens, encumbrances, security interests and charges of any
nature and shall not be subject to any preemptive right of any stockholder of
the Company and (iii) in connection with any such issuance, the Company shall
take such actions as are specified in Section 3.01(q) with respect to such
shares. Each share issued or delivered by the Company hereunder shall bear the
legend set forth in Section 13.11.
ARTICLE VI
LIMITATIONS ON PURCHASES OF ADDITIONAL EQUITY SECURITIES
SECTION 6.01 PURCHASES OF EQUITY SECURITIES. (a) Except as permitted by
Section 6.01(b) or 6.01(c), neither Purchaser nor its Affiliates will directly
or indirectly acquire any securities (including by exercise of the Warrants or
Special Warrants) or take any other action that would cause the percentage of
the Total Voting Power represented by the aggregate voting power of all Voting
Securities then held by Purchaser to equal or exceed 25%.
(b) Nothing herein shall prevent Purchaser from purchasing any Securities
pursuant to the terms of this Agreement (including through exercise of the
Warrants and the Special Warrants in accordance with their respective terms) and
the Purchaser shall not be treated as having breached any covenant in this
Agreement solely as a result of such purchase.
(c) This Section 6.01 shall terminate and be of no further force or effect
on the earlier to occur of (i) the fifth anniversary of the Closing and (ii) the
date on which the percentage of the Total Voting Power represented by the
aggregate voting power of all Voting Securities then owned by Purchaser (other
than any Voting Securities acquired in violation of this Agreement) is greater
than 50%.
SECTION 6.02 ADDITIONAL LIMITATIONS. Other than in connection with a Buyout
Transaction that is not solicited or proposed by Purchaser or its Affiliates or
as specifically approved by a majority of the Non-Investor Directors, during the
five-year period beginning on the date of this Agreement, Purchaser shall not,
and shall not permit its Affiliates to:
(i) contrary to the recommendation of the Company's Board of Directors, in
any "solicitation" of "proxies" (as such terms are used in the proxy rules of
the SEC), vote any shares of capital stock of the Company, initiate, propose or
otherwise solicit stockholders of the Company for the approval of one or more
stockholder proposals or induce or attempt to induce any other individual, firm,
corporation, partnership or other entity to initiate any stockholder proposal,
provided, however, that this clause shall be
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inapplicable to any solicitation of proxies, or inducement or attempt to induce
any other entity to initiate any stockholder proposal, in respect of any Cash
Transaction or Permitted Securities Transaction approved by the Board of
Directors of the Company without the approval of at least one Investor Director;
(ii) deposit any Voting Securities into a voting trust or subject any Voting
Securities to any arrangement or agreement with respect to the voting of such
securities or form, join a partnership, limited partnership, syndicate or other
group, or otherwise act in concert with any other Person, for the purpose of
acquiring, holding, voting or disposing of Voting Securities, or otherwise
become a "person" within the meaning of Section 13(d)(3) of the Exchange Act; or
(iii) make a public request to the Company (or its directors, officers,
stockholders, employees or agents) to amend or waive any provisions of this
Section 6.02.
ARTICLE VII
TRANSFER OF COMMON STOCK
SECTION 7.01 TRANSFER OF COMMON STOCK. (a) Other than as specifically
approved by a majority of the Non-Investor Directors, prior to the second
anniversary of the Closing, Purchaser will not, directly or indirectly, sell,
transfer or otherwise dispose of any Shares, Special Warrants or Warrants
(except to any Affiliate of Purchaser).
(b) Other than as specifically approved by a majority of the Non-Investor
Directors, prior to the fifth anniversary of the Closing, Purchaser will not,
directly or indirectly, sell, transfer or otherwise dispose of any Shares except
(i) pursuant to a registered underwritten public offering intended to achieve a
broad distribution in accordance with the Registration Rights Agreement, (ii) in
accordance with the volume and manner-of-sale limitations of Rule 144
promulgated under the Securities Act (regardless of whether such limitations are
applicable), (iii) in a transaction exempt from the registration requirements of
the Securities Act to any Person or group (within the meaning of Section
13(d)(3) of the Exchange Act) of Persons, if, prior to and after giving effect
to such sale, such Person or group of Persons (A) does not or would not to
Purchaser's knowledge after due inquiry, Beneficially Own (provided that for
purposes of this Section 7.01(a) a Person shall be deemed to Beneficially Own
all shares that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time) 5% or more of the
then outstanding shares of Common Stock or (B) is an investment company
registered under the Investment Company Act of 1940, as amended, or (iv) in
connection with a Buyout Transaction. Purported transfers of shares of Common
Stock that are not in compliance with this Article VII shall be of no force or
effect.
(c) The provisions of clauses (a) and (b) of this Article VII shall
terminate and be of no further force or effect on the earlier to occur of (i)
the fifth anniversary of the Closing and (ii) the date on which the percentage
of the Total Voting Power represented by the aggregate voting power of all
Voting Securities then owned by Purchaser (other than any Voting Securities
acquired in violation of this Agreement) is greater than 50%.
(d) Prior to the seventh anniversary of the Closing, the Purchasers will
not, directly or otherwise dispose of Shares representing 15% or more of the
then outstanding Common Stock to any Person or group (within the meaning of
Section 13(d)(3) of the Exchange Act) without first offering the Company the
right to make an offer to purchase the Shares proposed to be so sold,
transferred or otherwise disposed of. The provisions of the previous sentence
shall terminate and be of no effect on the date on which the percentage of the
Total Voting Power represented by the aggregate voting power of all Voting
Securities then owned by Purchaser (other than any Voting Securities acquired in
violation of this Agreement) is greater than 50%.
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ARTICLE VIII
COVENANTS AND ADDITIONAL AGREEMENTS
SECTION 8.01 COVENANTS OF THE COMPANY. During the period from the date of
this Agreement and continuing until the Closing, the Company agrees as to itself
and the Retained Subsidiaries that, except as set forth in the Distribution
Agreements or in Schedule 8.01, or to the extent that Purchaser otherwise
consents in writing:
(a) ORDINARY COURSE. The Retained Business will be conducted in the
ordinary course in substantially the same manner as presently conducted and the
Company will use commercially reasonable efforts to keep available the services
of the current officers and employees engaged primarily in the Retained Business
and to preserve the relationships with customers, suppliers and others having
business dealings with the Retained Business.
(b) NO ACQUISITIONS. The Company will not, nor will it permit any of the
Retained Subsidiaries to, acquire or agree to acquire (excluding any non-binding
letters of intent) by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets (other
than inventory) involving aggregate consideration having a value in excess of
$25 million in any case or $150 million in the aggregate (in either case whether
payable in cash, stock or a combination thereof); provided that (i) no such
consideration shall be payable in Common Stock or stock of any Retained
Subsidiary and (ii) any such consideration payable in stock of a Distributed
Company shall not be payable prior to completion of the Distributions; and
provided, further, that this paragraph (b) shall not limit the ability of the
Company or the Retained Subsidiaries to make acquisitions in respect of
businesses which will constitute part of a Distributed Company if all
acquisition debt associated therewith is allocated to such Distributed Company.
(c) NO DISPOSITIONS. The Company will not, nor will it permit any of the
Retained Subsidiaries to, sell, lease, license, encumber or otherwise dispose
of, or agree to sell, lease, license, encumber or otherwise dispose of, any of
the Assets of the Retained Business other than at fair market value in the
ordinary course of business consistent with past practice.
(d) OTHER TRANSACTIONS. The Company will not, nor will it permit any of
the Retained Subsidiaries to, do any of the following (except as otherwise
expressly provided herein or in any other Transaction Agreement):
(i) Amend its Certificate of Incorporation (except to the extent necessary
to implement a shareholder rights plan pursuant to clause (ii) below), By-laws
or other organizational documents (except for immaterial amendments to the
Certificate of Incorporation or By-laws of any Subsidiaries, provided such
amendments in no way adversely affect Purchaser or the rights granted to
Purchaser hereunder);
(ii) declare or pay any non-cash dividend or make any non-cash distribution
with respect to the Assets; provided, however, that the Company shall be
permitted to issue rights under a customary shareholder rights plan or "poison
pill" that (A) expires at Closing and (B) expressly exempts Purchaser and its
Affiliates from its operation;
(iii) redeem or otherwise acquire any shares of its capital stock or issue
any capital stock (except upon exercise of options issued prior to the date
hereof under a Company Stock Plan), or any option, or warrant or right relating
thereto (other than grants under the Company's 1994 Amended and Restated Long
Term Incentive Plan of options to acquire not more than 685,778 shares of Common
Stock in the aggregate from the separate "pools" of options that the Company has
heretofore allocated in connection with certain acquisitions that the Company
has made for award to employees of such acquired companies; provided that each
such option shall (A) have a per share exercise price that is not less than the
fair market value
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per share of Common Stock at the date of grant, (B) vest and become exercisable
no more rapidly than 25% on each of the first four anniversaries of the date of
grant, and (C) shall not vest or become earlier exercisable as a result of the
consummation of the Transactions);
(iv) incur any liabilities, obligations or indebtedness for borrowed money
or guarantee any such liabilities, obligations or indebtedness, other than in
the ordinary course of business consistent with past practice (except as
otherwise provided herein with respect to the Proposed Financings or as incurred
in connection with acquisitions to the extent permitted hereby) and in an
aggregate amount that would not be material to the Company;
(v) permit, allow or suffer any assets of the Retained Business to be
subject to any Lien other than Permitted Liens;
(vi) guarantee or otherwise become contingently liable for any obligation of
any of the Distributed Companies;
(vii) cancel any material indebtedness (individually or in the aggregate)
relating to the Retained Business or waive any claims or rights of substantial
value relating to the Retained Business;
(viii) pay, loan or advance any amount to, or sell, transfer or lease any of
its assets relating to the Retained Business, or enter into any agreement or
arrangement relating to the Retained Business with, any of the Distributed
Companies or any of their respective Affiliates other than in the ordinary
course of business consistent with past practice;
(ix) make any change in any method of accounting or accounting practice or
policy, except as may be required by GAAP;
(x) modify, amend, terminate or permit the lapse of any lease of real
property used in connection with, and which is material to, the Retained
Business (except modifications or amendments associated with renewals of such
leases in the ordinary course of business consistent with past practice of the
Retained Companies with respect to which Purchaser shall have the right to
participate and to approve);
(xi) enter into, terminate, renew or modify any Contract to which the
Company or any Retained Subsidiary is a party or by which any of their assets
are bound and which is material to the Company;
(xii) enter into any agreement or take any action in violation of the terms
of this Agreement or any of the other Transaction Agreements;
(xiii) settle any material tax audit, make or change any tax election or amend
any Tax Returns; or
(xiv) agree, whether in writing or otherwise, to do any of the foregoing.
(e) EMPLOYEE BENEFITS. Except (w) as set forth in Schedule 8.01(e), (x) in
connection with acquisitions to the extent permitted by this Agreement or (y) in
the ordinary course of business and as consistent with past practice (which
shall include normal periodic performance reviews and related benefit increases)
or (z) pursuant to the existing terms of any collective bargaining agreement,
the Company will not, nor will it permit any of the Retained Subsidiaries to (i)
increase in any manner the compensation of any of the officers or other
employees of the Retained Companies; (ii) pay or agree to pay any pension,
retirement allowance or other employee benefit not required by any existing
plan, agreement or arrangement to any such officer or employee, whether past or
present; (iii) enter into, or negotiate, any collective bargaining agreement
with respect to employees of the Retained Companies except as required by law,
in which case the Company or such Retained Subsidiary shall first notify
Purchaser; or (iv) commit itself to any additional pension, profit-sharing,
bonus, incentive, deferred compensation, stock purchase, stock option, equity
purchase (or other equity based plan), stock appreciation right, group
insurance, severance pay, retirement or other employee benefit plan, policy,
program, understanding, agreement or arrangement, or to any employment agreement
or consulting agreement (arising out of prior employment), regardless of the
applicable funding arrangements, with or for the benefit of any officer or
employee of the Retained
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Companies, or amend, renew or extend any of such plan or any of such agreements
in existence on the date hereof in any manner which would, in the case of
clauses (i), (ii), (iii) and (iv) above, result in liabilities that are material
to the Retained Companies taken as a whole.
SECTION 8.02 TRANSACTION PROPOSALS. (a) Subject to Section 8.02(d), the
Company shall not, nor shall it permit any of its Subsidiaries to, nor shall it
authorize or permit any officer, director or employee of, or any investment
banker, attorney, accountant or other advisor, agent or representative of, the
Company or any of its Subsidiaries to, (i) solicit or initiate, or encourage
(including by furnishing non-public information) the submission of, any
Transaction Proposal (as defined below) or (ii) participate in any discussions
or negotiations regarding, or furnish to any Person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Transaction Proposal; provided, however, that prior to the Company Meeting, in
response to an unsolicited written bona fide Transaction Proposal that in the
good faith opinion of the Board of Directors of the Company could reasonably be
expected to result in a Superior Proposal (as defined below), if the Board of
Directors of the Company determines in good faith, after consultation with
outside counsel, that failure to do so could reasonably be expected to result in
a breach of its fiduciary duties to stockholders under applicable law, the
Company may, subject to compliance with Section 8.02(c), (A) furnish information
with respect to the Company to such Person making such proposal pursuant to a
customary confidentiality and standstill agreement with such Person and (B)
participate in negotiations regarding such Transaction Proposal. For purposes of
this Agreement, "Transaction Proposal" means any inquiry, proposal or offer from
any Person relating to (x) any purchase or other acquisition from the Company of
assets representing 25% or more of the net revenues, net income or profits of
the Company and its Subsidiaries, taken as a whole, (y) any purchase or other
acquisition of 10% or more of any class of Equity Securities of the Company, or
(z) any merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving the Company (or any
Subsidiary whose business constitutes 25% or more of the net revenues, net
income or assets of the Company and its Subsidiaries, taken as a whole), in each
case other than the transactions contemplated by this Agreement. Immediately
after the execution and delivery of this Agreement, the Company will, and will
cause its Subsidiaries and Affiliates, and their respective officers, directors,
employees, investment bankers, attorneys, accountants and other agents to, cease
and terminate any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any possible Transaction Proposal.
(b) Nothing contained in this Section 8.02 shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act; provided that except as set forth
in this Section 8.02(b) or as permitted by Section 8.02(d), neither the Board of
Directors of the Company nor any committee thereof shall (A) withdraw or modify,
or propose to withdraw or modify, in a manner adverse to Purchaser, the approval
or recommendation by such Board of Directors or any such committee of this
Agreement or the Transactions, (B) approve or recommend, or propose to approve
or recommend, any Transaction Proposal (C) cause or permit the Company or any of
its Subsidiaries to enter into any agreement with respect to any Transaction
Proposal or (D) terminate this Agreement in response to a Transaction Proposal.
Notwithstanding the foregoing, if prior to the Company Meeting the Company has
received a Transaction Proposal that the Board determines in good faith is a
Superior Proposal, then the Board of Directors of the Company, if it determines
in good faith, after consultation with outside counsel, that failure to do so
could reasonably be expected to result in a breach of its fiduciary duties to
stockholders under applicable law, may (subject to the terms of this sentence
and compliance with the following sentence) (i) withdraw or modify its
recommendation of this Agreement, or the transactions contemplated hereby, (ii)
approve or recommend such Superior Proposal, (iii) cause the Company to enter
into an agreement with respect to a Superior Proposal and (iv) terminate this
Agreement, in each case (as contemplated by this Section 8.02(b)) no earlier
than five Business Days following Purchaser's receipt of a written notice from
the Company advising Purchaser that the Board of Directors of the Company has
received a Superior Proposal, specifying the terms and conditions of such
Superior Proposal and identifying the person making such Superior Proposal;
provided, however, that neither the Company nor its Board of Directors shall
take any of the actions specified in such clauses (i),
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(ii), (iii) or (iv) unless the Company shall have furnished Purchaser with
written notice on a date prior to the date any such actions are proposed to be
taken specifying such actions to be taken. In addition, if the Company or the
Board of Directors of the Company proposes to take any of the actions permitted
by the preceding sentence with respect to any Transaction Proposal, then the
Company shall, prior to the taking of any such action, pay, or cause to be paid,
to Purchaser, Purchaser's Expenses and the Termination Fee (each as defined in
Section 12.09). The term "Superior Proposal" shall mean any bona fide written
Transaction Proposal that has the following characteristics: (1) it is a
proposal to acquire, directly or indirectly, for consideration consisting of
cash and/or readily marketable securities, (x) shares of Common Stock
representing at least 20% of the Total Voting Power, or (y) at least 25% of the
assets of the Retained Subsidiaries and (2) the terms of such proposal in the
good faith judgment of the Board of Directors of the Company, based on advice
from the Company's financial adviser, provide consideration to the Company or
the Company's stockholders that is superior to the consideration provided
pursuant to this Agreement (after taking into account any modifications to this
Agreement proposed by Purchaser).
(c) The Company shall immediately advise Purchaser orally and in writing of
(i) any request for information which may relate to a Transaction Proposal, (ii)
any Transaction Proposal, (iii) any inquiry with respect to or that could lead
to any Transaction Proposal or (iv) any action taken in accordance with Section
8.02(a)(A) or (B), and in each case the material terms and conditions of such
request, Transaction Proposal, inquiry or action and the identity of the Person
making any such request, Transaction Proposal or inquiry with respect to which
such action is taken. The Company will keep Purchaser reasonably informed of
material developments concerning the status and details (including amendments or
proposed amendments) of any such request, Transaction Proposal, inquiry or
action.
SECTION 8.03 MODIFICATION OF TRANSACTION AGREEMENTS; ABANDONMENT OF
DISTRIBUTIONS. Notwithstanding anything to the contrary in this Agreement, the
Company may in its sole discretion modify each of the Transaction Agreements
relating to the Distributions and, if the Board of Directors of the Company
determines in good faith that it is in the best interest of the Company to do
so, abandon the Distributions.
SECTION 8.04 TRANSACTION AGREEMENTS AND SCHEDULES. The Company shall use
reasonable best efforts to cause (i) each of the Transaction Agreements to be
entered into by the Company, School, Travel, Technology or Print, as the case
may be, in connection with the Distributions, and each of the Annexes called for
in this Agreement that have not been provided to Purchaser prior to the
execution of this Agreement, to be delivered to Purchaser and its counsel by
7:00 p.m., New York Time, February 13, 1998 (the "Agreement Delivery Cut-Off
Time"); and (ii) each of the Schedules called for in this Agreement that have
not been provided to Purchaser prior to execution of this Agreement (and prior
to the Schedule Review Cut-Off Time (as defined below) may supplement Schedules
that have previously been supplied or may unilaterally amend this Agreement to
add additional Schedules) to be delivered to Purchaser and its counsel by 7:00
p.m., New York time, January 20, 1998 (the "Schedule Delivery Cut-off Time").
Purchaser shall review such Transaction Agreements, Schedules and Annexes in
good faith. Prior to the applicable Review Cut-off Time (as defined below) the
Company shall make available to Purchaser and its counsel at their request all
documentation related to any item set forth on any Schedule or Annex. Purchaser
shall complete its review of the Transaction Agreements, and the Annexes and
notify the Company that such review is complete by 7:00 p.m., New York time, on
February 27, 1998 (the "Agreement Review Cut-off Time") and shall complete its
review of the Schedules and notify the Company that such review is complete by
7:00 p.m., New York time, on February 3, 1998 (the "Schedule Review Cut-Off
Time"); provided, however, that if any Transaction Agreement, Schedule or Annex
is delivered after the applicable Delivery Cut-off Time, the applicable Review
Cut-off Time for all Transaction Agreements and Annexes and for the Schedules,
as the case may be shall be extended by the number of days elapsed (which, in
any case, shall not be less than one) between the date of such Delivery Cut-off
Time and the date of receipt by Purchaser and its counsel of such Transaction
Agreement or Annex or such Schedule, as the case may be; and provided further,
however, that if (A) the Transaction Agreements are not satisfactory to
Purchaser in its good faith reasonable judgment, (B) the Audited Retained
Business Financial Statements reflect
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financial information materially different from that presented in the Pro Forma
Retained Business Financial Statements, or (C) any new Schedule or change or
addition to the Schedules made after the date hereof is not satisfactory to
Purchaser in its good faith reasonable judgment, Purchaser may terminate this
Agreement upon written notice to the Company without further liability on the
part of Purchaser or the Company other than pursuant to Sections 10.02 and
13.09.
SECTION 8.05 COMPANY STOCKHOLDER APPROVAL; PROXY STATEMENT. (a) The Company
shall call a meeting of its stockholders (the "Company Meeting") for the
purpose, among others, of voting upon the issuance (the "Issuance") of the
Shares, the Special Warrants and the Warrants to Purchaser (the "Company Meeting
Proposal").
(b) The Company will prepare and file with the SEC a proxy statement
relating to the Company Meeting (as amended or supplemented and including
documents incorporated by reference therein, the "Proxy Statement") and shall
use its reasonable best efforts to respond to any comments of the SEC or its
staff and to cause the Proxy Statement to be cleared by the SEC. The Company
shall notify Purchaser of the receipt of any comments from the SEC or its staff
and of any request by the SEC or its staff for amendments or supplements to the
Proxy Statement or for additional information and shall supply Purchaser and its
counsel with copies of all correspondence between the Company or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Proxy Statement. The Company shall give Purchaser and its
counsel the opportunity to review the Proxy Statement prior to its being filed
with the SEC and shall give Purchaser and its counsel the opportunity to review
all amendments and supplements to the Proxy Statement and all responses to
requests for additional information and replies to comments prior to their being
filed with, or sent to, the SEC. Each of the Company and Purchaser agrees to use
its reasonable best efforts, after consultation with the other party hereto, to
respond promptly to all such comments of and requests by the SEC. After the
Proxy Statement has been cleared by the SEC, the Company shall mail the Proxy
Statement to the stockholders of the Company. If at any time prior to the
Company Meeting there shall occur any event that should be set forth in an
amendment or supplement to the Proxy Statement, the Company will prepare and
mail to its stockholders such an amendment or supplement.
(c) The Proxy Statement will not, at the date mailed to the Company's
stockholders and at the date of the Company Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading, except that no
representation is made by the Company with respect to statements made therein
based on information concerning Purchaser or its Affiliates supplied in writing
by Purchaser or any of its Affiliates specifically for inclusion in the Proxy
Statement. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder.
(d) Subject to Section 8.02(b), the Board of Directors of the Company shall
recommend that the Company's stockholders approve the Company Meeting Proposal
and the Company shall use its best efforts to obtain the necessary approvals by
its stockholders of the Company Meeting Proposal.
SECTION 8.06 RETAINED COMPANIES FINANCING. In connection with the Proposed
Financings, the Company and Purchaser shall jointly select all sources of the
Proposed Financings, including determining the respective roles of such sources;
provided, however, that Bankers Trust Company shall have the opportunity to be a
lead in the bank financing with economics at least as favorable as any other
lead in the bank financing if Bankers Trust Company's pricing is competitive. In
addition, (i) Purchaser and its counsel shall have the right to participate in
any discussions or negotiations between the Company and any of its
representatives, on the one hand, and its prospective lenders and their counsel,
on the other, and to comment on draft loan and other documentation in respect of
any such Proposed Financings and (ii) the Company shall provide Purchaser and
its counsel copies of all correspondence between the Company and its lenders
relating thereto. If, prior to the execution of any definitive documentation
with respect to the Proposed Financings, based on its review of such definitive
documentation, Purchaser determines in the
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good faith exercise of its reasonable judgment not to proceed with the
transactions contemplated by this Agreement, Purchaser may terminate this
Agreement upon written notice to the Company.
SECTION 8.07 TENDER OFFER. (a) The Company shall cause the commencement (as
such term is defined in Rule 13e-4(a)(4) under the Exchange Act) of the Tender
Offer to purchase 37,037,037 shares of Common Stock, at a price per share equal
to $27, net to the seller in cash, no later than the date specified in Schedule
8.07. Unless Purchaser shall otherwise agree, the Company's obligation to
complete the Tender Offer shall be subject only to the conditions (the "Offer
Conditions") set forth in Schedule 8.07. Subject to the provisions hereof, the
Tender Offer shall expire on the date set forth in Schedule 8.07; provided that
the Tender Offer shall be extended from time to time if the Offer Conditions
shall not have been satisfied, so long as this Agreement shall remain in effect.
(b) On the date of commencement of the Tender Offer, the Company shall file
with the SEC an Issuer Tender Offer Statement on Schedule 13E-4 with respect to
the Tender Offer (the "Tender Offer Statement"), which shall contain an offer to
purchase and a related letter of transmittal (such Tender Offer Statement and
the documents therein pursuant to which the Tender Offer will be made, together
with any supplements or amendments thereto, are referred to hereinafter as the
"Offer Documents"). After the Offer Documents are filed with the SEC, the
Company shall disseminate the Offer Documents to the stockholders of the
Company. If at any time prior to the expiration of the Tender Offer there shall
occur any event that should be set forth in an amendment or supplement to the
Offer Documents, the Company will prepare and file with the SEC and disseminate
to its stockholders such an amendment or supplement.
(c) The Company shall give Purchaser and its counsel the opportunity to
review the Offer Documents prior to their being filed with the SEC and shall
give Purchaser and its counsel the opportunity to review all amendments and
supplements to the Offer Documents and all responses to requests for additional
information and replies to comments prior to their being filed with, or sent to,
the SEC. The Company shall notify Purchaser of the receipt of any comments from
the SEC or its staff and of any request by the SEC or its staff for amendments
or supplements to the Offer Documents or for additional information and shall
supply Purchaser and its counsel with copies of all correspondence between the
Company or any of its representatives, on the one hand, and the SEC or its
staff, on the other hand, with respect to the Offer Documents.
(d) The Offer Documents will not, on the date filed with the SEC and as of
the date first published, sent or given to the Company's stockholders, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not misleading
except that no representation is made by the Company with respect to statements
made therein based on information concerning Purchaser or its Affiliates
supplied in writing by Purchaser or any of its Affiliates specifically for
inclusion in the Offer Documents. The Offer Documents will comply as to form in
all material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
SECTION 8.08 INFORMATION STATEMENTS. (a) The Company shall give Purchaser
and its counsel the opportunity to review the information statements to be
disseminated to stockholders of the Company in connection with the Distributions
(the "Information Statements") prior to its being filed with the SEC and shall
give Purchaser and its counsel the opportunity to review all amendments and
supplements to the Information Statements and all responses to requests for
additional information and replies to comments prior to their being filed with,
or sent to, the SEC. The Company shall notify Purchaser of the receipt of any
comments from the SEC or its staff and of any request by the SEC or its staff
for amendments or supplements to the Information Statements or for additional
information and shall supply Purchaser and its counsel with copies of all
correspondence between the Company or any of its representatives, on the one
hand, and the SEC or its staff, on the other hand, with respect to the
Information Statements. If at any time prior to completion of the Distributions
there shall occur any event that should be set forth in an amendment or
supplement to the Information Statement, the Company will prepare and file with
the SEC and disseminate to its stockholders such an amendment or supplement.
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(b) The Information Statements will not, on the date filed with the SEC and
as of the date first disseminated to the Company's stockholders, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading except that
no representation is made by the Company with respect to statements made therein
based on information concerning Purchaser or its Affiliates supplied in writing
by Purchaser or any of its Affiliates specifically for inclusion in the
Information Statements. The Information Statements will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
SECTION 8.09 [INTENTIONALLY OMITTED.]
SECTION 8.10 TAX STANDSTILL. Except as permitted by Section 6.01(b) or
6.01(c), during the period ending two years after the date of the Distributions,
(i) Purchaser shall not acquire any Securities or take any other action that
would cause Purchaser's Percentage Interest to equal or exceed 50%, (ii) none of
Purchaser, the Fund or CD&R shall act in concert with any other Person to
acquire any Securities if aggregating such acquisition with the Purchaser's
holdings would cause the Purchaser's Percentage Interest to equal or exceed 50%,
and (iii) none of Purchaser, the Fund or CD&R shall solicit the acquisition of
any Securities, provided that the provision by the Fund to its limited partners
of customary reports and information, and customary communication with such
limited partners on behalf of the Fund, with respect to the Fund's investment in
the Company that, in either case, do not recommend any such acquisition, shall
not be treated as a solicitation by the Purchaser within the meaning of this
clause (iii).
SECTION 8.11 ACCESS AND INFORMATION. (a) So long as this Agreement remains
in effect, prior to the Closing, the Company will (and will cause each of the
Retained Companies, and each of their respective accountants, counsel,
consultants, officers, directors, employees, agents and representatives of or to
any of the Retained Companies, to) give Purchaser and its Representatives, full
access during reasonable business hours to all of their respective properties,
assets, books, contracts, commitments, reports and records relating to the
Retained Companies, and furnish to them all such documents, records and
information with respect to the properties, assets and business of the Retained
Companies and copies of any work papers relating thereto as Purchaser shall from
time to time reasonably request. The Company will keep Purchaser generally
informed as to the affairs of the Retained Business.
(b) In addition, the Company shall deliver to Purchaser, not later than the
35th day following the end of each fiscal month prior to the Closing, updated
Pro Forma Retained Business Financial Statements as of the end of such fiscal
month.
SECTION 8.12 FURTHER ACTIONS. (a) The Company shall, and shall cause each
of the Retained Companies to, use reasonable best efforts to take or cause to be
taken all actions, and to do or cause to be done all other things, necessary,
proper or advisable in order for each of the Retained Companies to fulfill and
perform its obligations in respect of this Agreement and the Transaction
Agreements to which it is a party, or otherwise to consummate and make effective
the transactions contemplated hereby and thereby.
(b) The Company shall (and shall cause each of the Retained Companies to),
as promptly as practicable, (i) make, or cause to be made, all filings and
submissions (including but not limited to under the HSR Act and foreign
antitrust filings) required under any law applicable to any of the Retained
Companies, and give such reasonable undertakings as may be required in
connection therewith, and (ii) use all reasonable efforts to obtain or make, or
cause to be obtained or made, all Permits necessary to be obtained or made by
any of the Retained Companies, in each case in connection with this Agreement or
the Transaction Agreements, the sale and transfer of the Shares, the Special
Warrants and the Warrants pursuant hereto, or the consummation of the other
transactions contemplated hereby or thereby.
(c) The Company shall, and shall cause each of the Retained Companies to,
coordinate and cooperate with Purchaser in exchanging such information and
supplying such reasonable assistance as may
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be reasonably requested by Purchaser in connection with the filings and other
actions contemplated by this Agreement.
(d) At all times prior to the Closing Date, the Company shall promptly
notify Purchaser in writing of any fact, condition, event or occurrence that
could reasonably be expected to result in the failure of any of the conditions
contained in Article IX to be satisfied, promptly upon becoming aware of the
same.
SECTION 8.13 FURTHER ASSURANCES. Following the Closing Date, the Company
shall, and shall cause each of the Retained Companies to, from time to time,
execute and deliver such additional instruments, documents, conveyances or
assurances and take such other actions as shall be necessary, or otherwise
reasonably be requested by Purchaser, to confirm and assure the rights and
obligations provided for in this Agreement and the Transaction Agreements and
render effective the consummation of the transactions contemplated hereby and
thereby, or otherwise to carry out the intent and purposes of this Agreement.
ARTICLE IX
CONDITIONS PRECEDENT
SECTION 9.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The obligations of the
Company and Purchaser to consummate the transactions contemplated to occur at
the Closing shall be subject to the satisfaction prior to the Closing of each of
the following conditions, each of which may be waived only if it is legally
permissible to do so:
(a) HSR AND OTHER APPROVALS. Any applicable waiting period under the HSR
Act relating to the transactions contemplated hereby shall have expired or been
terminated, and all other material authorizations, consents, orders or approvals
of, or regulations, declarations or filings with, or expirations of applicable
waiting periods imposed by, any Governmental Entity (including, without
limitation, any foreign antitrust filing) necessary for the consummation of the
transactions contemplated hereby, shall have been obtained or filed or shall
have occurred.
(b) NO LITIGATION, INJUNCTIONS, OR RESTRAINTS. No statute, rule,
regulation, executive order, decree, temporary restraining order, preliminary or
permanent injunction or other order enacted, entered, promulgated, enforced or
issued by any Governmental Entity or other legal restraint or prohibition
preventing the consummation of the transactions contemplated by this Agreement
or any of the Transaction Agreements shall be in effect.
(c) STOCKHOLDERS VOTE. The Company Stockholder Approval shall have been
obtained.
(d) NASDAQ LISTING. The Shares shall have been approved for listing on the
Nasdaq Stock Market, subject only to official notice of issuance.
(e) CONSUMMATION OF DISTRIBUTIONS. The distribution of the businesses of
School, Travel, Technology, Print and their respective Subsidiaries shall have
occurred pursuant to the Distribution Agreements, which shall contain
provisions:
(i) effecting the Pre-Distribution Transactions;
(ii) allocating assets and liabilities among the Distributed Companies and
the Retained Companies;
(iii) allocating among the Distributed Companies an aggregate of $130 million
of corporate debt, in addition to acquisition debt incurred in respect of
acquisitions effected after the date hereof;
(iv) allocating among the Distributed Companies and the Company on a pro
rata basis all liabilities of the Distributed Companies not properly allocable
to any specific Distributed Company or to the Company;
(v) with respect to current and planned cross-selling opportunities between
the Distributed Companies and the Retained Companies; and
(vi) allocating on a pro rata basis the transaction costs associated with
the Transactions.
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(f) Tax Allocation Agreement. The Tax Allocation Agreement shall have been
executed and shall contain the following provisions:
(i) a joint and several indemnity from the Distributed Companies in favor of
the Company and the Retained Subsidiaries from and against any Losses with
respect to Taxes resulting from any Adverse Tax Act of any of the Distributed
Companies or their Subsidiaries;
(ii) an indemnity from each of the Distributed Companies in favor of the
Company from and against any Losses with respect to Taxes resulting from the
Pre-Distribution Transactions or the Distributions, as a result of the failure
of the Pre-Distribution Transactions or the Distributions to qualify under
sections 355 or 368 of the Code or otherwise, including, without limitation, by
reason of any stock or securities of any Distributed Company failing to qualify
as "qualified property" within the meaning of section 355(c)(2) of the Code,
except to the extent such Losses result from any Adverse Tax Act by any of the
Company, the Retained Subsidiaries, the Distributed Companies or any of their
Subsidiaries, provided that each Distributed Company shall be only liable for
the portion of such Losses that bears the same ratio to the aggregate amount of
such Losses as the Market Capitalization of such Distributed Company bears to
the aggregate Market Capitalization of the Company and the Distributed Companies
and provided, further, that each Distributed Company shall be liable for 100% of
any such Losses attributable to any "deferred intercompany transaction" to the
extent such Loss is attributable to any "intercompany item" that such
Distributed Company or any of its Subsidiaries is required to take into account
immediately prior to the Distributions pursuant to Treasury Regulations section
1.1502-13;
(iii) customary provisions providing for control and participation rights
with respect to any administrative and judicial proceedings with respect to
Taxes, including the right of the Person primarily responsible for the relevant
indemnification obligation thereunder to control any such proceeding.
Notwithstanding anything to the contrary in the preceding sentence, no
Distributed Company shall be entitled to assume control of any portion of any
administrative or judicial proceeding with respect to Taxes unless such
Distributed Company shall have theretofore acknowledged in writing its liability
for such Taxes pursuant to the Tax Allocation Agreement; and
(iv) Any tax saving or other benefit attributable any compensation deduction
arising from or in connection with the exercise by any Employee of the Company
or any of its Subsidiaries of any option granted under any of the Company Stock
Plans shall be apportioned to the entity whose shares were issued upon the
exercise of such option, provided that any compensation deduction arising from
or in connection with any such exercise on or prior to the Closing Date by any
Employee of any Distributed Company or any of its Subsidiaries shall be
apportioned to such Distributed Company.
SECTION 9.02 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations
of the Company to consummate the transactions contemplated to occur at the
Closing shall be subject to the satisfaction or waiver thereof prior to the
Closing of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Purchaser that are qualified as to materiality shall be true and correct,
and those that are not so qualified shall be true and correct in all
material respects, as of the date of this Agreement and as of the time of
the Closing as though made at and as of such time, except to the extent such
representations and warranties expressly relate to an earlier date (in which
case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, on and as of such
earlier date) and the Company shall have received a certificate signed by an
authorized officer of Purchaser to such effect.
(b) OPINION OF PURCHASER'S COUNSEL. The Company shall have received an
opinion dated as of the Closing of Debevoise & Plimpton, counsel to
Purchaser, in form and substance reasonably satisfactory to the Company.
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(c) REGISTRATION RIGHTS AGREEMENT. Purchaser shall have executed and
delivered the Registration Rights Agreement.
SECTION 9.03 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligations of
Purchaser to consummate the transactions contemplated to occur at the Closing
shall be subject to the satisfaction or waiver thereof prior to the Closing of
each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company set forth in this Agreement that are qualified as to materiality
shall be true and correct, and those that are not so qualified shall be true and
correct in all material respects, as of the date of this Agreement and as of the
time of the Closing as though made at and as of such time, except to the extent
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified shall
be true and correct in all material respects, on and as of such earlier date),
and Purchaser shall have received a certificate signed by the chief executive
officer and chief financial officer of the Company to such effect.
(b) TRANSACTION AGREEMENTS. Each Transaction Agreement to which the
Company is a party shall have been executed without modification from the forms
as in existence at the Review Cut-off Time or such earlier date as Purchaser
completed its review of such agreement.
(c) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed or complied in all material respects with all obligations and
covenants required to be performed or complied with by the Company under this
Agreement, and Purchaser shall have received a certificate signed by the chief
executive officer and chief financial officer of the Company to such effect.
(d) OPINION OF THE COMPANY'S COUNSEL. Purchaser shall have received
opinions dated as of the Closing of the general counsel of the Company, and
Wilmer, Cutler & Pickering, counsel to the Company, in form and substance
reasonably satisfactory to Purchaser.
(e) REGISTRATION RIGHTS AGREEMENT. The Company shall have executed and
delivered the Registration Rights Agreement.
(f) FINANCINGS. The Company shall have entered into definitive
documentation for the Proposed Financings and such definitive documentation
shall be satisfactory in form and substance to Purchaser.
(g) TENDER OFFER. The Company shall have consummated the Tender Offer as
provided for herein.
(h) CONSULTING AGREEMENT; TRANSACTION FEE. The Company shall have (A)
entered into a consulting agreement with CD&R providing for an annual fee of
$500,000 (plus reasonable out-of-pocket expenses) in connection with consulting
and advisory services and a related indemnification agreement and (B) authorized
payment to CD&R of the Transaction Fee and the Transaction Fee shall have been
paid to CD&R. The consulting agreement shall terminate at the later of (i) the
fifth anniversary of the Closing Date and (ii) such time as Purchaser is
entitled to nominate only one Investor Director.
(i) OTHER PARTIES. (A) No Person or "group" (as defined in the Exchange
Act), other than Purchaser, shall have acquired beneficial ownership of more
than 15% of the outstanding shares of Voting Securities, and (B) no Person
(other than Purchaser or one or more of its Affiliates) shall have entered into
an agreement in principle or definitive agreement with the Company with respect
to a tender or exchange offer for any shares of Common Stock or a merger,
consolidation or other business combination with or involving the Company.
(j) CORPORATE PROCEEDINGS. All corporate proceedings of the Company in
connection with the transactions contemplated by this Agreement and the
Transaction Agreements, and all documents and instruments incident thereto,
shall be satisfactory in form and substance to Purchaser and its counsel, and
Purchaser and its counsel shall have received all such documents and
instruments, or copies thereof, certified or requested, as may be reasonably
requested.
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(k) MANAGEMENT PLAN. Purchaser shall have completed discussions with
management which satisfactorily confirm to Purchaser that the operating
prospects of the Retained Business (exclusive of acquisitions), are, taken as a
whole, not materially inconsistent with the Company's forecasts (excluding (i)
the impact on the Company's earnings for fiscal quarters ending prior to or
including the Closing caused by the inability of the Company to complete
acquisitions following announcement of the Transactions and/or to account for
acquisitions as poolings of interest and (ii) the effect on the Company of being
required as a result of the Transactions to change accounting treatment for past
acquisitions from poolings of interests to purchases); provided, however, that
this condition shall be deemed satisfied if Purchaser shall not have given
notice to the Company on or prior to February 3, 1998 that Purchaser has
concluded that this condition has not been satisfied.
(l) BOARD OF DIRECTORS. The Board of Directors of the Company shall
consist of 9 persons, including the chief executive officer of the Company,
three designees of Purchaser, three persons selected by the current Board of
Directors and two persons who shall be satisfactory to both Purchaser and the
current Board of Directors of the Company.
(m) MATERIAL ADVERSE EFFECT. No event, change or development shall exist
or have occurred since October 25, 1997 which has had or is reasonably likely to
have a Material Adverse Effect on the Retained Companies, taken as a whole.
(n) DEBT AMOUNTS. The outstanding debt of the Retained Companies shall not
exceed $1.4 billion (after giving effect to the Transactions and assuming
conversion of all issued and outstanding 2001 Notes) and the outstanding debt of
the Distributed Companies shall be at least $130 million plus the expenditures
by the entities comprising such Distributed Companies for acquisitions after the
date hereof.
(o) OPTIONS. The Company's arrangements with respect to Management options
shall be satisfactory to Purchaser in its good faith reasonable judgment.
ARTICLE X
TERMINATION
SECTION 10.01 TERMINATION. This Agreement may be terminated at any time
prior to the Closing, whether before or after the Company Stockholder Approval
has been obtained:
(a) by mutual written consent of Purchaser and the Company;
(b) by Purchaser or the Company:
(i) if the Closing shall not have occurred prior to September 30, 1998,
provided, that the right to terminate this Agreement pursuant to this clause (i)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement results in the failure of the Closing to occur;
(ii) if the Company Stockholder Approval shall not have been obtained by
reason of the failure to obtain the required vote upon a vote held at the
Company Meeting, or such meeting shall not have been held by September 30, 1998;
(iii) if there shall be any statute, law, regulation or rule that makes
consummating the transactions contemplated hereby illegal or if any court or
other Governmental Entity of competent jurisdiction shall have issued a
judgment, order, decree or ruling, or shall have taken such other action
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated hereby and such judgment, order, decree or ruling
shall have become final and non-appealable;
(c) by Purchaser:
(i) if the Company shall have failed to perform in any material respect any
of its obligations hereunder or shall have breached in any respect any
representation or warranty contained herein qualified by materiality or shall
have breached in any material respect any representation or warranty not so
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qualified, and the Company has failed to perform such obligation or cure such
breach, within 30 days of its receipt of written notice thereof from Purchaser,
and such failure to perform shall not have been waived in accordance with the
terms of this Agreement;
(ii) if the Board of Directors of the Company or any committee thereof
withdraws or modifies (or publicly announces its intention to do so, or
resolves to do so) in a manner adverse to Purchaser (as determined by
Purchaser in its reasonable judgment) its approval or recommendation of this
Agreement or the transactions contemplated hereby or approves or recommends
a Transaction Proposal;
(iii) if the Board of Directors of the Company publicly announces its
determination not to effect the Distributions;
(iv) if any of the conditions set forth in Section 9.01 or 9.03 shall
become impossible to fulfill (other than as a result of any breach by
Purchaser of the terms of this Agreement) and shall not have been waived in
accordance with the terms of this Agreement;
(v) if permitted pursuant to Section 8.04 or 8.06;
(vi) if the Company shall make any substantive amendment to any
Transaction Agreement after the Review Cut-Off Time without Purchaser's
consent;
(d) by the Company:
(i) if Purchaser shall have failed to perform in any material respect
any of its obligations hereunder or shall have breached in any respect any
representation or warranty contained herein qualified by materiality or
shall have breached in any material respect any representation or warranty
not so qualified, and Purchaser has failed to perform such obligation or
cure such breach, within 30 days of its receipt of written notice thereof
from the Company, and such failure to perform shall not have been waived in
accordance with the terms of this Agreement;
(ii) if any of the conditions set forth in Section 9.01 or 9.02 shall
become impossible to fulfill (other than as a result of any breach by the
Company of the terms of this Agreement) and shall not have been waived in
accordance with the terms of this Agreement;
(iii) if permitted pursuant to Section 8.02(b).
SECTION 10.02 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either the Company or Purchaser as provided in Section 10.01, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Purchaser or the Company, other than the provisions
of this Section 10.02, Section 13.09 and Article XI and except to the extent
that such termination results from the wilful and material breach by a party of
any of its representations, warranties, covenants or agreements set forth in
this Agreement.
ARTICLE XI
INDEMNIFICATION
SECTION 11.01 INDEMNIFICATION OF PURCHASER. The Company covenants and
agrees to defend, indemnify and hold harmless each of Purchaser, its Affiliates
(other than the Company and any Retained Companies), and their respective
officers, directors, partners, employees, agents, advisers and representatives
including, without limitation, the Fund, CD&R Investment Associates, Inc., a
Delaware corporation, and CD&R Associates V Limited Partnership, a Cayman
Islands exempted limited partnership, and CD&R (collectively, the "Purchaser
Indemnitees") from and against, and pay or reimburse the Purchaser Indemnitees
for, any and all claims, demands, liabilities, obligations, losses, costs,
expenses, fines or damages (whether absolute, accrued, conditional or otherwise
and whether or not resulting from third party claims), including interest and
penalties with respect thereto and out-of-pocket expenses and
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reasonable attorneys' and accountants' fees and expenses incurred in the
investigation or defense of any of the same or in asserting, preserving or
enforcing any of their respective rights hereunder (collectively, "Losses"),
resulting from or based on (or allegedly resulting from or based on):
(i) any actions (including by any shareholders of the Company in
connection with any derivative actions) resulting from or based on (or
allegedly resulting from or based on) any of the Transactions, provided that
the indemnity provided in this clause (i) shall not include (A) actions
brought by any limited partner of the Fund against Purchaser or any of its
Affiliates relating to the transactions contemplated by this Agreement, (B)
Losses resulting from or based on the acts or omissions of a Purchaser
Indemnitee following the Closing, (C) claims resulting from or based on (1)
a breach by Purchaser of its obligations under this Agreement, (2) any
contract, agreement, obligation, commitment, understanding or other
arrangement between the claimant and any Purchaser Indemnitee, (3) any
intentional tort by a Purchaser Indemnitee or (4) any fee, compensation or
other payment to be paid to any Purchaser Indemnitee;
(ii) subject to the limitations set forth in Section 11.03, any breach
by the Company of any representation, warranty, covenant or obligation of
the Company hereunder; and
(iii) any failure of any of the Distributed Companies to satisfy its
stated obligations and liabilities under the Distribution Agreements, the
Tax Allocation Agreement or any of the other Transaction Agreements to which
it is a party, whether by virtue of such agreement's unenforceability, the
Distributed Company's bankruptcy or otherwise.
The Losses described in clauses (i), (ii) and (iii) of this Section 11.01(a)
are herein referred to as "Purchaser Indemnifiable Losses". The Company shall
reimburse the Purchaser Indemnitees for any legal or other expenses incurred by
such Purchaser Indemnitees in connection with investigating or defending any
such Purchaser Indemnifiable Losses as such expenses are incurred.
SECTION 11.02 INDEMNIFICATION PROCEDURES. Promptly after receipt by a
Purchaser Indemnitee of notice of the commencement of any action or the written
assertion of any claim, such Purchaser Indemnitee shall, if a claim in respect
thereof is to be made against the Company, as the case may be (the "Indemnifying
Person"), notify the Indemnifying Person in writing of the commencement or the
written assertion thereof. Failure by a Purchaser Indemnitee to so notify the
Indemnifying Person shall relieve the Indemnifying Person from the obligation to
indemnify such Purchaser Indemnitee only to the extent that the Indemnifying
Person suffers actual and material prejudice as a result of such failure but in
no event shall such failure to notify the Indemnifying Person (i) constitute
prejudice suffered by the Indemnifying Person if it has otherwise received
notice of the actions giving rise to such obligation to indemnify or (ii)
relieve it from any liability or obligation that it may otherwise have to such
Purchaser Indemnitee. In case any such action or claim shall be brought or
asserted against any Purchaser Indemnitee and it shall notify the Indemnifying
Person of the commencement or assertion thereof, the Indemnifying Person shall
be entitled to participate therein but the defense of such action or claim shall
be conducted by counsel to the Purchaser Indemnitee, provided, however, that the
Indemnifying Person shall not, in connection with any one such action or
proceeding or separate but substantially similar actions or proceedings arising
out of the same general allegations, be liable for the fees and expenses of more
than one separate firm of attorneys at any time for all Purchaser Indemnitees,
except to the extent that local counsel, in addition to regular counsel, is
required in order to effectively defend against such action or proceeding and
provided further that a Purchaser Indemnitee shall not enter into any settlement
of any such claim without the prior consent of the Company, such consent not to
be unreasonably withheld or delayed.
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SECTION 11.03 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company contained in this Agreement shall
expire for all purposes on the first anniversary of the Closing Date, except for
the representations and warranties contained in Sections 3.01(n), 3.01(o) and
3.01(p), which shall expire for all purposes upon expiration of the applicable
statute of limitations.
ARTICLE XII
INTERPRETATION; DEFINITIONS
SECTION 12.01 INTERPRETATION. As used in this Agreement:
(a) any reference to the Company and its Subsidiaries means the Company and
each of its Subsidiaries;
(b) any reference to the "Retained Company" and its Subsidiaries or the
"Retained Companies" means the Company and those of its Subsidiaries included in
the Retained Business;
(c) any reference to the "Retained Subsidiaries" means the Subsidiaries of
the Company included in the Retained Business;
(d) any reference to School, Travel, Technology or Print and their
Subsidiaries means School, Travel, Technology or Print immediately after
completion of the Distributions and those entities that immediately after the
completion of the Distributions will be Subsidiaries of School, Travel,
Technology or Print.
SECTION 12.02 DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
"2001 Notes" is defined in the recitals to this Agreement.
"2003 Notes" is defined in Section 3.01(d).
"Adverse Tax Act" means, for any Person, any action of such Person, or any
omission by such Person of an action reasonably available to it, after the date
of the Distributions, that materially contributes to a Final Determination that
the Pre-Distribution Transactions or any of the Distributions results in the
recognition of gain to the Company by virtue of the Pre-Distribution
Transactions or any of the Distributions failing to qualify under sections 355
or 368 of the Code, including, without limitation, by reason of any stock or
securities of any Distributed Company failing to qualify as "qualified property"
within the meaning of section 355(c)(2) of the Code, or otherwise.
"Affiliate" shall have the meaning set forth in Rule 12b-2 under the
Exchange Act (as in effect on the date of this Agreement).
"Agreement" is defined in the recitals to this agreement.
"Assets" is defined in Section 3.01(k).
"Audited Balance Sheet" is defined in Section 3.01(g)(iv).
"Audited Retained Business Financial Statements" is defined in 3.01(g)(iv).
"Balance Sheet" is defined in Section 3.01(g)(i).
"Beneficially Own" with respect to any securities means having "beneficial
ownership" of such securities (as determined pursuant to Rule 13d-3 under the
Exchange Act), including pursuant to any agreement, arrangement or
understanding, whether or not in writing.
"Business Day" means any day on which banking institutions are open in the
City of New York.
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"Buyout Transaction" means a tender offer, merger, sale of all or
substantially all the Company's assets or any similar transaction that offers
each holder of Voting Securities (other than, if applicable, the Person
proposing such transaction) the opportunity to dispose of Voting Securities
Beneficially Owned by each such holder for the same consideration or otherwise
contemplates the acquisition of Voting Securities Beneficially Owned by each
such holder for the same consideration.
"Cash Transaction" is defined in Section 4.02(b)(i).
"CD&R" means Clayton, Dubilier & Rice, Inc., a Delaware corporation.
"Closing" is defined in Section 1.02.
"Closing Date" is defined in Section 1.02.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" is defined in the recitals to this Agreement.
"Company" is defined in the recitals to this Agreement.
"Company Business Financial Statements" is defined in Section 3.01(g)(i).
"Company By-laws" is defined in Section 3.01(a).
"Company Charter" is defined in Section 3.01(a).
"Company Intellectual Property" is defined in Section 3.01(s).
"Company Meeting" is defined in Section 8.05(a).
"Company Meeting Proposal" is defined in Section 8.05(a).
"Company SEC Documents" is defined in Section 3.01(f).
"Company Stock Plans" is defined in Section 3.01(d).
"Company Stockholder Approval" is defined in Section 3.01(b).
"Contingent Stock" means Common Stock issued after the Closing Date pursuant
to (i) the Amendment to Stock Purchase Agreement, dated as of June 20, 1996, by
and between the Company and Eric Watson or (ii) any security, option, warrant,
call, subscription, right, contract, commitment, arrangement or understanding
required to be disclosed on Schedule 3.01(d) but not disclosed thereon.
"Contract" is defined in Section 3.01(c)(i).
"Delivery Cut-off Time" is defined in Section 8.04.
"DGCL" is defined in Section 3.01(q).
"Distribution Agreements" is defined in the recitals to this Agreement.
"Distributions" is defined in the recitals to this Agreement.
"Distributed Companies" is defined in the recitals to this Agreement.
"Employee" means any employee or former employee of any member of the
Company or any of its Subsidiaries or any beneficiary or dependent of any such
employee or former employee.
"Employee Benefit Plans" means all defined contribution, defined benefit,
welfare benefit, bonus, incentive compensation, stock option, stock purchase,
stock appreciation right, stock bonus, incentive, deferred compensation,
insurance, medical, dental, vision, life, death benefit, fringe benefit or other
employee benefit plans, programs, policies or arrangements, including without
limitation, any employment, consulting, offer, secondment, severance or other
termination agreement, whether or not an employee
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benefit plan within the meaning of section 3(3) of ERISA, maintained by the
Company or any of its Subsidiaries.
"Environmental Law" is defined in Section 3.01(p).
"Environmental Permits" is defined in Section 3.01(p).
"Equity Security" means (i) any Common Stock or other Voting Securities,
(ii) any securities of the Company convertible into or exchangeable for Common
Stock or other Voting Securities or (iii) any options, rights or warrants (or
any similar securities) issued by the Company to acquire Common Stock or other
Voting Securities.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" is defined in Section 3.01(c)(ii).
"Filed Company SEC Documents" is defined in Section 3.01(i).
"Final Determination" means the final resolution of liability for any Tax
for any taxable period, including any related interest or penalties, by or as a
result of: (i) a final and unappealable decision, judgment, decree or other
order of a court of competent jurisdiction; (ii) a closing agreement or accepted
offer in compromise under Section 7121 or 7122 of the Code, or comparable
agreement under the laws of other jurisdictions, which resolves the entire tax
liability for any tax period; (iii) any allowance of a refund or credit in
respect of an overpayment of Tax, but only after the expiration of all periods
during which such refund may be recovered (including by way of offset) by the
applicable taxing jurisdiction; or (iv) any other final disposition, including
by reason of the expiration of the applicable statute of limitations.
"Fund" means Clayton, Dubilier & Rice Fund V Limited Partnership, a Cayman
Islands exempted limited partnership.
"GAAP" means United States generally accepted accounting principles.
"Governmental Entity" is defined in Section 3.01(c)(ii).
"Hazardous Substance" is defined in Section 3.01(p).
"HSR Act" is defined in Section 3.01(c)(ii).
"Indemnifying Person" is defined in Section 11.02.
"Information Statement" is defined in Section 8.08(a).
"Intellectual Property" means trademarks, trade names, trade dress, service
marks, copyrights, domain names, and similar rights (including registrations and
applications to register or renew the registration of any of the foregoing),
patents and patent applications, trade secrets, ideas, inventions, improvements,
practices, processes, formulas, designs, know-how, confidential business or
technical information, computer software, firmware, data and documentation,
licenses of or agreements relating to any of the foregoing, rights of privacy
and publicity, moral rights, and any other similar intellectual property rights
and tangible embodiments of any of the foregoing (in any medium including
electronic media).
"Investor Directors" is defined in Section 4.01.
"Issuance" is defined in Section 8.05(a).
"knowledge of the Company" or any like expression means to the knowledge of
the persons listed on Schedule 12.02 after due inquiry.
"Lien" is defined in Section 3.01(c)(i).
"Losses" is defined in Section 11.01(a).
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<PAGE>
"Market Capitalization" means, for any entity, the market capitalization of
such entity determined on the basis of the average closing price for the common
stock of such entity for the five-day period ending on the tenth day after the
date of the Distributions.
"Material Adverse Effect" on or with respect to an entity (or group of
entities taken as a whole) means any state of facts, event, change or effect
that has had, or would reasonably be expected to have, a material adverse effect
on the business, properties, results of operations or financial condition of
such entity (or, if with respect thereto, of such group of entities taken as a
whole), or on the ability of such entity (or group of entities) to consummate
the transactions contemplated hereby, including the Pre-Distribution
Transactions and the Distributions, or to perform its obligations under the
Transaction Agreements to which it is or will be a party; provided, however,
that a "Material Adverse Effect" shall exclude (i) the impact on the Company's
earnings for fiscal quarters ending prior to or including the Closing caused by
the inability of the Company to complete acquisitions following the announcement
of the Transactions and/or to account for acquisitions as poolings of interest
and (ii) the effect on the Company of being required as a result of the
Transactions to change accounting treatment for past acquisitions from poolings
of interests to purchases.
"Material Contracts" is defined in Section 3.01(m).
"Material Subsidiary" is defined in Section 3.01(a).
"New Security" means any Equity Security issued by the Company after the
Closing; provided that "New Security" shall not include (i) any securities
issuable upon conversion of any convertible Equity Security, (ii) any securities
issuable upon exercise of any option, warrant or other similar Equity Security
or (iii) any securities issuable in connection with any stock split, stock
dividend or recapitalization of the Company where such securities are issued to
all stockholders of the Company on a pro rata basis.
"Non-Investor Directors" is defined in Section 4.01.
"Notes to Pro Forma Financial Statements" is defined in Section
3.01(g)(iii).
"Offer Conditions" is defined in Section 8.07(a).
"Offer Documents" is defined in Section 8.07(b).
"Other Holders" means the holders of the Other Shares.
"Other Shares" means Voting Securities not Beneficially Owned by Purchaser
or its Affiliates.
"Permit" is defined in Section 3.01(c)(i).
"Permitted Liens" shall mean those Liens (A) securing debt that is reflected
on the Balance Sheet or the notes thereto or securing debt incurred as part of
the Proposed Financings, (B) referred to in Schedule 3.01(l), (C) for Taxes not
yet due or payable or being contested in good faith and for which adequate
reserves have been established in accordance with GAAP, (D) that constitute
mechanics', carriers', workmens' or like liens, liens arising under original
purchase price conditional sales contracts and equipment leases with third
parties entered into in the ordinary course, (E) Liens incurred or deposits made
in the ordinary course of business consistent with past practice in connection
with workers' compensation, unemployment insurance and social security,
retirement and other legislation and (F) easements, covenants, declarations,
rights of way, encumbrances, or similar restrictions in connection with real
property owned by certain of the Retained Subsidiaries that do not materially
impair the use of such real property by such Retained Subsidiaries, and in the
case of Liens described in clauses (B), (C), (D), (E) or (F) that, individually
or in the aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole.
"Permitted Options" is defined in Section 4.02(a)(i).
"Permitted Securities Transaction" is defined in Section 4.02(b)(ii).
B-36
<PAGE>
"Person" means any individual, partnership, joint venture, corporation,
limited liability company, trust, unincorporated organization, government or
department or agency of a government.
"Plans" is defined in Section 3.01(o)(ii).
"Pre-Distribution Transactions" means the contribution of certain assets,
the assumption of certain liabilities and other transfers contemplated by the
respective Distribution Agreements, pursuant to which the respective businesses
of School, Travel, Technology and Print will be consolidated under such
corporations prior to the Distributions.
"Print" is defined in the recitals to this Agreement.
"Print Distribution" is defined in the recitals to this Agreement.
"Print Distribution Agreement" is defined in the recitals to this Agreement.
"Pro Forma Balance Sheet" is defined in Section 3.01(g)(iii).
"Pro Forma Income Statements" is defined in Section 3.01(g)(iii).
"Pro Forma Retained Business Financial Statements" is defined in Section
3.01(g)(iii).
"Pro Rata Share" means the fraction of an entire issuance of New Securities,
the numerator of which shall be the number of shares of Common Stock owned or
receivable upon exercise of the Warrant and the Special Warrant by Purchaser and
its Affiliates (other than the Company and its Subsidiaries) immediately prior
to such issuance of such New Securities and the denominator of which shall be
the aggregate number of shares of Common Stock outstanding immediately prior to
such issuance of such New Securities and receivable upon exercise of the Warrant
and the Special Warrant.
"Proposed Charter Amendments" is defined in Section 4.05.
"Proposed Financings" is defined in the recitals to this Agreement.
"Proxy Statement" is defined in Section 8.05(b).
"Purchase Price" is defined in Section 1.01.
"Purchaser" is defined in the recitals to this Agreement.
"Purchaser Indemnifiable Losses" is defined in Section 11.01(a).
"Purchaser Indemnitees" is defined in Section 11.01(a).
"Purchaser's Expenses" is defined in Section 13.09(b).
"Purchaser's Percentage Interest" means the greater of (i) the percentage of
Total Voting Power, determined on the basis of the number of Voting Securities
actually outstanding, that is controlled directly or indirectly by Purchaser or
any Subsidiary or Affiliate of Purchaser (other than the Company and its
Subsidiaries), including by beneficial ownership and (ii) the percentage of the
total Fair Market Value of all classes of outstanding capital stock of the
Company that is owned directly or indirectly by Purchaser or any Subsidiary or
Affiliate of Purchaser (other than the Company and its Subsidiaries), including
by beneficial ownership. For purposes of determining Purchaser's Percentage
Interest, (a) any options, rights, warrants (including the Warrants and the
Special Warrants) and similar securities that entitle the holder thereof to
acquire shares of any class of capital stock of the Company, whether voting or
non-voting, shall be treated as exercised; (b) any debt security that is
convertible into shares of any class of capital stock of the Company, whether
voting or non-voting, shall be treated as converted; and (c) any equity security
that is convertible into shares of any class of capital stock of the Company,
whether voting or non-voting, shall be treated as converted, but only to the
extent that such conversion would result in Purchaser's Percentage Interest
being greater than such interest would be if such conversion had not been deemed
to occur.
"Purchaser's Total Securities" is defined in Section 4.01(b)(i).
"Registration Rights Agreement" is defined in the recitals to this
Agreement.
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<PAGE>
"Retained Business" means the business and operation of the Retained
Companies.
"Retained Companies" is defined in Section 12.01(b).
"Retained Plans" is defined in Section 3.01(O)(i).
"Retained Subsidiaries" is defined in Section 12.01(c).
"Review Cut-off Time" is defined in Section 8.04.
"School" is defined in the recitals to this Agreement.
"School Distribution" is defined in the recitals to this Agreement.
"School Distribution Agreements" is defined in the recitals to this
Agreement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" is defined in Section 3.01(c)(ii).
"Security" means at any time Equity Securities and any shares of any class
of capital stock of the Company.
"Shares" is defined in Section 1.01.
"Special Warrants" is defined in the recitals to this Agreement.
"Special Warrant Shares" means shares of Common Stock issuable upon exercise
of the Special Warrants.
"Subscription Notice" is defined in Section 5.01.
"Subsidiary" means, as to any Person, any corporation at least a majority of
the shares of stock of which having general voting power under ordinary
circumstances to elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency) is, at the time as of which the determination is being made, owned
by such Person, or one or more of its Subsidiaries or by such Person and one or
more of its Subsidiaries.
"Superior Proposal" is defined in Section 8.02(b).
"Tax Allocation Agreement" is defined in the recitals to this Agreement.
"Tax Returns" is defined in Section 3.01(n)(i).
"Taxes" is defined in Section 3.01(n)(i).
"Technology" is defined in the recitals to this Agreement.
"Technology Distribution" is defined in the recitals to this Agreement.
"Technology Distribution Agreement" is defined in the recitals to this
Agreement.
"Tender Offer" is defined in the recitals to this Agreement.
"Tender Offer Statement" is defined in Section 8.07(b).
"Termination Fee" is defined in Section 13.09(b).
"Total Voting Power" means at any time the total combined voting power in
the general election of directors of all the Voting Securities then outstanding.
"Transactions" means the execution, delivery and performance of each
Transaction Agreement by the Company and the consummation by the Company of the
Pre-Distribution Transactions, the Distributions,
B-38
<PAGE>
the Proposed Financings, the Tender Offer, the issuance and sale by the Company
of the Shares, the Special Warrants and the Warrants, and of the other
transactions contemplated by the Transaction Agreements.
"Transaction Agreements" means, collectively, this Agreement, the Special
Warrant, the Warrant, the Registration Rights Agreement, the Distribution
Agreements, the Tax Allocation Agreement, the tax representation letters to be
delivered in connection with the Distributions and such other agreements as are
entered into to effect the Pre-Distribution Transactions, including, without
limitation, any employee benefits agreement, intellectual property agreement and
transitional services agreement.
"Transaction Fee" means an amount equal to $15 million plus out-of-pocket
expenses.
"Transaction Proposal" is defined in Section 8.02.
"Travel" is defined in the recitals to this Agreement.
"Travel Distribution" is defined in the recitals to this Agreement.
"Travel Distribution Agreement" is defined in the recitals to this
Agreement.
"Unaudited Company Business Financial Statements" is defined in Section
3.01(g)(ii).
"Voting Securities" means at any time shares of any class of capital stock
of the Company which are then entitled to vote generally in the election of
directors.
"Warrants" is defined in the recitals to this Agreement.
"Warrant Shares" means the shares of Common Stock issuable upon exercise of
the Warrants.
ARTICLE XIII
MISCELLANEOUS
SECTION 13.01 SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such which may be hereafter declared invalid, void or unenforceable.
SECTION 13.02 SPECIFIC ENFORCEMENT. Purchaser, on the one hand, and the
Company, on the other, acknowledge and agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state thereof having jurisdiction, this being in addition to any
other remedy to which they may be entitled at law or equity.
SECTION 13.03 ENTIRE AGREEMENT. This Agreement (including the documents set
forth in the Exhibits and Schedules hereto) and the other Transaction Agreements
contain the entire understanding of the parties with respect to the transactions
contemplated hereby.
SECTION 13.04 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more of the counterparts have been signed by
each party and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
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<PAGE>
SECTION 13.05 NOTICES. All notices, consents, requests, instructions,
approvals and other communications provided for herein and all legal process in
regard hereto shall be validly given, made or served, if in writing and
delivered personally, by telecopy (except for legal process) or sent by
registered mail, postage prepaid, if to:
The Company:
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attention of: Mark D. Director
Telecopy No.: (202) 339-6727
with a copy to:
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Attention of: George P. Stamas
Telecopy No.: (202) 663-6363
Purchaser:
c/o Clayton, Dubilier & Rice Fund V
Limited Partnership
1043 Foulk Road, Suite 106
Wilmington, Delaware
with a copy to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue, 18th Floor
New York, New York 10152
Attention of: Brian D. Finn
Telecopy No.: (212) 407-5200
with a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention of: Franci J. Blassberg
Telecopy No.: (212) 909-6836
or to such other address or telex number as any party may, from time to time,
designate in a written notice given in a like manner.
SECTION 13.06 AMENDMENTS. This Agreement may be amended as to Purchaser and
their successors and assigns (determined as provided in Section 13.08), and the
Company may take any action herein prohibited, or omit to perform any act
required to be performed by it, if the Company shall obtain the written consent
of Purchaser. This Agreement may not be waived, changed, modified, or discharged
orally, but only by an agreement in writing signed by the party or parties
against whom enforcement of any waiver, change, modification or discharge is
sought or by parties with the right to consent to such waiver, change,
modification or discharge on behalf of such party.
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<PAGE>
SECTION 13.07 COOPERATION. Purchaser and the Company agree to take, or
cause to be taken, all such further or other actions as shall reasonably be
necessary to make effective and consummate the transactions contemplated by this
Agreement, including, without limitation, making all required filings under the
HSR Act, if any; provided, however, that the foregoing shall not limit the
ability of the Company to abandon the Distributions pursuant to Section 8.03.
SECTION 13.08 SUCCESSORS AND ASSIGNS.
All covenants and agreements contained herein shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that neither party may assign any of its rights under this
Agreement without the written consent of the other party.
SECTION 13.09 EXPENSES AND REMEDIES.
(a) Whether or not the Closing takes place, all costs and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be borne by the party incurring such expense, except as set forth in the next
seven paragraphs.
(b) Notwithstanding Section 13.09(a), if Purchaser terminates this Agreement
pursuant to Section 10.01(c)(ii), (c)(iii) or (c)(vi) the Company shall
reimburse Purchaser for the reasonable out-of-pocket expenses (including
reasonable fees and expenses of legal counsel) incurred by Purchaser in
connection with this Agreement or the matters contemplated hereby ("Purchaser's
Expenses") and shall pay CD&R a termination fee of $25 million (the "Termination
Fee").
(c) Notwithstanding Section 13.09(a), if the Company terminates this
Agreement pursuant to Section 10.01(d)(iii), the Company shall pay Purchaser's
Expenses to Purchaser and the Termination Fee to CD&R.
(d) Notwithstanding Section 13.09(a), if Purchaser terminates this Agreement
pursuant to any provision of Section 10.01 other than those referred to in
Sections 13.09(b) or the Company terminates this Agreement pursuant to any
provision of Section 10.01 other than those referred to in Section 13.09(c) and
other than pursuant to Section 10.01(d)(i), the Company shall pay Purchaser's
Expenses to Purchaser; provided that if Purchaser terminates this Agreement
pursuant to Section 10.01(c)(iv) by reason of the failure to be satisfied of the
condition set forth in Section 9.03(k), Purchaser's Expenses shall be limited to
$2,000,000.
(e) Notwithstanding Section 13.09(a), if (i) the Company terminates this
Agreement pursuant to any provision of Section 10.01 other than those referred
to in Sections 13.09(c) or Purchaser terminates this Agreement pursuant to
Section 10.01(b)(ii), (ii) a Transaction Proposal was made prior to September
30, 1998 and (iii) during the period ending 12 months after termination the
Company enters into an agreement relating to or publicly announces, a
transaction including the sale or other disposition of Equity Securities
representing in excess of 20% of the Total Voting Power or 20% of the assets of
the Company and its Subsidiaries, taken as a whole, then upon consummation of
such transaction, the Company shall pay Purchaser's Expenses (without
duplication of any Purchaser's Expenses paid pursuant to Section 13.09(d)) and
the Termination Fee to CD&R.
(f) Notwithstanding Section 13.09(a), upon the occurrence of the Closing,
the Company shall pay Purchaser's Expenses to Purchaser.
(g) Notwithstanding Section 13.09(a), if Purchaser terminates this Agreement
pursuant to Section 10.01(c)(i) the Company shall reimburse Purchaser for
Purchaser's Expenses and shall pay CD&R a termination fee of $10 million.
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<PAGE>
SECTION 13.10 TRANSFER OF SHARES AND WARRANTS.
Purchaser understands and agrees that neither any shares of Common Stock or
any Warrants, Special Warrants, Warrant Shares or Special Warrant Shares have
been registered under the Securities Act or the securities laws of any state and
that they may be sold or otherwise disposed of only in one or more transactions
registered under the Securities Act and, where applicable, such laws or as to
which an exemption from the registration requirements of the Securities Act and,
where applicable, such laws is available. Purchaser acknowledges that except as
provided in the Registration Rights Agreement, Purchaser has no right to require
the Company to register shares of Common Stock, the Warrants, the Special
Warrants, the Warrant Shares or the Special Warrant Shares. Purchaser
understands and agrees that each certificate representing shares of Common
Stock, Warrants, Special Warrants, Warrant Shares or Special Warrant Shares
(other than, with respect to the first legend, shares of Common Stock, Warrants,
Special Warrants, Warrant Shares or Special Warrant Shares that are no longer
subject to the provisions of Article VII and other than, with respect to the
second legend, shares of Common Stock, Warrants, Special Warrants, Warrant
Shares or Special Warrant Shares which have been transferred in a transaction
registered under the Securities Act or exempt from the registration requirements
of the Securities Act pursuant to Rule 144 thereunder or any similar rule or
regulation) shall bear the following legends:
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY AN AGREEMENT ON FILE AT THE OFFICES OF THE CORPORATION."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT
BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS."
and Purchaser agrees to transfer shares of Common Stock, Warrants and Warrant
Shares only in accordance with the provisions of such legends.
SECTION 13.11 GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York, except to the extent that
Delaware law mandatorily governs.
SECTION 13.12 PUBLICITY.
The Company and Purchaser will consult and cooperate with each other before
issuing, and provide each other the opportunity to review and comment upon, any
press releases or otherwise making public statements with respect to the
transactions contemplated by this Agreement.
SECTION 13.13 NO THIRD PARTY BENEFICIARIES.
(a) Nothing contained in this Agreement is intended to confer upon any
person or entity other than the parties hereto and their respective successors
and permitted assigns, any benefit, right or remedies under or by reason of this
Agreement; provided, however, that the parties hereto hereby acknowledge and
agree that the Distributed Companies are each third party beneficiaries of
Section 6.01 of this Agreement and that the Purchaser Indemnitees (other than
Purchaser) are third party beneficiaries of Article XI of this Agreement.
(b) Purchaser shall cooperate with the Company in connection with any tax
audits or administrative or judicial proceedings with respect to the application
of Section 355(e) (as ultimately enacted), including in rebutting any
presumption arising under Section 355(e) of the Code.
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<PAGE>
SECTION 13.14 CONSENT TO JURISDICTION.
Each of the Company and Purchaser irrevocably submits to the personal
exclusive jurisdiction of the United States District Court for the Southern
District of New York for the purposes of any suit, action or other proceeding
arising out of this Agreement or any transaction contemplated hereby (and, to
the extent permitted under applicable rules of procedure, agrees not to commence
any action, suit or proceeding relating hereto except in such court). Each of
the Company and Purchaser further agrees that service of any process, summons,
notice or document hand delivered or sent by registered mail to such party's
respective address set forth in Section 13.05 will be effective service of
process for any action, suit or proceeding in New York with respect to any
matters to which it has submitted to jurisdiction as set forth in the
immediately preceding sentence. Each of the Company and Purchaser irrevocably
and unconditionally waives any objection to the laying of venue of any action,
suit or proceeding arising out of this Agreement or the transactions
contemplated hereby in the United States District Court for the Southern
District of New York, and hereby further irrevocably and unconditionally waives
and agrees not to plead or claim in such court that any such action, suit or
proceeding brought in such court has been brought in an inconvenient forum.
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<PAGE>
IN WITNESS WHEREOF, Purchaser and the Company have caused this Agreement to
be duly executed as of the day and year first above written.
<TABLE>
<S> <C> <C>
U.S. OFFICE PRODUCTS COMPANY
/S/ THOMAS I. MORGAN
-----------------------------------------
Name: Thomas I. Morgan
TITLE: PRESIDENT
CDR-PC ACQUISITION, L.L.C.
By: /s/ DONALD J. GOGEL
-----------------------------------------
Name: Donald J. Gogel
TITLE: PRESIDENT
</TABLE>
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<PAGE>
EXHIBIT 1
TO INVESTMENT AGREEMENT
TERMS OF SPECIAL WARRANTS
<TABLE>
<S> <C>
Exercise Price: $.01 per share.
Expiration Date: 12 years from date of issuance.
Exercisability: To the extent of 24.9% of sum of (A) the number of shares
of Common Stock issued upon conversion of the 2001
Notes, (B) the number of any shares of Contingent Stock
that are issued, and (C) the number of shares of Common
Stock issuable pursuant to this Special Warrant in
respect of shares described in clauses (A) and (B)
above; or after the second anniversary of the issuance
of this Special Warrant, whichever is earlier.
Shares Subject to Warrant: Equal to the number of shares of Common Stock that is the
difference between (i) 24.9% of the sum of (A) the
outstanding shares of Common Stock as of the Closing
Date after giving effect to the issuance of the Shares
and the exercise of this Special Warrant, and assuming
the conversion into Common Stock of all the 2001 Notes
outstanding on the Closing Date at the conversion price
resulting from adjustments made as a result of the
Tender Offer and the Distributions and (B) the number of
any shares of Contingent Stock that are issued, and (ii)
24.9% of the outstanding shares of Common Stock as of
the Closing after giving effect to the issuance of the
Shares.
Transferability: Transferable to the same extent as Shares.
Cashless Exercise: Permitted.
Antidilution Protection: Customary.
Registration Rights: Same as for Shares.
Listing of Warrants: Upon request of Purchaser.
Listing of Shares issuable upon
exercise of Warrants: Prior to Closing.
Listing of Special Covenants: The Company will not be permitted to repurchase Common
Stock if as a result thereof the exercisability of the
Special Warrant will be limited.
</TABLE>
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<PAGE>
EXHIBIT 2
TO INVESTMENT AGREEMENT
TERMS OF WARRANTS
<TABLE>
<S> <C>
Exercise Price: 1.5 times $270 million divided by the total number of
Shares and shares of Common Stock subject to Special
Warrants.
Expiration Date: 12 years from date of issuance.
Exercisability: Only after the second anniversary of issuance.
Shares Subject to Warrant: Equal to the number of the Shares.
Transferability: Transferable to the same extent as the Shares under
Section 7.01.
Cashless Exercise: Permitted.
Antidilution Protection: Customary.
Registration Rights: Same as for Shares.
Listing of Warrants: Upon request of Purchaser.
Listing of Shares issuable upon
exercise of Warrants: Prior to Closing.
Listing of Special Covenants: The Company will not be permitted to repurchase Common
Stock if as a result thereof the exercisability of the
Warrant will be limited.
</TABLE>
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<PAGE>
EXHIBIT 3
TO INVESTMENT AGREEMENT
TERMS OF REGISTRATION RIGHTS AGREEMENT
<TABLE>
<S> <C>
Registrable Securities: Shares issued under Investment Agreement, Warrants,
Special Warrants and other Common Stock purchased by
Purchaser in compliance with the Investment Agreement.
Demand Registrations: Four.
Piggyback Registrations: Unlimited.
Registration Fees and Expenses: Payable by the Company, including counsel for selling
stockholder.
Selection of Underwriters: Purchaser selects underwriters for Demand Registrations
subject to Company's consent which shall not be
unreasonably withheld. Company selects underwriters for
Piggyback Registrations subject to Purchaser's consent
which shall not be unreasonably withheld.
Priority in Exercise of
Registration of Rights: In the event of cutbacks, securities to be registered for
the account of the Purchaser shall have priority over
other securities to be registered in connection with
Demand Registrations and over other securities to be
registered for the account other selling stockholders in
Piggyback Registrations.
Indemnification: Customary.
Registration Procedures: Customary including, without limitation, provision of
opinions of counsel and comfort letter.
</TABLE>
B-47
<PAGE>
SCHEDULE 8.07
TO INVESTMENT AGREEMENT
TENDER OFFER TIMING AND CONDITIONS
The capitalized terms used in this Schedule 8.07 have the meaning set forth
in the attached Agreement.
COMMENCEMENT DATE:
Approximately 20 business days preceding the date of the Company Meeting set
forth in the Proxy Statement
EXPIRATION DATE:
No earlier than 20 business days following the Commencement Date.
CONDITIONS:
The conditions to the Tender Offer shall be as set forth below (capitalized
terms set forth below shall have the meaning given them in the Tender
Offer):
Notwithstanding any other provisions of the Tender Offer, and in addition to
(and not in limitation of) the Company's rights to extend and amend the Tender
Offer at any time in its sole discretion (subject to the provisions of the
Investment Agreement), the Company shall not be required to accept for payment
or, subject to any applicable rules and regulations of the Commission, including
Rule 14e-1(c) under the Exchange Act (relating to the Tender Offer), pay for,
and may delay the acceptance for payment of or, subject to the restriction
referred to above, the payment for, any tendered shares of Common Stock, and may
amend the Tender Offer consistent with the terms of the Investment Agreement or
terminate the Tender Offer if (i) the Minimum Condition (as defined below) has
not been satisfied; (ii) the Financing Condition (as defined below) has not been
satisfied; (iii) the Equity Investment Condition (as defined below) has not been
satisfied; (iv) the Distribution Condition (as defined below) has not been
satisfied; or (v) any of the General Conditions (as defined below) shall not
have been satisfied.
The Minimum Condition will be satisfied if, at the Acceptance Date, a
minimum of 37,037,037 Shares (including Option Shares) have been validly
tendered pursuant to the terms of the Tender Offer and not withdrawn.
The Financing Condition will be satisfied upon (a) the availability to the
Company on terms and conditions satisfactory to the Company in its sole
discretion of funds sufficient to pay the Tender Offer Price for 37,037,037
Shares and related costs and expenses of the Tender Offer from the Subordinated
Debt Offering, through borrowings under the Credit Facility, and/or from the
Equity Investment, or any combination of the foregoing, and (b) the Company
having obtained all necessary consents from lenders for completion of the Tender
Offer and the Distributions.
The Equity Investment Condition will be satisfied when all conditions to
closing under the Investment Agreement have been satisfied or waived other than
the following conditions: the condition set forth in Section 9.01(e) of the
Investment Agreement relating to consummation of the Distributions; and the
condition set forth in Section 9.03(g) of the Investment Agreement relating to
consummation of the Tender Offer.
The Distributions Condition shall be satisfied when all conditions,
including among others (a) the registration statements relating to the
distribution of shares in the Distributions having been declared effective by
the Commission and (b) the Company having received an opinion of Wilmer, Cutler
& Pickering regarding the tax treatment of the Distributions, to the obligation
of the Company to consummate the Distributions under the Distribution Agreement
have been satisfied or waived, other than the
B-48
<PAGE>
condition set forth in Section 8.01(g) of the Distribution Agreement relating to
consummation of the Tender Offer.
For purposes of the foregoing provisions, all the General Conditions shall
be deemed to have been satisfied unless any of the following conditions shall
occur prior to the Acceptance Date:
(i) there shall have been instituted or threatened or be pending any
action or proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, that
challenges the making of or the consummation of the transactions
contemplated by the Tender Offer, the Equity Investment or the
Distributions; or that has, or is reasonably likely to have, in the sole
judgment of the Company, a material adverse effect on the business,
operations, properties, condition (financial or otherwise); assets,
liabilities or prospects of the Company and its subsidiaries taken as a
whole;
(ii) any order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been proposed, enacted, entered,
issued, promulgated, enforced or deemed applicable by any court or
governmental, regulatory or administrative agency or instrumentality that,
in the sole judgment of the Company, would or might prohibit, prevent,
restrict or delay in consummation of the Tender Offer, the Equity Investment
or the Distributions or that has, or is reasonably likely to have, in the
sole judgment of the Company, a material adverse effect on the business,
operations, properties, condition (financial or otherwise), assets,
liabilities or prospects of the Company and its subsidiaries taken as a
whole;
(iii) there shall have occurred or be likely to occur any event that, in
the sole judgment of the Company, would or might prohibit, prevent, restrict
or delay consummation of the Tender Offer, the Equity Investment or the
Distributions or that will, or is reasonably likely to, materially impair
the contemplated benefits to the Company of the Tender Offer, the Equity
Investment or the Distributions, or otherwise result in the consummation of
the Tender Offer, the Equity Investment or the Distributions not being, or
not being reasonably likely to be, in the best interests of the Company and
its subsidiaries taken as a whole;
(iv) a tender or exchange offer for some or all of the Shares (other
than the Tender Offer) or a proposal with respect to a merger, consolidation
or other business combination with or involving the Company or any
subsidiary shall have been proposed to be made or shall have been made by
another person; or
(v) (1) any entity, "group" (as that term is used in Section 13(d)(3) of
the Exchange Act) or person (other than Investor and entities, groups or
persons, if any, who have filed with the Commission, on or before
January 12, 1998, a Schedule 13G or Schedule 13D with respect to any of
the Shares) shall have acquired or proposed to acquire beneficial
ownership of more than 5% of the outstanding Shares; or
(2) such entity, group or person that has publicly disclosed any such
beneficial ownership of more than 5% of the Shares prior to such date
shall have acquired, or proposed to acquire, beneficial ownership of
additional Shares constituting more than 2% of the outstanding Shares or
shall have been granted any option or right to acquire beneficial
ownership of more than 2% of the outstanding Shares (other than the
Equity Investment); or
(3) any entity, person or group shall have filed a Notification and
Report Form under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 reflecting an intent to acquire the Company or any of its Shares; or
(vi) there shall have occurred (a) any general suspension of trading in,
or limitation on prices for, securities in the United States national
securities exchanges or over-the-counter markets, (b) any significant
adverse change in the trading prices for the Common Stock or in the
Company's other securities, or in any financial markets, (c) a material
impairment in the trading market for securities that could, in the sole
judgment of the Company, affect the Equity Investment, the Tender Offer, the
Distributions or the New Borrowings, (d) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States, (e) any limitation (whether or not mandatory) by any government or
governmental, administrative or regulatory authority or agency, domestic or
foreign, on (or other event that, in the reasonable judgment of the Company,
might affect) the extension of credit by banks or other lending institutions
in the United States, (f) a commencement of a war or armed hostilities or
other national or international calamity directly or indirectly involving
the United States, or (g) in the case of any of the foregoing existing on
the date hereof, a material acceleration or worsening thereof.
B-49
<PAGE>
ANNEX C--PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION
Article Four of the Amended and Restated Certificate of Incorporation of
U.S. Office Products Company shall be amended by adding the following paragraph
4 under the heading "Common Stock:"
4. Reclassification
As of 5:00 p.m., Eastern time, on the date on which this Certificate of
Amendment is filed with the Secretary of State of Delaware (the "Effective
Time"), each four outstanding shares of common stock, $.001 per share ("Old
Common Stock") shall thereupon be reclassified and changed into one share of
common stock, par value $.001 per share ("New Common Stock"). Upon such
Effective Time, each holder of Old Common Stock shall thereupon
automatically be and become the holder of one share of New Common Stock for
every four shares of Old Common Stock held by such holder prior thereto.
Upon such Effective Time, each certificate formerly representing a stated
number of shares of Old Common Stock shall thereupon be deemed for all
corporate purposes to evidence ownership of New Common Stock in the
appropriately reduced whole number of shares. As soon as practicable after
such Effective Time, stockholders as of the date of the reclassification
will be notified thereof and upon their delivery of their certificates of
Old Common Stock to the Corporation or its designated agent, will be sent
stock certificates representing their shares of New Common Stock, rounded
down to the nearest whole number, together with cash representing the fair
value of such holder's fractional shares of Old Common Stock. No scrip or
fractional share certificate for New Common Stock will be issued in
connection with this reverse stock split. All references elsewhere in the
Amended and Restated Certificate of Incorporation to the "Common Stock"
shall, after the Effective Time, refer to the New Common Stock.
C-1
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Introduction to Selected Financial Data................................................................... F-2
Selected Financial Data................................................................................... F-3
Management's Discussion and Analysis of Financial Position and Results of Operations...................... F-5
Pro Forma Combined Financial Information of U.S. Office Products Company
Introduction to Pro Forma Combined Financial Information................................................ F-21
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited)..................................... F-23
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998 (unaudited)........... F-25
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997 (unaudited)........... F-26
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997
(unaudited)........................................................................................... F-27
Notes to Pro Forma Combined Financial Statements........................................................ F-28
Consolidated Financial Statements of U.S. Office Products Company
Report of Price Waterhouse LLP, Independent Accountants................................................. F-32
Report of Ernst & Young LLP, Independent Accountants.................................................... F-33
Report of BDO Seidman, LLP, Independent Accountants..................................................... F-34
Report of KPMG Peat Marwick LLP, Independent Accountants................................................ F-35
Report of KPMG Peat Marwick LLP, Independent Accountants................................................ F-36
Report of Rubin, Koehmstedt and Nadler, Independent Accountants......................................... F-37
Report of Deloitte & Touche LLP, Independent Accountants................................................ F-38
Report of Hertz, Herson & Company, LLP, Independent Accountants......................................... F-39
Report of Hertz, Herson & Company, LLP, Independent Accountants......................................... F-40
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and January 24, 1998 (unaudited)........ F-41
Consolidated Statement of Income for the fiscal years ended April 30, 1995 and 1996, April 26, 1997 and
the nine months ended January 25, 1997 (unaudited) and January 24, 1998 (unaudited)................... F-42
Consolidated Statement of Stockholders' Equity for the fiscal years ended April 30, 1995 and 1996, April
26, 1997 and the nine months ended January 24, 1998 (unaudited)....................................... F-43
Consolidated Statement of Cash Flows for the fiscal years ended April 30, 1995 and 1996, April 26, 1997
and the nine months ended January 25, 1997 (unaudited) and January 24, 1998 (unaudited)............... F-45
Notes to Consolidated Financial Statements.............................................................. F-47
Consolidated Financial Statements of Mail Boxes Etc.
Report of Ernst & Young LLP, Independent Auditors....................................................... F-74
Consolidated Balance Sheets as of April 30, 1997 and 1996............................................... F-75
Consolidated Statements of Income for the fiscal years ended April 30, 1997, 1996 and 1995.............. F-76
Consolidated Statement of Stockholders' Equity for the fiscal years ended April 30, 1997, 1996 and
1995.................................................................................................. F-77
Consolidated Statements of Cash Flows for fiscal years ended April 30, 1997, 1996 and 1995.............. F-78
Notes to Consolidated Financial Statements.............................................................. F-80
Condensed Consolidated Balance Sheet as of October 31, 1997 (unaudited)................................. F-91
Condensed Consolidated Statements of Operations for three months and six months ended October 31, 1997
(unaudited) and October 31, 1996 (unaudited).......................................................... F-92
Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 1997 (unaudited)
and October 31, 1996 (unaudited)...................................................................... F-93
Notes to Condensed Consolidated Financial Statements (unaudited)........................................ F-94
</TABLE>
F-1
<PAGE>
INTRODUCTION TO SELECTED FINANCIAL DATA
Set forth below is certain selected financial data for U.S. Office Products
Company (the "Company"). The historical Statement of Income Data for the fiscal
years ended April 30, 1995 and 1996 and April 26, 1997 and the Balance Sheet
Data at April 30, 1996 and April 26, 1997 have been derived from the Company's
consolidated audited financial statements and are included elsewhere in this
Proxy Statement. The historical Statement of Income Data for the years ended
April 30, 1993 and 1994 and the Balance Sheet Data at April 30 1993, 1994, and
1995 have been derived from unaudited consolidated financial statements which
are not included elsewhere in this Proxy Statement. The Selected Financial Data
for the nine months ended January 25, 1997 and January 24, 1998 (except pro
forma amounts) have been derived from unaudited consolidated financial
statements that appear elsewhere in this Proxy Statement. These unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the financial position and results of operations for the
periods presented. The financial data have been restated from prior
presentations as a result of the Company's adoption of the Strategic
Restructuring Plan.
The pro forma financial data gives effect, as applicable, to the Strategic
Restructuring Plan, the offer to exchange the 2001 Notes for common stock at a
reduced conversion price (the "2001 Note Offer"), the tender offer for the 2003
Notes (the "2003 Note Tender"), the offering of senior subordinated notes ("Note
Offering") and borrowings under the new senior secured credit facilities (the
"Credit Facility"; borrowings under the Note Offering and the Credit Facility
are referred to as the "New Borrowings") and the acquisitions completed by the
Company after May 1, 1996 for balance sheet purposes as if such transactions had
occurred on January 24, 1998 and for income statement purposes as if such
transactions had occurred at the beginning of the relevant period. In addition,
the pro forma information is based on available information and certain
assumptions and adjustments.
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the
unaudited pro forma financial information, including the notes thereto, and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Proxy Statement.
F-2
<PAGE>
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------------ -----------
PRO FORMA
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25,
1993 1994 1995 1996 1997 1997 (2) 1997
----------- ----------- ----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $ 486,763 $ 523,755 $ 658,494 $1,061,528 $2,115,954 $2,794,009 $1,498,320
Cost of revenues.................. 350,647 377,494 485,955 789,436 1,518,287 1,988,315 1,077,408
----------- ----------- ----------- --------- --------- ----------- -----------
Gross profit.................. 136,116 146,261 172,539 272,092 597,667 805,694 420,912
Selling, general and
administrative expenses......... 124,065 132,320 152,176 231,569 488,215 646,867 344,474
Amortization expense.............. 601 733 801 2,711 12,416 25,138 8,072
Non-recurring acquisition costs... 8,057 8,001 8,001 7,316
Restructuring costs............... 682 4,201 4,201
----------- ----------- ----------- --------- --------- ----------- -----------
Operating income.............. 11,450 13,208 19,562 29,073 84,834 121,487 61,050
Interest expense.................. 2,914 2,519 3,401 8,132 36,047 103,996 27,540
Interest income................... (327) (411) (675) (3,506) (6,857) (6,048)
Other income...................... (1,463) (1,315) (1,456) (684) (4,233) (7,150) (4,073)
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 10,326 12,415 18,292 25,131 59,877 24,641 43,631
Provision for income taxes........ 1,594 1,727 2,800 6,032 27,939 18,481 18,238
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before extraordinary items...... 8,732 10,688 15,492 19,099 31,938 $ 6,160 25,393
-----------
-----------
Income from discontinued
operations, net of income taxes
(3)............................. 2,824 10,953 15,675 15,778 26,800 20,411
----------- ----------- ----------- --------- --------- -----------
Income before extraordinary
items........................... 11,556 21,641 31,167 34,877 58,738 45,804
Extraordinary items, net of income
taxes (4)....................... 701 1,450 612
----------- ----------- ----------- --------- --------- -----------
Net income........................ $ 11,556 $ 21,641 $ 31,167 $ 34,176 $ 57,288 $ 45,192
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Weighted average common shares
outstanding
Basic......................... 44,260 44,260 45,562 67,545 90,026 146,331(5) 85,978
Diluted....................... 44,260 44,260 45,704 68,374 91,761 148,066(5) 87,824
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.30
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.24 0.31 0.24
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.51 $ 0.64 $ 0.53
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.29
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.23 0.29 0.23
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.50 $ 0.62 $ 0.51
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Ratio of earnings to fixed charges
(6)............................. 2.1x 2.3x 2.5x 1.9x 2.0x 1.2x 2.0x
<CAPTION>
PRO FORMA PRO FORMA
JANUARY 24, JANUARY 25, JANUARY 24,
1998 1997 (2) 1998 (2)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $1,930,113 $2,087,861 $2,070,655
Cost of revenues.................. 1,390,855 1,487,711 1,481,421
----------- ----------- -----------
Gross profit.................. 539,258 600,150 589,234
Selling, general and
administrative expenses......... 436,037 483,908 467,356
Amortization expense.............. 13,830 18,415 18,433
Non-recurring acquisition costs... 7,316
Restructuring costs...............
----------- ----------- -----------
Operating income.............. 89,391 90,511 103,445
Interest expense.................. 27,534 77,997 77,997
Interest income................... (1,545)
Other income...................... (6,369) (6,730) (6,711)
----------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 69,771 19,244 32,159
Provision for income taxes........ 32,535 14,433 20,903
----------- ----------- -----------
Income from continuing operations
before extraordinary items...... 37,236 $ 4,811 $ 11,256
----------- -----------
----------- -----------
Income from discontinued
operations, net of income taxes
(3)............................. 25,464
-----------
Income before extraordinary
items........................... 62,700
Extraordinary items, net of income
taxes (4).......................
-----------
Net income........................ $ 62,700
-----------
-----------
Weighted average common shares
outstanding
Basic......................... 114,758 146,331(5) 146,331(5)
Diluted....................... 117,185 148,177(5) 148,757(5)
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.23
Extraordinary items...........
-----------
Net income.................... $ 0.55
-----------
-----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.22
Extraordinary items...........
-----------
Net income.................... $ 0.54
-----------
-----------
Ratio of earnings to fixed charges
(6)............................. 2.5x 1.2x 1.4x
</TABLE>
<TABLE>
<CAPTION>
JANUARY
APRIL 30, 24, 1998
------------------------------------------ APRIL 26, ---------
1993 1994 1995 1996 1997 ACTUAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 13,609 $ 51,344 $ 70,153 $ 274,124 $ 233,986 $ 107,120
Net assets of discontinued operations........................ 19,199 26,879 33,514 33,674 171,122 461,042
Total assets................................................. 130,666 172,656 259,904 805,978 1,706,991 2,469,442
Long-term debt, less current portion......................... 2,414 15,112 18,841 176,230 380,209 381,844
Stockholders' equity......................................... 27,986 77,735 128,512 394,746 921,148 1,472,922
<CAPTION>
PRO FORMA (7)
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 396,609
Net assets of discontinued operations........................
Total assets................................................. 2,006,085
Long-term debt, less current portion......................... 1,155,509
Stockholders' equity......................................... 590,792
</TABLE>
F-3
<PAGE>
- ------------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method (the "Purchased Companies") have been included from the dates of
their respective acquisitions. The pro forma financial data reflect purchase
acquisitions completed by the Company through March 20, 1998.
(2) Gives effect to the Strategic Restructuring Plan, the 2001 Note Offer, the
2003 Note Tender, the New Borrowings and the purchase acquisitions completed
by the Company since May 1, 1996 as if such transactions had been made on
May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of the Company's future operating results.
(3) The results of the companies included in the Distributions are reflected as
discontinued operations for all periods presented in the Company's
consolidated statement of income.
(4) Extraordinary items represent the losses associated with the early
terminations of credit facilities, net of the related income tax benefits.
(5) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 25,
1997 and January 24, 1998, see Notes to Pro Forma Combined Financial
Statements included elsewhere in this Proxy Statement.
(6) In computing the ratio of earnings to fixed charges: (i) earnings are based
on income from continuing operations before provision for income taxes and
extraordinary items and fixed charges; and (ii) fixed charges consist of
interest expense from continuing and discontinued operations, amortization
of deferred financing costs and the estimated interest component of rent
expense.
(7) Gives effect to the Strategic Restructuring Plan, the 2001 Note Offer, the
2003 Note Tender, the New Borrowings and the purchase acquisitions completed
by the Company subsequent to January 24, 1998 as if such transactions had
been made on January 24, 1998. The pro forma balance sheet data are not
necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of the Company's future financial position.
F-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. WHEN USED IN THIS PROXY STATEMENT, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," AND "EXPECT" AND SIMILAR
EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION
TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW UNDER THE HEADINGS "EFFECTS OF THE
PROPOSED SALE OF EQUITY SECURITIES AND THE STRATEGIC RESTRUCTURING PLAN" WITHIN
THE BODY OF THE PROXY STATEMENT, AND "FACTORS AFFECTING THE COMPANY'S BUSINESS"
BELOW.
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
historical financial statements and the pro forma combined financial statements
of the Company, including the related notes to each thereto, appearing elsewhere
in this Proxy Statement. The discussion of the Company's pro forma results of
operations is based on the assumptions and conditions described in the Pro Forma
Combined Financial Statements and the Notes thereto. The Company's audited
consolidated financial statements have been restated to reflect (i) the results
of the businesses to be spun off to shareholders in the Company's recently
announced Strategic Restructuring Plan as discontinued operations; and (ii) the
change in accounting treatment of the 22 business combinations completed during
the nine months ended January 24, 1998, from the pooling-of-interests method to
the purchase method.
In January 1998, the Company's Board of Directors approved the Strategic
Restructuring Plan. The principal elements of the Strategic Restructuring Plan
are (1) the Tender Offer and the incurrence of debt to pay a portion of the
purchase price in the Tender Offer; (2) after acceptance of shares in the Tender
Offer, the Distributions; and (3) the Equity Investment by Investor following
acceptance of shares in the Tender Offer and the record date for the
Distributions. In conjunction with the Strategic Restructuring Plan, the Company
plans to undertake the 2001 Note Offer, the 2003 Note Tender and the New
Borrowings. (Capitalized terms not defined herein shall have the meaning given
such term in the text of the Proxy Statement.)
As a result of the Strategic Restructuring Plan, the Company's consolidated
financial statements reflect the results of those companies to be owned by the
Spin-Off Companies (and thus included in the Distributions) as discontinued
operations. Assuming completion of the transactions contemplated by the
Strategic Restructuring Plan, the Company's continuing operations will consist
of its North American Office Products Group (which includes office supply,
office furniture, and coffee, beverage, and vending service businesses), its
Mail Boxes Etc. subsidiary (acquired in late November 1997), its operations in
New Zealand and Australia, and its 49% interest in Dudley Stationery Limited, a
U.K. contract stationer ("Dudley"). The Company's North American Office Products
Group operates primarily in the United States; it also includes three coffee and
beverage businesses located in Canada.
Except where specifically noted, the discussion of financial condition and
results of operations that appears below covers only the Company's continuing
operations, assuming completion of the transactions contemplated by the
Strategic Restructuring Plan. For additional information about the results of
discontinued operations, see Note 4 of the Company's Notes to Consolidated
Financial Statements.
The Company's continuing operations derived revenues primarily from the sale
of a wide variety of office supplies, office furniture, and other office
products (including coffee, beverage, and vending products and services) to
corporate, commercial and industrial customers. Cost of revenues represents the
purchase price for office supplies, office furniture and other office products
and includes occupancy and delivery costs and is reduced by rebates and
discounts on purchases.
F-5
<PAGE>
The Company's financial condition and results of operations have changed
dramatically from the Company's inception in October 1994 to January 24, 1998 as
a result of the Company's aggressive acquisition program. The Company completed
165 business combinations (144 related to continuing operations and 21 related
to discontinued operations) from its inception through the end of fiscal 1997,
54 of which were accounted for under the pooling-of-interests method (39 related
to continuing operations and 15 related to discontinued operations). During the
nine months ended January 24, 1998, the Company completed an additional 60
business combinations (40 related to continuing operations and 20 related to
discontinued operations). As a result of the Board's adoption of the Strategic
Restructuring Plan, all 60 business combinations completed during the nine
months ended January 24, 1998 are accounted for under the purchase method. Prior
to the adoption of the Strategic Restructuring Plan, 22 of these 60 business
combinations were accounted for under the pooling-of-interests method (12
related to continuing operations and 10 related to discontinued operations).
Following adoption of the Strategic Restructuring Plan, the Company restated its
historical consolidated financial statements to account for these 22 business
combinations under the purchase method (including the Company's acquisition of
Mail Boxes Etc.) The Company's consolidated financial statements give
retroactive effect to the business combinations accounted for under the
pooling-of-interests method during the fiscal year ended April 26, 1997 and
include the results of companies acquired in business combinations accounted for
under the purchase method from their respective acquisition dates.
Due to the Company's growth through acquisitions, year-to-year comparisons
of the historical results of the Company's operations have been affected
primarily by the addition of acquired companies. In most instances, these dollar
increases in the various revenues and expense components of the Company's
results are due primarily to growth from acquisitions. Neither the magnitude nor
the source of such year-to-year changes is necessarily indicative of changes
that will occur in the future. As a result of the Strategic Restructuring Plan,
the Company expects to focus more on improving and expanding existing
operations, and less on acquisitions as a means of growth. In any event, the
Company expects that the impact of acquisitions on the future results of the
Company's continuing operations will decrease because the size of companies that
it expects to be available for acquisition will be smaller than in prior periods
and the Company's existing operations are larger than in prior years.
F-6
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the fiscal years ended April 30, 1995 and 1996 and April 26, 1997 and for the
nine months ended January 25, 1997 and January 24, 1998, as well as for the
fiscal year ended April 26, 1997 and for the nine months ended January 25, 1997
and January 24, 1998 on a pro forma basis reflecting the Strategic Restructuring
Plan, the 2001 Note Offer, the 2003 Note Tender, the New Borrowings and the
results of the companies acquired between May 1, 1996 and March 20, 1998 in
business combinations accounted for under the purchase method as if such
transactions had occurred on May 1, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25, JANUARY 24, JANUARY 25,
1995 1996 1997 1997 1997 1998 1997
----------- ----------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............. 73.8 74.4 71.8 71.2 71.9 72.1 71.2
----- ----- ----- ----- ----- ----- -----
Gross profit 26.2 25.6 28.2 28.8 28.1 27.9 28.8
Selling, general and
administrative expenses.... 23.1 21.8 23.1 23.2 23.0 22.6 23.2
Amortization expense 0.1 0.3 0.6 0.9 0.5 0.7 0.9
Non-recurring acquisition
costs...................... 0.7 0.4 0.3 0.5 0.3
Restructuring charges........ 0.1 0.1 0.1
----- ----- ----- ----- ----- ----- -----
Operating income........... 3.0 2.7 4.0 4.3 4.1 4.6 4.4
Interest expense, net........ 0.4 0.4 1.4 3.7 1.5 1.3 3.8
Other income (loss).......... (0.2) (0.1) (0.2) (0.3) (0.3) (0.3) (0.3)
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 2.8 2.4 2.8 0.9 2.9 3.6 0.9
Provision for income taxes... 0.4 0.6 1.3 0.7 1.2 1.7 0.7
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before
extraordinary items........ 2.4 1.8 1.5 0.2% 1.7 1.9 0.2%
----- -----
----- -----
Discontinued operations, net
of income taxes............ 2.3 1.5 1.3 1.4 1.3
----- ----- ----- ----- -----
Income before extraordinary
items...................... 4.7 3.3 2.8 3.1 3.2
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes............... 0.1 0.1 0.1
----- ----- ----- ----- -----
Net income................... 4.7% 3.2% 2.7% 3.0% 3.2%
----- ----- ----- -----
----- ----- ----- ----- -----
-----
<CAPTION>
PRO FORMA
JANUARY 24,
1998
-------------
<S> <C>
Revenues..................... 100.0%
Cost of revenues............. 71.5
-----
Gross profit 28.5
Selling, general and
administrative expenses.... 22.6
Amortization expense 0.9
Non-recurring acquisition
costs......................
Restructuring charges........
-----
Operating income........... 5.0
Interest expense, net........ 3.8
Other income (loss).......... (0.3)
-----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 1.5
Provision for income taxes... 1.0
-----
Income from continuing
operations before
extraordinary items........ 0.5%
-----
-----
Discontinued operations, net
of income taxes............
Income before extraordinary
items......................
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes...............
Net income...................
</TABLE>
PRO FORMA RESULTS OF OPERATIONS
The Company's pro forma results of operations for the fiscal year ended
April 26, 1997 and the nine months ended January 25, 1997 and January 24, 1998
reflect significant decreases in net income and net income per share from the
amounts reported in the Company's historical consolidated financial statements.
The significant decreases can be attributed primarily to (i) substantially
higher amortization expenses as compared to prior periods (as a result of
reclassifying 12 business combinations as purchase acquisitions (including the
Company's acquisition of Mail Boxes Etc.), rather than under the pooling-of-
interests method, as the Company had expected when it completed those
acquisitions); (ii) substantially higher interest expense, as a result of
increased borrowing that the Company expects to incur to help finance the cost
of the Tender Offer; and (iii) higher effective income tax rates, due to
increased non-deductible goodwill expense. The pro forma results do not purport
to represent the results the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or of the future results of the Company.
F-7
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Consolidated revenues increased 28.8%, from $1,498.3 million for the nine
months ended January 25, 1997, to $1,930.1 million for the nine months ended
January 24, 1998. This increase was primarily due to acquisitions. Revenues for
the nine months ended January 24, 1998 include revenues from 111 companies
acquired in business combinations accounted for under the purchase method after
the beginning of fiscal 1997 (the "Fiscal 1997 and 1998 Purchased Companies").
Revenues for the nine months ended January 25, 1997 include revenues from 54 of
the Fiscal 1997 and 1998 Purchased Companies for a portion of such period. This
increase was partially offset by the effect on international revenues of the
devaluation of the New Zealand and Australian dollars versus the USD. Because
revenues generated in New Zealand and Australia contributed approximately
one-third of the Company's consolidated revenues during the nine months ended
January 24, 1998, management estimates that currency devaluation had the effect
of reducing the Company's reported consolidated revenues (in U.S. dollar terms)
by approximately 3.8%.
International revenues increased 36.5%, from $488.8 million, or 32.6% of
consolidated revenues, for the nine months ended January 25, 1997, to $667.4
million, or 34.6% of consolidated revenues, for the nine months ended January
24, 1998. The increase in international revenues was primarily due to the
inclusion, in the revenues for the nine months ended January 24, 1998, of
revenues from 31 companies that were acquired in business combinations accounted
for under the purchase method after the beginning of fiscal 1997, the most
significant of which was Whitcoulls Group Limited, which the Company's
wholly-owned subsidiary Blue Star Group Limited acquired in July 1996. Revenues
from 14 of such companies were included in international revenues for a portion
of the nine months ended January 25, 1997. The growth in international revenues
was partially reduced by a decline in the exchange rates of the New Zealand and
Australian dollars against the USD. The following table details the declines in
the average exchange rates of the New Zealand and Australian dollars versus the
USD for the nine months ended January 24, 1998 and January 25, 1997:
<TABLE>
<CAPTION>
AVERAGE EXCHANGE RATES FOR
THE NINE MONTHS ENDED
----------------------------
JANUARY 24, JANUARY 25,
1998 1997 DECLINE
------------- ------------- -----------
<S> <C> <C> <C>
New Zealand dollar............................................................. $ .64 $ .70 $ (.06)
Australian dollar.............................................................. $ .72 $ .79 $ (.07)
</TABLE>
International revenues in New Zealand and Australia, calculated in their
local currencies, increased 49.4% for the nine months ended January 24, 1998, as
compared to the nine months ended January 25, 1997. This increase was due
primarily to the inclusion, in the revenues for the nine months ended January
24, 1998, of revenues from the acquired companies discussed above.
Gross profit increased 28.1%, from $420.9 million for the nine months ended
January 25, 1997, to $539.3 million for the nine months ended January 24, 1998.
Gross profit as a percentage of revenues decreased from 28.1% for the nine
months ended January 25, 1997 to 27.9% for the nine months ended January 24,
1998. The slight decrease in gross profit as a percentage of revenues was due
primarily to a shift in revenue mix, primarily as a result of acquisitions, to
revenues from traditionally lower margin products and services, partially offset
by improved purchasing and rebate programs negotiated with vendors. The Company
expects to continue to negotiate favorable purchasing and rebate programs with
vendors. However, the Company does not believe that it will be able to continue
to improve these programs at the same rates as in the past, as significant
progress has already been made with vendors.
Selling, general and administrative expenses increased 26.6%, from $344.5
million for the nine months ended January 25, 1997, to $436.0 million for the
nine months ended January 24, 1998 primarily due to the inclusion of the results
of the Fiscal 1997 and 1998 Purchased Companies. Selling, general and
administrative expenses as a percentage of revenues decreased from 23.0% for the
nine months ended January 25, 1997 to 22.6% for the nine months ended January
24, 1998. The decrease in selling, general and administrative expenses as a
percentage of revenues was due to several factors, including (i) a shift in
F-8
<PAGE>
revenue mix, primarily as a result of acquisitions, to revenues from products
and services traditionally having lower selling, general and administrative
expenses; (ii) reductions in selling, general and administrative expenses by the
Company through the consolidation of certain redundant facilities and job
functions; and (iii) reductions in the costs of many general and administrative
expenses incurred by the Company through the negotiation of national or other
large-scale contracts with the providers of certain services affecting these
general and administrative expenses.
Amortization expense increased 71.3%, from $8.1 million for the nine months
ended January 25, 1997, to $13.8 million for the nine months ended January 24,
1998. This increase is due exclusively to the increase in the number of purchase
acquisitions, including the 12 acquisitions that were originally planned to be
accounted for under the pooling-of-interests method but were restated as
purchase acquisitions as a result of the Strategic Restructuring Plan, included
in the results for the nine months ended January 24, 1998 versus the nine months
ended January 25, 1997.
The Company incurred non-recurring acquisition costs of approximately $7.3
million during the nine months ended January 25, 1997, in conjunction with
business combinations that were accounted for under the pooling-of-interests
method. These non-recurring acquisition costs included accounting, legal and
investment banking fees, real estate and environmental assessments and
appraisals, various regulatory fees and recognition of transaction related
obligations. Generally accepted accounting principles require the Company to
expense all acquisition costs (both those paid by the Company and those paid by
the sellers of the acquired companies) related to business combinations
accounted for under the pooling-of-interests method. In accordance with
generally accepted accounting principles, the Company will be unable to utilize
the pooling-of-interests method to account for acquisitions for a period of up
to 6-9 months following the completion of the Strategic Restructuring Plan.
During this period, the Company will not reflect any non-recurring acquisition
costs in its results of operations, as all costs incurred of this nature would
be related to acquisitions accounted for under the purchase method and would,
therefore, be capitalized as a portion of the purchase consideration.
Consistent with the objectives of the Strategic Restructuring Plan and as
part of the Company's increased focus on operational matters, the Company
expects to undertake cost reduction measures including the elimination of
duplicative facilities, the consolidation of certain operating functions, and
the deployment of common information systems. The implementation of the cost
reduction measures may involve the incurrence by the Company of certain
restructuring costs. However, at the present time, no formal plans to implement
any restructuring have been developed. Once developed, any such plans will
necessarily require review by the Company's senior management and the
implementation of such plans would not be initiated prior to the receipt of
proper authorization of the Company's Board of Directors. Based on the
additional time and resources expected to be involved in the development, review
and approval of any such restructuring plans, the Company cannot presently
predict if a restructuring charge will be incurred and, if incurred, the timing
or overall magnitude of such a charge.
Interest expense, net of interest income, increased 20.9% from $21.5 million
for the nine months ended January 25, 1997, to $26.0 million for the nine months
ended January 24, 1998. This was due primarily to a reduction in interest income
during the nine months ended January 24, 1998. The Company earned interest
income on the proceeds from the issuance of an aggregate of $230.0 million of
convertible subordinated notes in May and June of 1996 (the first quarter of
fiscal 1997). These proceeds were subsequently used to fund a portion of the
cash consideration used in business combinations. Interest expense has remained
relatively consistent, as steadily increasing borrowings and a declining cash
position have been offset by the repayment of debt from the proceeds of a stock
offering in January 1997 and declining interest rates.
Other income increased 56.4%, from $4.1 million for the nine months ended
January 25, 1997, to $6.4 million for the nine months ended January 24, 1998.
Other income for the nine months ended January 24, 1998 of $6.4 million
consisted primarily of a $4.7 million marketing fee, a gain on the sale of an
investment and the Company's 49% share of the net income of the Company's 49%
equity investment in Dudley. The Company acquired its 49% interest in Dudley in
November 1996. Other income for the nine months ended January 25, 1997 of $4.1
million consisted primarily of a foreign currency gain of $3.4 million. Although
management is pursuing additional opportunities to generate other income from
arrangements with third parties that desire access to the Company's distribution
network and customer base, management can not predict whether or when such
opportunities will be realized, or what amount of other income might be
available to the Company.
F-9
<PAGE>
YEAR ENDED APRIL 26, 1997 COMPARED TO THE YEAR ENDED APRIL 30, 1996
Consolidated revenues increased 99.3%, from $1,061.5 million in fiscal 1996,
to $2,116.0 million in fiscal 1997. This increase was primarily due to the
inclusion in fiscal 1997 revenues of revenues from the 91 companies related to
continuing operations that were acquired in business combinations accounted for
under the purchase method during fiscal 1997 (the "Fiscal 1997 Purchased
Companies") from their respective dates of acquisition and revenues from the 31
companies related to continuing operations that were acquired in business
combinations accounted for under the purchase method during fiscal 1996 (the
"Fiscal 1996 Purchased Companies") for the entire year. Revenues in fiscal 1996
include revenues from the Fiscal 1996 Purchased Companies from their respective
dates of acquisition.
International revenues increased from $84.8 million, or 8.0% of consolidated
revenues, in fiscal 1996, to $708.4 million, or 33.5% of consolidated revenues
in fiscal 1997. International revenues consisted primarily of revenues from New
Zealand and Australia, with the balance from Canada. The increase in
international revenues was primarily due to the inclusion, in the revenues for
fiscal 1997, of revenues from 15 companies that were acquired in business
combinations accounted for under the purchase method during fiscal 1997. Fiscal
1996 international revenues include the results of two companies for the entire
year and the results of two companies acquired in fiscal 1996 in business
combinations accounted for under the purchase method.
Gross profit increased 119.7%, from $272.1 million, or 25.6% of revenues, in
fiscal 1996, to $597.7 million, or 28.2% of revenues, in fiscal 1997. The
increase in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix resulting in a higher proportion of revenues in
traditionally higher margin products and services, primarily as a result of the
increase in products sold in New Zealand and Australia and as a result of
improved purchasing and rebate programs negotiated with vendors. The Company
expects to continue to negotiate favorable purchasing and rebate programs with
vendors. However, the Company does not believe that it will be able to continue
to improve these programs at the same rates as in the past, as significant
progress has already been made with vendors.
Selling, general and administrative expenses increased 110.8%, from $231.6
million, or 21.8% of revenues, in fiscal 1996, to $488.2 million, or 23.1% of
revenues, in fiscal 1997. The increase in selling, general and administrative
expenses as a percentage of revenues was due primarily to a shift in revenue mix
resulting in a higher proportion of revenues from products and services with
traditionally higher selling, general and administrative expenses, such as
products sold in New Zealand and Australia.
The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interests in the
Company, which also has the effect of more closely aligning their interests with
the interests of stockholders of the Company. As a result, if the Company had
recorded compensation expense based upon the fair market value of the stock
options on the dates of grant under the methodology prescribed by SFAS 123, the
Company's income from continuing operations for the fiscal year ended April 26,
1997 would have been reduced by approximately $12.6 million or 39.6%. The
Company believes that the adjustments to the employee stock options as a result
of the Strategic Restructuring Plan will result in a significant increase in the
number of stock options outstanding which may limit the number of stock options
available for grant to employees in the future. The Company believes that it
offers its employees market competitive compensation packages and does not
expect that a reduction in the number of stock options available to employees in
the future will have a material impact on the Company's ability to retain and
attract qualified employees.
Amortization expense increased from $2.7 million in fiscal 1996 to $12.4
million in fiscal 1997. This increase is due exclusively to the increase in the
number of purchase acquisitions included in the results for fiscal 1997 versus
fiscal 1996.
The Company incurred non-recurring acquisition costs of $8.1 million and
$8.0 million during fiscal 1996 and 1997, respectively, in conjunction with
business combinations accounted for under the pooling-of-interests method. The
non-recurring acquisition costs reflect the completion of 14 and 25 business
combinations accounted for under the pooling-of-interests method during fiscal
1996 and fiscal 1997, respectively. The non-recurring acquisition costs in
fiscal 1996 included a charge of approximately $4.7
F-10
<PAGE>
million related to one business combination which included the payment of
significant transaction-related compensation obligations.
The Company also incurred restructuring costs of approximately $682,000 and
$4.2 million during fiscal 1996 and 1997, respectively. These costs represent
the external costs and liabilities to close redundant Company facilities,
severance costs related to the Company's employees and other costs associated
with the Company's restructuring plans. The Company expects to incur similar
costs in the future as the Company continues to review its operations. On a
regional level, the Company is implementing regional consolidation and
integration plans for its office supply, office coffee and beverage services and
office furniture divisions through which the Company has established and expects
to continue to establish district fulfillment centers ("DFCs"). The DFCs are
intended to enable certain operational activities, such as inventory management,
purchasing, accounting and human resources, to be shared among hubs and spokes
located within the same geographic area. This regional approach is intended to
permit the elimination of duplicative facilities and costs and promote
integration of the operations within each region.
Interest expense, net of interest income, increased 531.0%, from $4.6
million in fiscal 1996, to $29.2 million in fiscal 1997. This increase was due
primarily to the increase in the Company's borrowings through the issuance of an
aggregate of $373.75 million of 5 1/2% Convertible Subordinated Notes (the
"Notes") during the fourth quarter of fiscal 1996 and the first quarter of
fiscal 1997 and an increase in the outstanding balance under the Company's
credit facility. The proceeds from the issuance of the Notes and the additional
borrowings under the credit facility were used primarily to fund the cash
portion of the consideration in certain business combinations accounted for
under the purchase method and to refinance indebtedness assumed in business
combinations.
Other income increased 518.9%, from $684,000 in fiscal 1996, to $4.2 million
in fiscal 1997. Fiscal 1997 other income consists primarily of foreign currency
gains and equity in the net income of the Company's 49% investment in Dudley,
the largest independent office products dealer in the United Kingdom. The
Company anticipates that the income from its equity investment will increase as
the fiscal 1997 amount represented earnings from November 14, 1996, the date of
the Company's investment, through April 26, 1997.
Provision for income taxes increased from $6.0 million in fiscal 1996 to
$27.9 million in fiscal 1997, reflecting effective income tax rates of 24.0% and
46.7%, respectively. The low effective income tax rate in fiscal 1996, compared
to the federal statutory rate of 35.0%, was primarily due to the fact that
several of the companies included in the results for such year, which were
acquired in business combinations accounted for under the pooling-of-interests
method, were not subject to federal income taxes on a corporate level as they
had elected to be treated as subchapter S corporations prior to being acquired
by the Company. In fiscal 1997, this effect was offset by the increase in
nondeductible expenses, including amortization of goodwill and non-recurring
acquisition costs.
Income from discontinued operations increased 69.9% from $15.8 million in
fiscal 1996 to $26.8 million in fiscal 1997. See Note 4 of the Company's Notes
to Consolidated Financial Statements.
During fiscal 1997, the Company incurred extraordinary items totaling $1.5
million, which represent the aggregate expenses, net of the expected tax
benefit, associated with the early termination of the Company's $50 million
credit facility with First Bank National Association and the early termination
of credit facilities at two companies acquired in transactions accounted for
under the pooling-of-interests method during fiscal 1997.
YEAR ENDED APRIL 30, 1996 COMPARED TO THE YEAR ENDED APRIL 30, 1995
Consolidated revenues increased 61.2%, from $658.5 million in fiscal 1995,
to $1,061.5 million in fiscal 1996. This increase was primarily due to the
inclusion in the revenues for fiscal 1996 of revenues from the Fiscal 1996
Purchased Companies from their respective dates of acquisition and revenues from
five companies that were acquired in business combinations accounted for under
the purchase method during fiscal 1995 (the "Fiscal 1995 Purchased Companies")
for the entire year. Revenues in fiscal 1995 include revenues from the Fiscal
1995 Purchased Companies from their respective dates of acquisition.
F-11
<PAGE>
International revenues increased from $35.7 million, or 5.4% of consolidated
revenues, in fiscal 1995, to $84.8 million, or 8.0% of consolidated revenues, in
fiscal 1996. This increase was primarily due to the inclusion in the revenues
for fiscal 1996 of revenues from two companies for the entire year and two
companies that were acquired in business combinations accounted for under the
purchase method during fiscal 1996.
Gross profit increased 57.7%, from $172.5 million, or 26.2% of revenues, in
fiscal 1995, to $272.1 million, or 25.6% of revenues, in fiscal 1996. The
decrease in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix, primarily resulting from acquisitions, to revenues in
traditionally lower gross margin products and services.
Selling, general and administrative expenses increased 52.2%, from $152.2
million, or 23.1% of revenues, in fiscal 1995, to $231.6 million, or 21.8% of
revenues, in fiscal 1996. The decrease in selling, general and administrative
expenses as a percentage of revenues was due primarily to a shift in revenue
mix, primarily resulting from acquisitions, to revenues in products and services
traditionally lower in selling, general and administrative expenses.
Amortization expense increased 238.5%, from $801,000 in fiscal 1995 to $2.7
million in fiscal 1996. This increase is due exclusively to the increase in the
number of purchase acquisitions included in the results for fiscal 1996 versus
fiscal 1995.
The Company incurred non-recurring acquisition costs of approximately $8.1
million in fiscal 1996, in conjunction with 14 business combinations accounted
for under the pooling-of-interests method. The non-recurring acquisition costs
in fiscal 1996 included a charge of approximately $4.7 million related to one
business combination which included the payment of significant
transaction-related compensation obligations. During fiscal 1996, the Company
also recorded restructuring charges of $682,000 related to the discontinuation
of the printing division at one subsidiary.
Interest expense, net of interest income, increased 69.7% from $2.7 million,
in fiscal 1995, to $4.6 million in fiscal 1996. This increase was due primarily
to the increase in the Company's borrowings through the issuance of $143.75
million of Notes during the fourth quarter of fiscal 1996 and an increase in the
outstanding balance on the Company's credit facility. The proceeds from the
issuance of the Notes and the additional borrowings from the credit facility
were used to fund the cash portion of the consideration in business combinations
and to refinance indebtedness assumed in such business combinations.
Provision for income taxes increased from $2.8 million in fiscal 1995 to
$6.0 million in fiscal 1996 reflecting effective income tax rates of 15.3% and
24.0%, respectively. The low effective income tax rates in fiscal 1995 and 1996,
compared to the federal statutory rate of 35.0%, are primarily due to the fact
that several companies included in the results for fiscal 1995 and 1996, which
were acquired in business combinations accounted for under the
pooling-of-interests method, were not subject to federal income taxes on a
corporate level as they had elected to be treated as subchapter S corporations
prior to being acquired by the Company.
Income from discontinued operations increased from $15.7 million in fiscal
1995 to $15.8 million in fiscal 1996.
During fiscal 1996, the Company incurred an extraordinary item of $701,000,
which represented the aggregate expenses, net of the expected tax benefit,
associated with the early termination of a credit facility at a company acquired
in a business combination accounted for under the pooling-of-interests method.
Basic and diluted income from continuing operations per share decreased $.06
from fiscal 1995 to fiscal 1996. These decreases are primarily the result of the
fact that U.S. Office Products began operations in February 1995 and the
majority of the results included prior to that date represented the results of
companies acquired in business combinations accounted for under the
pooling-of-interests method, many of which were subchapter S corporations. This
resulted in an effective income tax rate of 15.3% in fiscal 1995 versus 24.0% in
fiscal 1996. In addition, the Company incurred $8.1 million in non-recurring
acquisition costs and $682,000 in restructuring costs during fiscal 1996
compared to no such costs in fiscal 1995.
F-12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On a pro forma as adjusted basis, at January 24, 1998, the Company had
working capital of $396.6 million, long-term debt of $1,155.5 million and
capitalization of $1.7 billion. Such pro forma amounts give effect to the
Strategic Restructuring Plan, the 2001 Note Offer, the 2003 Note Tender and the
New Borrowings to be undertaken in conjunction with the Strategic Restructing
Plan and purchase acquisitions completed subsequent to January 24, 1998, and
through March 20, 1998, as if such transactions had occurred on January 24,
1998.
The Company anticipates that after the Strategic Restructuring Plan is
completed, its cash on hand, cash flow from operations and borrowings available
from its expected refinancing of its existing bank credit facility will be
sufficient to meet its liquidity requirements for its operations and capital
expenditures and for its additional debt service obligations for the remainder
of the calendar year. The Company does not currently anticipate that any
possible restructuring costs related to the Company's planned cost reduction
measures, coupled with the effects of such cost reduction measures, would have a
significant adverse effect on the Company's financial position, liquidity or
cash flows. The Company anticipates capital expenditures of approximately $40.0
million in both fiscal 1999 and fiscal 2000.
The existing credit facility provides the Company with a $500 million line
of credit, bearing interest, at the Company's option, at the bank's base rate
plus an applicable margin of up to 1.25%, or a eurodollar rate plus an
applicable margin of up to 2.5%. At March 20, 1998, the Company had
approximately $362.0 million outstanding under the Credit Facility, at an annual
interest rate of approximately 6.5%, and $138.0 million available under the
Credit Facility for acquisition and working capital purposes. Because certain
elements of the Strategic Restructuring Plan would violate covenants in the
Credit Facility, that facility will either have to be modified with the lenders'
consent or refinanced. The Company currently expects to finance the aggregate
cost of purchasing shares in the Tender Offer with the proceeds of the Equity
Investment, additional senior secured bank debt, and the net proceeds from the
issuance of subordinated debt securities. In connection with the completion of
the Strategic Restructuring Plan, the Company expects to incur approximately
$500 million of additional indebtedness. The Company also expects to incur
significant transaction (including financing) costs and expenses.
U.S. Office Products has agreed to and accepted a commitment letter from The
Chase Manhattan Bank, Bankers Trust Company, and Merrill Lynch Capital
Corporation, as agents, and Chase Securities Inc., BT Alex. Brown Incorporated
and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as co-arrangers, for a
new bank loan facility that will provide for an aggregate principal amount of
$1,225.0 million, consisting of (i) seven-year term loan facilities totaling up
to $300.0 million, (ii) an eight-year term loan in the principal amount of
$675.0 million, and (iii) a revolving credit facility in the principal amount of
$250.0 million. U.S. Office Products and the banks may agree to alter the
allocated principal amount of two or more of the loan facilities before signing
definitive documents depending on market conditions. The loan facilities will be
guaranteed by U.S. Office Products' material domestic subsidiaries and secured
by substantially all of the assets of U.S. Office Products and its material
domestic subsidiaries. U.S. Office Products will be required to enter into
arrangements to insure that the effective interest rate paid by U.S. Office
Products on at least 50% of its outstanding bank and subordinated debt will not
go above a certain rate. The loan documents will likely include financial and
other covenants. These will include, among others, restrictions on U.S. Office
Products' ability to incur additional indebtedness, sell assets, pay dividends
or engage in certain other transactions, and requirements that U.S. Office
Products maintain certain financial ratios, and other provisions customary for
loans to highly leveraged companies, including representations by U.S. Office
Products, conditions to funding, cost and yield protections, restricted payment
provisions, transfer provisions, amendment provisions and indemnification
provisions. The loan facilities will be subject to mandatory prepayment in a
variety of circumstances, including upon certain asset sales and financing
transactions. The commitment will terminate unless definitive loan documents are
entered into, and the Strategic Restructuring Plan and Financing Transactions
are completed, by June 30, 1998. As a result of the Company's increased
indebtedness, a portion of the cash flows from the Company's international
operations, will be required to service debt and interest payments. The Company
expects that it will incur additional costs with respect to accessing cash flows
from international operations including
F-13
<PAGE>
such items as New Zealand and Australian withholding and other taxes and foreign
currency hedging costs. In addition, the results of operations could be further
impacted by fluctuations in the New Zealand and Australian exchange rates as a
result of the structure of certain financing alternatives being evaluated by the
Company. The Company also expects to issue $400.0 million principal amount
senior subordinated notes in a private placement but has not received any
commitment with respect to such issuance.
The Company expects that the indenture governing the senior subordinated
notes will also place restrictions on the Company's ability to incur
indebtedness, to make certain payments, investments, loans and guarantees and to
sell or otherwise dispose of a substantial portion of its assets to, or merge or
consolidate with, another entity.
On a historical basis, the Company's working capital was $286.0 million at
April 26, 1997 and $134.0 million at January 24, 1998. Long-term debt was $380.2
million and $381.8 million at April 26, 1997 and January 24, 1998, respectively.
The decline in working capital was due primarily to an increase in the Company's
borrowings under its Credit Facility from $140.1 million at April 26, 1997 to
$330.0 million at January 24, 1998. The increase in the borrowings under the
Credit Facility was primarily to fund the purchase price of acquisitions and to
repay higher-cost debt assumed in acquisitions. Long-term debt increased during
the fiscal year ended April 26, 1997 as a result of the sales, in an offshore
offering and in a concurrent private placement in the United States, of the 2003
Notes in the principal amount of $230.0 million. The net proceeds were used for
working capital and acquisition purposes. In addition, the Company completed the
public sale, at a gross price of $22.00 per share, of approximately 13.0 million
shares of common stock. The net proceeds to the Company were approximately
$275.7 million and were used to repay a portion of the balance outstanding under
the Company's Credit Facility.
During the nine months ended January 24, 1998, the New Zealand and
Australian dollars weakened against the USD. The New Zealand exchange rate
declined from $0.69 USD at April 27, 1997 to $0.58 USD at January 24, 1998. The
Australian exchange rate declined from $0.78 USD at April 27, 1997 to $0.66 USD
at January 24, 1998. This resulted in a reduction in stockholders' equity,
through a cumulative translation adjustment, of approximately $105.5 million,
reflecting the impact of the declining exchange rate on the Company's
investments in its New Zealand and Australian subsidiaries. In addition, the
devaluation has adversely affected the return on the Company's investment in its
New Zealand and Australian operations. If the exchange rates stabilize at
current rates or continue to decline, the Company's return on assets and equity
from its New Zealand and Australian operations will continue to be depressed.
Subsequent to April 26, 1997 and through March 20, 1998, the Company
completed 67 business combinations (45 related to continuing operations and 22
related to discontinued operations) for an aggregate purchase price of $774.7
million, consisting of approximately $190.8 million of cash and 27.8 million
shares of the Company's common stock with an aggregate market value on the dates
of acquisition of approximately $583.9 million.
During the nine months ended January 24, 1998, net cash provided by
operating activities was $34.9 million. Net cash used in investing activities
was $97.6 million, including $33.6 million used for acquisitions, $28.2 million
used for additions to property and equipment and $40.8 million paid to Dudley to
satisfy the remaining commitment related to the Company's 49% equity investment
in Dudley. Net borrowings increased $62.6 million during the nine months ended
January 24, 1998, primarily to fund the purchase prices of acquisitions, to
repay higher-cost debt assumed in acquisitions and to fund the remaining equity
investment in Dudley. Discontinued operations used $3.8 million of cash during
the nine months ended January 24, 1998.
During the nine months ended January 25, 1997, net cash used in operating
activities was $9.2 million which resulted primarily from a decrease in accounts
payable due to the Company's aggressive policy of taking negotiated cash
discounts. Net cash used in investing activities was $390.5 million, including
$323.8 million used for acquisitions, $15.9 million used for additions to
property and equipment and $41.3 million paid to Dudley as the initial payment
related to the Company's 49% equity investment in Dudley. Net borrowings
increased $244.7 million during the nine months ended January 25, 1997,
primarily to fund the purchase prices of acquisitions, to repay higher-cost debt
assumed in acquisitions and to fund the initial equity investment in Dudley. The
Company also received $41.9 million in cash as a result of the sale of common
stock during the period. Discontinued operations used $3.2 million of cash
during the nine months ended January 25, 1997.
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<PAGE>
During fiscal 1997, net cash provided by operating activities was $15.8
million. Net cash provided by operating activities was impacted by the Company's
aggressive cash payment policies related to bringing current the accounts
payable balances at all acquired companies and earning all available cash
discounts offered by vendors for paying balances on reduced payment terms. Net
cash used in investing activities was $424.0 million, including $345.3 million
for acquisitions, $34.0 million for additions to property and equipment and
$41.3 million to make an equity investment in Dudley. Net cash provided by
financing activities was $277.4 million. The Company received net proceeds from
the sale of shares of its common stock of $318.9 million and approximately
$225.4 million from the issuance of the Notes. These net proceeds were used
primarily to fund acquisitions and repay higher interest rate debt assumed in
acquisitions. Net cash used in discontinued operations was $8.2 million.
During fiscal 1996, net cash provided by operating activities was $19.2
million. Net cash used in investing activities was $120.1 million, including
$89.2 million used for acquisitions and $17.9 million used for additions to
property and equipment. Net cash provided by financing activities was $257.8
million. The Company received net proceeds from the sale of shares of its common
stock of $180.2 million and net proceeds from the issuance of the Notes of
approximately $139.0 million. These net proceeds were used primarily to fund
acquisitions, including the repayment of higher interest rate debt assumed in
business combinations. Net cash provided by discontinud operations was $1.7
million.
During fiscal 1995, net cash provided by operating activities was $7.7
million. Net cash used in investing activities was $26.2 million, including
$16.0 million used for acquisitions and $11.0 million used for additions to
property and equipment. Net cash provided by financing activities was $22.3
million, representing net proceeds from the initial public offering, partially
offset by the payment of $11.3 million to the stockholders of four of the
companies acquired simultaneously with the completion of the Company's initial
public offering and the payment of dividends to certain of the companies
acquired in business combinations accounted for under the pooling-of-interests
method of $7.7 million. Net cash provided by discontinued operations was $3.5
million.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
seasonality of the core office products business, however, is expected to be
impacted by the seasonality of the Company's other operations, which have
expanded through acquisitions. For example, the revenues and profitability of
the Company's operations in New Zealand and Australia have generally been higher
in the Company's third quarter. As the Company's mix of businesses evolves
through future acquisitions, these seasonal fluctuations may continue to change.
Therefore, results for any quarter are not necessarily indicative of the results
that the Company may achieve for any subsequent fiscal quarter or for a full
fiscal year.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold, general economic conditions and the retroactive restatement in
accordance with generally accepted accounting principles of the Company's
consolidated financial statements for acquisitions accounted for under the
pooling-of-interests method. Moreover, the operating margins of companies
acquired by the Company may differ substantially from those of the Company,
which could contribute to the further fluctuation in its quarterly operating
results. Therefore, results for any quarter are not necessarily indicative of
the results that the Company may achieve for any subsequent fiscal quarter or
for a full fiscal year.
The following tables set forth certain unaudited consolidated quarterly
financial data for the fiscal years ended April 30, 1996 and April 26, 1997 and
the fiscal year ending April 25, 1998 (in thousands, except for per share
amounts). The information has been derived from unaudited consolidated financial
F-15
<PAGE>
statements that in the opinion of management reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of such
quarterly information.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit....................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................... 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items.............................. 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations......... 3,387 5,550 7,727 (886) 15,778
Net income......................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.24
Net income..................................... 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.23
Net income..................................... 0.08 0.15 0.20 0.07 0.50
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
Gross profit....................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................... 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items.............................. 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations................ 9,475 8,933 2,003 6,389 26,800
Net income......................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.31
Net income..................................... 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.29
Net income..................................... 0.20 0.20 0.12 0.12 0.62
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 614,814 $ 649,340 $ 665,959 $ 1,930,113
Gross profit....................................... 170,782 179,256 189,220 539,258
Operating income................................... 23,802 28,300 37,289 89,391
Income from continuing operations before
extraordinary items.............................. 9,035 12,770 15,431 37,236
Income from discontinued operations................ 10,951 11,428 3,085 25,464
Net income......................................... 19,986 24,198 18,516 62,700
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.09 0.12 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.03 0.23
Net income..................................... 0.19 0.22 0.15 0.55
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.02 0.22
Net income..................................... 0.18 0.21 0.14 0.54
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1995, 1996 or 1997 or during the nine months
ended January 24, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. SFAS No. 128 requires restatement of all prior
period EPS data presented. The Company has adopted SFAS No. 128 during the nine
months ended January 24, 1998 and has restated all prior period EPS data.
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company intends to adopt SFAS
No. 130 in the fiscal year ending April 24, 1999.
FACTORS AFFECTING THE COMPANY'S BUSINESS
A number of factors, including those discussed below, may affect the
Company's future operating results. Where indicated, the following discussion
addresses factors that management believes will be applicable to the Company's
business upon completion of the Strategic Restructuring Plan.
Historically, U.S. Office Products has grown substantially through
acquisitions. U.S. Office Products' aggressive acquisition program has produced
a significant increase in sales, employees, facilities and
F-17
<PAGE>
distribution systems. While the Company's decentralized management strategy,
together with operating
efficiencies resulting from the elimination of duplicative functions and
economies of scale, may present opportunities to reduce costs, such strategies
may initially require additional costs and expenditures to expand operational
and financial systems and corporate management administration. Because of the
various costs and possible cost-savings strategies, historical operating results
may not be indicative of future performance. There also can be no assurance that
the pace of the Company's acquisitions will not adversely affect efforts to
implement cost-savings and integration strategies and to manage operations and
acquisitions profitably. Additionally, attempts to achieve economies of scale
through cost cutting and lay-offs of existing personnel may, at least in the
short term, have an adverse impact upon U.S. Office Products. Delays in
implementing planned integration and consolidation strategies, or the failure of
such strategies to achieve anticipated cost savings, also could adversely affect
the Company's results. In addition, there can be no assurance that U.S. Office
Products' management and financial controls, personnel, computer systems and
other corporate support systems will be adequate to manage the continuing
increase in the size and scope of the Company's operations and acquisition
activity.
U.S. Office Products intends to pursue future acquisition opportunities;
however, no assurance can be given that U.S. Office Products will identify,
finance and complete additional suitable acquisitions on acceptable terms, or
that future acquisitions, if completed, will be successful. U.S. Office Products
will likely incur additional debt to finance any additional acquisitions. In
addition, acquired companies may not achieve future sales and profitability
levels that justify the prices that U.S. Office Products paid to acquire them.
Acquisitions also may involve a number of special risks that could have a
material adverse effect on future operations and financial performance,
including diversion of management's attention; unanticipated declines in
revenues or profitability following acquisitions; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated business problems or legal liabilities; and the amortization of
acquired intangible assets, such as goodwill. Tax considerations may also
restrict the amount of stock that U.S. Office Products can use for acquisitions.
See "Effect of the Proposed Sale of Equity Securities and the Strategic
Restructuring Plan--We may be Unable to Issue Additional Stock in Some
Circumstances."
As a result of the Tender Offer and the Distributions, U.S. Office Products
will be precluded from completing business combinations under the
pooling-of-interests accounting method for a period up to 6-9 months. Any
business combinations that U.S. Office Products completes during this period
will have to be accounted for under the purchase method. Under the purchase
method of accounting, U.S. Office Products will have to record goodwill for each
such acquisition, in an amount equal to any excess of the purchase price paid
for the acquired company over the fair market value of the acquired company's
net assets. Under the pooling-of-interests method, no goodwill is recorded in
connection with the acquisition of a pooled company, and there is no
corresponding expense associated with the amortization of such goodwill.
Approximately $917.0 million, or 45.7% of the Company's pro forma total
assets as of January 24, 1998, represents intangible assets, the substantial
majority of which is goodwill. This amount will increase to the extent that U.S.
Office Products acquires additional companies under the purchase method of
accounting. The Company amortizes goodwill on a straight-line method over a
period of up to 40 years. The amount amortized in a particular fiscal period is
a non-cash expense that reduces the Company's net income. As a result of the
accounting for the acquisition of Mail Boxes Etc. ("MBE") under the purchase
method (rather than the pooling-of-interests method that had been intended at
the time of the acquisition), the Company's amortization charge will increase by
approximately $6.5 million annually. The substantial majority of goodwill also
is not a deductible expense for U.S. federal income tax purposes. The Company
expects that its effective tax rate will be higher than the federal statutory
rate, because its net earnings will be reduced by a significant amount of
non-deductible goodwill charges.
The Company is currently reviewing the year 2000 compliance of software that
it uses in its business. The Company's Trinity system, which it is currently
installing throughout its North American Office Products Group operations as the
core operations system, is year 2000 compliant. However, the Company's
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<PAGE>
operating subsidiaries are, in some cases, using billing or other software that
is not year 2000 compliant. Based upon information that the Company has
collected from its operating subsidiaries, it expects to be able to achieve year
2000 compliance in 1999 and does not expect that the cost of making necessary
adaptations will be material to the Company. If the Company cannot make the
necessary adaptations on a timely basis, or if the costs are greater than
expected, the Company's business could be adversely affected.
Management intends to continue to focus significant attention and resources
on international operations and expects foreign sales to continue to represent a
significant portion of U.S. Office Products' total sales. The factors described
in this section that apply to U.S. Office Products' domestic operations also may
affect U.S. Office Products' foreign operations. In addition, U.S. Office
Products' foreign operations are subject to a number of other risks, including
currency exchange rates; new and different legal and regulatory requirements in
local jurisdictions; tariffs and trade barriers; potential difficulties in
staffing and managing local operations; credit risk of local customers and
distributors; potential difficulties in protecting intellectual property,
potential imposition of restrictions on investments; potentially adverse tax
consequences, including imposition or increase of withholding and other taxes on
remittances and other payments by subsidiaries; and local economic, political
and social conditions, including the possibility of hyper-inflationary
conditions, in certain countries. There can be no assurance that one or a
combination of these factors will not have a material adverse impact on U.S.
Office Products' ability to maintain or increase its foreign sales or on its
business, financial condition or results of operations. See "Managements'
Discussion and Analysis of Financial Position and Results of
Operations--Liquidity and Capital Resources."
U.S. Office Products expects to incur substantial additional borrowings in
connection with the Tender Offer. See Note 1 of the Company's Notes to
Consolidated Financial Statements and "--Liquidity and Capital Resources." This
substantial increase in U.S. Office Products' leverage could have material
consequences to U.S. Office Products and the holders of common stock, including,
but not limited to, the following: (i) U.S. Office Products' ability to obtain
additional financing in the future for acquisitions, working capital, capital
expenditures, and general corporate or other purposes may be impaired, (ii) a
substantial portion of U.S. Office Products' cash flow will be required for debt
service and, as a result, will not be available for other purposes; and (iii)
U.S. Office Products' level of indebtedness could make it more vulnerable to
economic downturns, limit its ability to withstand competitive pressures and
reduce its flexibility in responding to changing business and economic
conditions. In addition, it is expected that the Company's financing agreements
will contain covenants that may restrict its ability to take certain actions
(such as buying or selling assets, paying dividends, making capital
expenditures, or engaging in other transactions). If U.S. Office Products is
unable to service its indebtedness, it will be forced to pursue one or more
alternative strategies, such as selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. The Company's management
does not have experience operating a business with a substantial amount of
leverage.
U.S. Office Products operates in a highly competitive environment. It
generally competes with a large number of smaller, independent companies, many
of which are well-established in their markets. In addition, in North America,
the North American Office Products Group competes with five large office
products companies, each of which has significant financial resources. No
assurances can be give that competition will not have an adverse effect on the
Company's business.
U.S. Office Products acquired MBE in November 1997. Various factors may
affect MBE's business, including recent changes in MBE's senior management, the
reliance of MBE franchisees on United Parcel Service for ground shipping
services, the limited control that MBE has over its franchisees, the impact of
government regulation of MBE as a franchisor, the historically litigious nature
of franchise relationships and the growing competition from the United States
Postal Service.
As part of the Strategic Restructuring Plan, it is expected that Investor
will acquire shares of U.S. Office Products common stock representing 24.9% of
the outstanding shares of the Company's common stock after giving effect to the
issuance of such shares. Investor also will purchase various warrants that
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<PAGE>
give it the right to acquire additional shares of common stock in the future.
Under the Investment Agreement that Investor and the Company signed on January
12, 1998 (the "Investment Agreement"), Investor will have, among other things,
the right (subject to certain conditions) to nominate three of the nine members
of the U.S. Office Products Board of Directors, including the Chairman of the
Board, and certain Board decisions will be subject to super-majority voting
provisions that, in certain circumstances, may require the concurrence of at
least one director nominated by Investor. Matters subject to super-majority
Board approval include (i) the issuance of new shares in excess of certain
amounts specified in the Investment Agreement, (ii) certain business
combinations, (iii) a disposition by the Company of all or substantially all of
its assets, (iv) a major recapitalization, dissolution, or liquidation of the
Company, or (v) an amendment of the Company's charter or by-laws that is
inconsistent with the terms of the Investment Agreement. Investor's significant
ownership of U.S. Office Products common stock may permit Investor to influence
significantly matters requiring the approval of the Company's stockholders. The
super-majority Board voting requirements may give Investor the ability to block
the approval of certain actions requiring the super-majority vote of the Board.
Together, this ownership position and the Board voting requirements may have the
effect of discouraging (or possibly preventing) a future change in control of
U.S. Office Products. In addition, the super-majority Board voting requirement
may have the effect of limiting the Company's future use of equity to acquire
businesses, raise capital, or provide employees with long-term incentives.
TAX CONSEQUENCES OF THE DISTRIBUTIONS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions stating that for U.S. federal income tax
purposes the Distributions will qualify as tax-free spin-offs under Section 355
of the Code and will not be taxable under Section 355(e) of the Code. The
Company will not complete the Distributions unless it receives the Tax Opinion.
The Tax Opinion will be based on the accuracy as of the time of the
Distributions of factual representations made by the Company, the Spin-Off
Companies and Investor, and certain other data, documentation and other
materials that Wilmer, Cutler & Pickering has deemed necessary. See "Tax
Consequences of the Distributions" in the Proxy Statement.
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e), no gain or loss will be recognized by
the Company or the Company's stockholders (except with respect to cash received
in lieu of fractional shares) as a result of the Distributions.
If a Distribution fails to qualify as a tax-free spin-off under Section 355,
the Company will recognize gain equal to the difference between the fair market
value of the common stock of the Spin-Off Company and the Company's adjusted tax
basis in the common stock of the Spin-Off Company. In addition, holders of U.S.
Office Products common stock will be treated as having received a taxable
corporate distribution in an amount equal to the fair market value of the common
stock of the Spin-Off Company that you receive in the Distribution. If the
Company were to recognize gain on one or more Distributions, such gain would
likely be substantial.
If any Distribution is taxable under Section 355(e), but otherwise qualifies
as a tax-free spin-off, the Company will recognize gain equal to the difference
between the fair market value of the common stock of the Spin-Off Company and
the Company's adjusted tax basis in the common stock of the Spin-Off Company.
However, no gain or loss will be attributable to holders of U.S. Office
Products' common stock as the result of a Distribution being taxable under
Section 355(e). If the Company were to recognize gain on one or more
Distributions, such gain would likely be substantial.
Certain limitations under Section 355 may restrict the Company's ability to
issue capital stock after the Distributions. These limitations will generally
prevent the Company from issuing capital stock to the extent the issuance is
part of a plan, which includes a Distribution, pursuant to which one or more
people or organizations acquire capital stock of the Company that represents 50%
or more of the voting power or 50% or more of the value of the Company's capital
stock. These limitations may restrict the Company's ability to undertake
transactions involving issuances of capital stock of the Company that management
otherwise believes would be beneficial.
F-20
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to (i) the Equity
Self-Tender, (ii) the Distributions, and (iii) the Equity Investment
contemplated by the Strategic Restructuring Plan, (iv) the 2001 Note Offer, (v)
the 2003 Note Tender, (vi) the New Borrowings to be undertaken in conjunction
with the Strategic Restructuring Plan and (vii) all acquisitions completed
through March 20, 1998. The unaudited pro forma combined financial statements do
not give effect to the allocation of corporate overhead to the Spin-Off
Companies.
The pro forma combined balance sheet gives effect to (i) the Equity
Self-Tender, (ii) the Distributions, (iii) the Equity Investment, (iv) the 2001
Note Offer, (v) the 2003 Note Tender, (vi) the New Borrowings and (vii) the
businesses acquired by the Company after January 24, 1998 in business
combinations accounted for under the purchase method (the "Post January 24, 1998
Purchase Acquisitions"), as if all such transactions had occurred as of the
Company's most recent balance sheet date, January 24, 1998.
The pro forma combined statement of income for the nine months ended January
24, 1998 gives effect to (i) the Equity Self-Tender; (ii) the Distributions;
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; and (vii) the business combinations accounted for under
the purchase method during fiscal 1998 (the "Fiscal 1998 Purchase
Acquisitions"), as if all such transactions had occurred on April 27, 1997. The
pro forma combined statement of income for the nine months ended January 24,
1998 is comprised of (i) the unaudited financial information of the Company for
the nine months ended January 24, 1998; and (ii) the unaudited financial
information of the Fiscal 1998 Purchase Acquisitions for the period from April
27, 1997 through their respective acquisition dates, except for the financial
information of the Post January 24, 1998 Purchase Acquisitions which is included
through January 24, 1998.
The pro forma combined statement of income for the nine months ended January
25, 1997 gives effect to (i) the Equity Self-Tender; (ii) the Distributions;
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; (vii) the business combinations accounted for under the
purchase method during fiscal 1997 (the "Fiscal 1997 Purchase Acquisitions");
and (viii) the Fiscal 1998 Purchase Acquisitions, as if all such transactions
had occurred on May 1, 1996. The pro forma combined statement of income for the
nine months ended January 25, 1997 is comprised of (i) the unaudited financial
information of the Company for the nine months ended January 25, 1997; (ii) the
unaudited financial information of the Fiscal 1997 Purchase Acquisitions for the
period from May 1, 1996 through the earlier of January 25, 1997 or their
respective dates of acquisition; and (iii) the unaudited financial information
of the Fiscal 1998 Purchase Acquisitions for the period from May 1, 1996 through
January 25, 1997.
The pro forma combined statement of income for the fiscal year ended April
26, 1997 gives effect to (i) the Equity Self-Tender; (ii) the Distributions,
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; (vii) the Fiscal 1997 Purchase Acquisition; and (viii)
the Fiscal 1998 Purchase Acquisitions, as if all such transactions had occurred
on May 1, 1996. The pro forma combined statement of income for the year ended
April 26, 1997 is comprised of (i) the audited financial information of the
Company for the fiscal year ended April 26, 1997; (ii) the unaudited financial
information of the Fiscal 1997 Purchase Acquisitions for the period from May 1,
1996 through their respective dates of acquisition and (iii) the unaudited
financial information of the Fiscal 1998 Purchase Acquisitions for the period
from May 1, 1996 through April 26, 1997.
The historical financial statements of the Company give retroactive effect
to the results of the 25 companies (related to continuing operations) acquired
by the Company during the fiscal year ended
F-21
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
April 26, 1997 which were acquired in business combinations accounted for under
the pooling-of-interests method of accounting. The results of the companies
included in the Spin-Off Companies have been reflected as discontinued
operations in the Company's historical statement of income.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or the future results of the Company. The pro
forma combined financial statements should be read in conjunction with the
Company's audited consolidated financial statements.
F-22
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST
U.S. JANUARY 24, PRO FORMA ADJUSTMENTS
OFFICE 1998 ---------------------------------------------------
PRODUCTS PURCHASE PURCHASE EQUITY
COMPANY ACQUISITIONS ACCOUNTING SELF-TENDER DISTRIBUTIONS
---------- ------------- ----------- ------------- -------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 45,258 $ 108 $(22,754)(a) $ 907,388(b) $
70,000(b)
(1,000,000)(b)
Accounts receivable,
net.................. 324,976 5,077
Inventory, net......... 239,043 2,035
Prepaid and other
current assets....... 103,624 94 (1,447)(b)
---------- ------------- ----------- ------------- -------------
Total current
assets........... 712,901 7,314 (22,754) (24,059)
Property and equipment,
net.................... 217,228 6,144
Intangible assets, net... 903,722 13,255(a)
Other assets............. 174,549 317 (3,739)(b)
Net assets of
discontinued
operations:
Amounts to become
receivable upon the
Distributions........ 114,959 (114,959)(c)
All other net assets... 346,083 (346,083)(d)
---------- ------------- ----------- ------------- -------------
Total assets....... $2,469,442 $13,775 $ (9,499) $ (27,798) $(461,042)
---------- ------------- ----------- ------------- -------------
---------- ------------- ----------- ------------- -------------
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------
EQUITY 2001 NOTE 2003 NOTE PRO FORMA
INVESTMENT OFFER TENDER COMBINED
----------- ----------- ----------- ----------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 270,000(e) $ $ 217,350(h) $
(270,000)(e) (217,350)(h)
Accounts receivable,
net.................. 330,053
Inventory, net......... 241,078
Prepaid and other
current assets....... 102,271
----------- ----------- ----------- ----------
Total current
assets........... 673,402
Property and equipment,
net.................... 223,372
Intangible assets, net... 916,977
Other assets............. 30,000(f) (3,275) (g) (5,518)(h) 192,334
Net assets of
discontinued
operations:
Amounts to become
receivable upon the
Distributions........
All other net assets...
----------- ----------- ----------- ----------
Total assets....... $ 30,000 $ (3,275) $ (5,518) $2,006,085
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
F-23
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST PRO FORMA ADJUSTMENTS
U.S. OFFICE JANUARY 24, 1998 -----------------------------------------------
PRODUCTS PURCHASE PURCHASE EQUITY
COMPANY ACQUISITIONS ACCOUNTING SELF-TENDER DISTRIBUTIONS
----------- ---------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt............. $ 332,636 $ 640 $ (640)(a) $ $(114,959)(c)
Accounts payable............ 164,229 2,438
Accrued compensation........ 41,262
Other accrued liabilities... 67,654 1,742 (2,074 )(b)
(26,000 )(b)
----------- -------- ---------- ----------- -------------
Total current
liabilities........... 605,781 4,820 (640) (28,074 ) (114,959)
Long-term debt................ 381,844 3,817 (3,817)(a) 907,388 (b)
Deferred income taxes......... 2,845
Other long-term liabilities
and minority interests...... 6,050 96
----------- -------- ---------- ----------- -------------
Total liabilities....... 996,520 8,733 (4,457) 879,314 (114,959)
Stockholders' equity:
Common stock................ 133 (37 )(b)
5 (b)
Paid-in capital............. 1,463,523 69,995 (b) (314,514)(d)
(999,963 )(b)
65,000 (b)
Cumulative translation
adjustment................ (113,022)
Retained earnings
(deficit)................. 122,288 (3,112 )(b) (31,569)(d)
(39,000 )(b)
Equity of purchased
companies................. 5,042 (5,042)(a)
----------- -------- ---------- ----------- -------------
Total stockholders'
equity................ 1,472,922 5,042 (5,042) (907,112 ) (346,083)
----------- -------- ---------- ----------- -------------
Total liabilities and
stockholders'
equity................ $2,469,442 $ 13,775 $ (9,499) $ (27,798 ) $(461,042)
----------- -------- ---------- ----------- -------------
----------- -------- ---------- ----------- -------------
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------
EQUITY 2001 NOTE 2003 NOTE PRO FORMA
INVESTMENT OFFER TENDER COMBINED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt............. $(217,677)(e) $ $ $
Accounts payable............ 166,667
Accrued compensation........ 41,262
Other accrued liabilities... (1,311)(g) 2,853(h) 42,864
---------- ---------- ---------- ----------
Total current
liabilities........... (217,677) (1,311) 2,853 250,793
Long-term debt................ (52,323)(e) (143,750)(g) (230,000)(h) 1,155,509
75,000(f) 217,350(h)
Deferred income taxes......... 2,845
Other long-term liabilities
and minority interests...... 6,146
---------- ---------- ---------- ----------
Total liabilities....... (195,000) (145,061) (9,797) 1,415,293
Stockholders' equity:
Common stock................ 33(e) 12(g) 146
Paid-in capital............. 269,967(e) 168,897(g) 707,905
(15,000)(f)
Cumulative translation
adjustment................ (113,022 )
Retained earnings
(deficit)................. (30,000)(f) (25,159)(g) 7,590(h) (4,237 )
(1,964)(g) (3,311)(h)
Equity of purchased
companies.................
---------- ---------- ---------- ----------
Total stockholders'
equity................ 225,000 141,786 4,279 590,792
---------- ---------- ---------- ----------
Total liabilities and
stockholders'
equity................ $ 30,000 $ (3,275) $ (5,518) $2,006,085
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-24
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1998
PRODUCTS PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS COMBINED
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 1,930,113 $ 140,542 $ $ 2,070,655
Cost of revenues.................................. 1,390,855 90,566 1,481,421
------------ ----------- ------------- ------------
Gross profit.................................... 539,258 49,976 589,234
Selling, general and administrative expenses...... 436,037 33,676 (2,357 (i) 467,356
Amortization expense.............................. 13,830 4,603(j) 18,433
------------ ----------- ------------- ------------
Operating income................................ 89,391 16,300 (2,246) 103,445
Other (income) expense:
Interest expense................................ 27,534 506 49,957(k) 77,997
Interest income................................. (1,545) (169) 1,714(k)
Other........................................... (6,369) (342) (6,711)
------------ ----------- ------------- ------------
Income from continuing operations before provision
for income taxes................................ 69,771 16,305 (53,917) 32,159
Provision for income taxes........................ 32,535 2,161 (13,793 (l) 20,903
------------ ----------- ------------- ------------
Income from continuing operations................. $ 37,236 $ 14,144 $ (40,124) $ 11,256
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Weighted average shares outstanding:
Basic........................................... 114,758 146,331(m)
Diluted......................................... 117,185 148,757(m)
Income per share from continuing operations:
Basic........................................... $ 0.32 $ 0.08
Diluted......................................... $ 0.32 $ 0.08
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-25
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 1,498,320 $ 363,229 $ 226,312 $ $ 2,087,861
Cost of revenues........................................... 1,077,408 259,958 150,345 1,487,711
------------ ----------- ----------- ----------- ------------
Gross profit........................................... 420,912 103,271 75,967 600,150
Selling, general and administrative expenses............... 344,474 93,201 53,931 (7,698)(i) 483,908
Amortization expense....................................... 8,072 10,343(j) 18,415
Non-recurring acquisition costs............................ 7,316 7,316
------------ ----------- ----------- ----------- ------------
Operating income....................................... 61,050 10,070 22,036 (2,645) 90,511
Other (income) expense:
Interest expense......................................... 27,540 3,109 1,855 45,493(k) 77,997
Interest income.......................................... (6,048) (186) (1,017) 7,251(k)
Other.................................................... (4,073) (2,156) (501) (6,730)
------------ ----------- ----------- ----------- ------------
Income from continuing operations before provision for
income taxes and extraordinary items..................... 43,631 9,303 21,699 (55,389) 19,244
Provision for income taxes................................. 18,238 3,007 7,341 (14,153)(l) 14,433
------------ ----------- ----------- ----------- ------------
Income from continuing operations before extraordinary
items.................................................... $ 25,393 $ 6,296 $ 14,358 $ (41,236) $ 4,811
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
Weighted average shares outstanding:
Basic.................................................... 85,978 146,331(m)
Diluted.................................................. 87,824 148,177(m)
Income per share from continuing operations before
extraordinary items:
Basic.................................................... $ 0.30 $ 0.03
Diluted.................................................. $ 0.29 $ 0.03
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-26
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................................... $ 2,115,954 $ 374,886 $ 303,169 $ $ 2,794,009
Cost of revenues....................................... 1,518,287 268,618 201,410 1,988,315
------------ ------------ ------------ ------------ ------------
Gross profit....................................... 597,667 106,268 101,759 805,694
Selling, general and administrative expenses........... 488,215 95,913 70,996 (8,257)(i) 646,867
Amortization expense................................... 12,416 12,722(j) 25,138
Non-recurring acquisition costs........................ 8,001 8,001
Restructuring costs.................................... 4,201 4,201
------------ ------------ ------------ ------------ ------------
Operating income................................... 84,834 10,355 30,763 (4,465) 121,487
Other (income) expense:
Interest expense..................................... 36,047 3,170 2,552 62,227(k) 103,996
Interest income...................................... (6,857) (212) (1,448) 8,517(k)
Other................................................ (4,233) (2,164) (753) (7,150)
------------ ------------ ------------ ------------ ------------
Income from continuing operations before provision for
income taxes and extraordinary items................. 59,877 9,561 30,412 (75,209) 24,641
Provision for income taxes............................. 27,939 3,056 9,933 (22,447)(l) 18,481
------------ ------------ ------------ ------------ ------------
Income from continuing operations before extraordinary
items................................................ $ 31,938 $ 6,505 $ 20,479 $ (52,762) $ 6,160
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
------------
Weighted average shares outstanding:
Basic................................................ 90,026 146,331(m)
Diluted.............................................. 91,761 148,066(m)
Income per share from continuing operations before
extraordinary items:
Basic................................................ $ 0.35 $ 0.04
Diluted.............................................. $ 0.35 $ 0.04
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-27
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments and repayment of
certain short-term and long-term debt associated with the Post January
24, 1998 Purchase Acquisitions. The portion of the consideration assigned
to goodwill ($13,255) in transactions accounted for under the purchase
method represents the excess of the cost over the fair market value of
the net assets acquired. The Company amortizes goodwill over a period of
40 years. The recoverability of the unamortized goodwill will be assessed
on an ongoing basis by comparing anticipated undiscounted future cash
flows from operations to net book value.
(b) Adjustment to reflect the Equity Self-Tender, including the repurchase
of 37,037 shares of common stock (including shares underlying employee
stock options) by the Company for $1,000,000 and reduced by the proceeds
from the exercise of employee stock options related to shares
participating in the Equity Self-Tender of $70,000. The funds to finance
the net $930,000 cost of the Equity Self-Tender are expected to be
obtained from New Borrowings of $907,388 and cash on hand of $22,612. As
a result of the New Borrowings, the adjustment also reflects the
write-off of $5,186 in short-term and long-term capitalized debt issue
costs related to the Company's current credit facility. The Company
estimates that the proceeds from the exercise of employee stock options
will be approximately $70,000 based upon 5,000 employee stock options
exercised at an average exercise price of $14.00 per share. As a result
of the Company allowing for the conditional exercise of employee stock
options tendered pursuant to the Equity Self-Tender, such tendered stock
options take on the characteristics of a combination plan during the
Equity Self-Tender period (the "Deemed Combination Plan"). Combination
plans are those that provide stock appreciation rights ("SARs") in
combination with typical stock options. To the extent that the
optionholder exercises the SAR provisions, the companion stock options
are canceled. Compensation expense is recorded for cash payments made
upon exercise of the deemed SARs. Upon completion of the Equity
Self-Tender, stock options not accepted pursuant to the Equity
Self-Tender revert to fixed option awards with terms identical to those
prior to commencement of the Equity Self-Tender. The terms of the Equity
Self-Tender, including the number of shares to be repurchased in relation
to the total number of shares and options outstanding and the stated
tender price in relation to the current market price of the Company's
common stock, provide persuasive evidence that only a portion of the
Deemed Combination Plan awards will be extinguished via payment under the
deemed SAR provisions. The Company estimates that the compensation
expense related to the option shares purchased in the Equity Self-Tender
will range from $65,000 to $72,000, assuming management's estimate of the
likely range of acceptance rates for the Equity Self-Tender of 22.5% to
25.0% of the total number of shares (including shares underlying options)
tendered. For purposes of the pro forma combined balance sheet, the
Company has reflected the after-tax compensation expense of $39,000
($65,000 before benefit from income taxes) as a reduction to retained
earnings. Additionally, other accrued liabilities has been decreased by
$26,000 to reflect the expected income tax benefit and additional paid-in
capital has been increased by $65,000. The Company has not included this
compensation expense in the unaudited pro forma combined statements of
income because it is of a non-recurring nature and is directly related to
the restructuring transaction.
(c) Adjustment to reflect the collection of $114,959 of receivables from the
Spin-Off Companies at the date of the Distributions.
F-28
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
(d) Adjustment to remove the remaining net assets of the Spin-Off Companies.
(e) Adjustment to reflect the issuance of 33,489 shares of common stock in
conjunction with the Equity Investment of $270,000. The Company has made
certain preliminary calculations in relation to the allocation of the
proceeds to be received from Investor to the related common stock, the
Warrants and the Special Warrants. These calculations cannot be finalized
until the trading value of the Company's common stock immediately
following the Distributions is available. The Company intends to reflect
any amounts allocated to the Warrants and the Special Warrants in
additional paid-in capital. The preliminary assessment of the fair value
of the Warrants at the future grant date was determined using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
WARRANTS
-----------
<S> <C>
Expected life...................................................................... 9 years
Risk free interest rate............................................................ 5.6%
Expected volatility of Company common stock........................................ 40%
Dividend rate...................................................................... 0%
</TABLE>
With respect to the Special Warrants, the Company's calculations assumed
that all holders of the 2001 Notes accept the 2001 Note Offer. The
Company does not anticipate assigning a value to the Special Warrants at
the time of the Equity Investment by Investor because (i) the 2001 Note
Offer is expected to have been completed prior to such Equity Investment;
and (ii) the other potential events which could give rise to the exercise
of the Special Warrants are considered by the Company to be contingent in
nature.
Based on the above assumptions, the Company's preliminary calculations
indicate that approximately $203,700 of the proceeds from the Equity
Investment will be allocated to the shares of Company common stock issued
to Investor, $66,300 will be allocated to the Warrants and no value will
be allocated to the Special Warrants. In arriving at these values, no
discount was applied to the value of the Warrants to reflect the
illiquidity of the Warrants pursuant to SFAS No. 123 issued by FASB.
(f) Adjustment to reflect the estimated transaction fees and expenses
(including financing costs) associated with the Equity Self-Tender, the
Distributions, the Equity Investment and the New Borrowings of $75,000.
Of this amount, $30,000 of debt issue costs will be capitalized. These
fees and expenses have not been reflected in the unaudited pro forma
combined statements of income because they are either capitalizable or
are of a non-recurring nature and are directly related to the Strategic
Restructuring Plan.
(g) Adjustment to reflect the issuance of 11,837 shares of common stock in
conjunction with the 2001 Note Offer, consisting of 8,890 shares of
common stock issued in exchange for 2001 Notes and 2,947 shares of common
stock to Investor in accordance with the provisions of the Special
Warrants. As a result of the 2001 Note Offer, the Company will issue
1,324 shares of common stock over the contractual amount with a market
value of $25,159 to induce conversion of the 2001 Notes. The $25,159 has
been reflected as a reduction in retained earnings as the market value of
the inducement is required to be recorded as an expense. In addition, the
adjustment
F-29
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
reflects the write-off of $3,275 in capitalized debt issue costs related
to the 2001 Notes. These expenses have not been reflected in the
unaudited pro forma combined statements of income because they are of a
non-recurring nature and are directly related to the Strategic
Restructuring Plan.
(h) Adjustment to reflect the early extinguishment of the 2003 Notes,
$230,000 principal amount, in exchange for $217,350 in cash in the 2003
Note Tender. The Company believes that it will be able to retire the 2003
Notes at a price of 94.5% of par value, or $217,350, resulting in an
extraordinary gain of $7,590, net of income taxes of $5,060, which has
been reflected as an increase to retained earnings. In addition, the
adjustment reflects the write-off of $5,518 in capitalized debt issue
costs related to the 2003 Notes. The gain and write-off have not been
reflected in the unaudited pro forma combined statements of income
because they are extraordinary items and are directly related to the
Strategic Restructuring Plan.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(i) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations
of executive compensation agreements resulting from certain acquisitions.
The Company believes that these reductions are expected to remain in
place for the forseeable future and are not reasonably likely to affect
operating performance.
(j) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1997
Purchase Acquisitions and the Fiscal 1998 Purchase Acquisitions for the
periods prior to the respective dates of acquisition. The Company has
recorded goodwill amortization in the historical financial statements
from the respective dates of acquisition forward. The goodwill is being
amortized over an estimated life of 40 years.
(k) Adjustment to reflect the increase in interest expense, at a weighted
average rate of 9.0%, resulting from the increase in debt outstanding to
$1,155,509 as a result of the Equity Self-Tender, partially offset by the
proceeds from the Equity Investment, and the effects of the 2001 Note
Offer and the 2003 Note Tender assuming full exchange and tender,
respectively. The weighted average interest rate of 9.0% was determined
based upon $755,509 outstanding under the terms of the new bank loan
facility at annual interest rates of LIBOR plus margins ranging from
2.25% to 2.5% (approximately 7.9% to 8.15%) and the issuance of $400,000
of senior subordinated notes at an annual interest rate of approximately
9.0%, plus commitment fees on unused balances and amortization of the
related debt issue costs. Pro forma interest expense will fluctuate
$5,778 on an annual basis for each 0.5% change in interest rates.
Depending on market conditions at the time the senior subordinated notes
are offered and when funds are borrowed under the new bank loan facility,
the interest rates may vary from those indicated herein.
(l) Adjustment to calculate the provision for income taxes on the combined
pro forma results at effective income tax rates of approximately 75%, 65%
and 75% for the fiscal year ended April 26, 1997 and the nine months
ended January 24, 1998 and January 25, 1997, respectively. The difference
between the effective tax rates and the statutory tax rate of 35% relates
primarily to state income taxes and non-deductible goodwill amortization
expense. This adjustment assumes
F-30
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
that all companies were taxed at the effective tax rates regardless of
how they were taxed prior to being acquired by the Company, including
those companies that previously paid no taxes under Subchapter S.
(m) Basic pro forma earnings per share is calculated based upon 146,331
weighted average shares of common stock outstanding for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997. The amounts are comprised of 133,042 shares outstanding for each of
the periods, 37,037 shares repurchased as a result of the Equity
Self-Tender, the issuance of 36,436 shares as a result of the Equity
Investment, the issuance of 5,000 shares related to employee stock
options participating in the Equity Self-Tender and the issuance of 8,890
shares as a result of the 2001 Note Offer, assuming full conversion. The
weighted average shares outstanding used to calculate diluted pro forma
earnings per share is based upon the basic weighted average shares
outstanding plus 1,735, 2,426 and 1,846 common stock equivalents
considered to be outstanding related to stock options for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997, respectively.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
U.S. Office Products Company
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the consolidated statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of U.S. Office Products Company and
its subsidiaries at April 26, 1997 and April 30, 1996, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended April 26, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
certain wholly-owned subsidiaries, which statements reflect net income of $7.4
million and $10.4 million included in the Company's income from discontinued
operations, net of income taxes, for fiscal years ended April 30, 1996 and 1995,
respectively. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for those wholly-owned subsidiaries, is based
solely on the reports of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for the opinion expressed above.
As described in Note 4, as a result of the Strategic Restructuring Plan, the
Company has restated its financial statements to account for certain business
combinations as purchase transactions.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
June 6, 1997, except as to the second paragraph
of the Common Stock section of Note 15, which
is as of November 6, 1997 and Note 4, which is
as of January 13, 1998
F-32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the balance sheets of School Specialty, Inc. (formerly known
as EDA Corporation) (the Company) as of December 31, 1995 and 1994, and the
related statements of operations, changes in shareholders' deficit and cash
flows for the years then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheets of The Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for three years ended December 31, 1995,
1994, and 1993 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for three years ended December 31, 1995, 1994, and 1993 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 8, 1996
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hano Document Printers, Inc.:
We have audited the balance sheet of Hano Document Printers, Inc. as of
December 31, 1995 and the related statements of income, stockholders' equity,
and cash flows for the year then ended, which are not included herein. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SFI Corp. and Hano Document Printers, Inc.:
We have audited the combined balance sheet of SFI Corp. and Hano Document
Printers, Inc. (collectively referred to as the "Companies") as of December 31,
1994, and the related statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1994, which are
not included herein. These combined financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of SFI Corp. and Hano
Document Printers, Inc. as of December 31, 1994 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Fortran Corp.
Newington, Virginia
We have audited the accompanying balance sheet of Fortran Corp. as of March
31, 1996, and 1995 and the related statements of earnings, changes in
stockholders' equity, and cash flows for the years ended March 31, 1996, 1995,
and 1994 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to and above present
fairly, in all material respects, the financial position of Fortran Corp. as of
March 31, 1996, and 1995 and the results of its operations and its cash flows
for three years ended March 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
RUBIN, KOEHMSTEDT AND NADLER
Springfield, Virginia
June 7, 1996, except for Note 9,
as to which the date is
October 24, 1996
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MTA, Inc.
Seattle, Washington
We have audited the consolidated balance sheet of MTA, Inc. (the Company) as
of December 31, 1995 and the related statements of income and retained earnings
and of cash flows for the period from January 25, 1995 (date of incorporation)
to December 31, 1995 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTA, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the period from January 25, 1995 (date of incorporation) to December 31, 1995,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
September 23, 1996
F-38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheets of United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc., as at December 31, 1995 and 1994, and the
related combined statements of income and retained earnings and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As referred to in Note A on "Principles of Combination," the companies,
whose financial statements are combined, are related through common ownership
and control. In addition, each has pledged certain assets and guaranteed
long-term indebtedness of the other as described in the notes to financial
statements. In view of their close operating and financial relationship, the
preparation of combined financial statements was considered appropriate. The
combined statements, however, do not refer to a legal entity and neither of the
companies guarantees trade obligations of the other.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of United
Envelope Co., Inc. and its affiliate as at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Huxley Envelope Corporation
We have audited the balance sheets of Huxley Envelope Corporation as of
December 31, 1995 and 1994, and the related statements of income and retained
earnings (accumulated deficit) and cash flows for the years then ended (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Huxley Envelope Corporation
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 4, 1996
F-40
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 183,483 $ 44,026 $ 45,258
Accounts receivable, less allowance for doubtful accounts of $3,586,
$7,337 and $9,110, respectively....................................... 159,448 283,751 324,976
Inventory............................................................... 103,768 225,998 239,043
Prepaid expenses and other current assets............................... 47,994 74,580 103,624
---------- ------------ ------------
Total current assets................................................ 494,693 628,355 712,901
Property and equipment, net............................................... 77,529 182,633 217,228
Intangible assets, net.................................................... 135,140 611,474 903,722
Other assets.............................................................. 64,942 113,407 174,549
Net assets of discontinued operations:
Amounts to become receivable upon the Distributions..................... 87,700 114,959
All other net assets.................................................... 33,674 83,422 346,083
---------- ------------ ------------
Total assets........................................................ $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt......................................................... $ 94,174 $ 144,125 $ 332,636
Accounts payable........................................................ 87,546 153,915 164,229
Accrued compensation.................................................... 16,775 32,515 41,262
Other accrued liabilities............................................... 22,074 63,814 67,654
---------- ------------ ------------
Total current liabilities........................................... 220,569 394,369 605,781
Long-term debt............................................................ 176,230 380,209 381,844
Deferred income taxes..................................................... 6,186 2,458 2,845
Other long-term liabilities and minority interests........................ 8,247 8,807 6,050
---------- ------------ ------------
Total liabilities................................................... 411,232 785,843 996,520
---------- ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, none
outstanding
Common stock, $.001 par value, 500,000,000 shares authorized,
79,464,423, 104,479,004 and 133,041,979 shares issued and outstanding,
respectively.......................................................... 79 104 133
Additional paid-in capital.............................................. 319,906 867,039 1,463,523
Cumulative translation adjustment....................................... 770 (5,583) (113,022)
Retained earnings....................................................... 73,991 59,588 122,288
---------- ------------ ------------
Total stockholders' equity.......................................... 394,746 921,148 1,472,922
---------- ------------ ------------
Total liabilities and stockholders' equity.......................... $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ 658,494 $1,061,528 $2,115,954 $1,498,320 $1,930,113
Cost of revenues..................................... 485,955 789,436 1,518,287 1,077,408 1,390,855
----------- --------- --------- ----------- -----------
Gross profit..................................... 172,539 272,092 597,667 420,912 539,258
Selling, general and administrative expenses......... 152,176 231,569 488,215 344,474 436,037
Amortization expense................................. 801 2,711 12,416 8,072 13,830
Non-recurring acquisition costs...................... 8,057 8,001 7,316
Restructuring costs.................................. 682 4,201
----------- --------- --------- ----------- -----------
Operating income................................. 19,562 29,073 84,834 61,050 89,391
Interest expense..................................... 3,401 8,132 36,047 27,540 27,534
Interest income...................................... (675) (3,506) (6,857) (6,048) (1,545)
Other income......................................... (1,456) (684) (4,233) (4,073) (6,369)
----------- --------- --------- ----------- -----------
Income from continuing operations before provision
for income taxes and extraordinary items........... 18,292 25,131 59,877 43,631 69,771
Provision for income taxes........................... 2,800 6,032 27,939 18,238 32,535
----------- --------- --------- ----------- -----------
Income from continuing operations before
extraordinary items................................ 15,492 19,099 31,938 25,393 37,236
Income from discontinued operations, net of income
taxes.............................................. 15,675 15,778 26,800 20,411 25,464
----------- --------- --------- ----------- -----------
Income before extraordinary items.................... 31,167 34,877 58,738 45,804 62,700
Extraordinary items--losses on early terminations of
credit facilities, net of income taxes............. 701 1,450 612
----------- --------- --------- ----------- -----------
Net income........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.30 $ 0.32
Income from discontinued operations.............. 0.34 0.24 0.31 0.24 0.23
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net income....................................... $ 0.68 $ 0.51 $ 0.64 $ 0.53 $ 0.55
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Diluted:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.29 $ 0.32
Income from discontinued operations.............. 0.34 0.23 0.29 0.23 0.22
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net Income....................................... 0.68 $ 0.50 $ 0.62 $ 0.51 $ 0.54
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Unaudited pro forma income from continuing operations
before extraordinary items (see Note 11)........... $ 29,962
---------
---------
Unaudited pro forma basic income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
Unaudited pro forma diluted income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------ PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
---------- ------ ---------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994............... 38,443,262 $ 38 $26,483 $ (340) $ 58,733 $ (7,562) $77,352
Transactions of Combined Companies
upon formation of Company:
Issuance of common stock............ 5,817,000 6 (5) 1
Capital contribution................ 1,500 1,500
Distributions to stockholders....... (11,300) (11,300)
Adjustments to stockholders'
equity............................ (12,597) 5,035 7,562
Cash dividends...................... (222) (222)
Issuance of common stock, net of
associated expenses in conjunction
with:
Initial public offering............. 5,606,250 6 32,684 32,690
Acquisition......................... 1,312,500 1 8,749 8,750
Transactions of Pooled Companies:
Exercise of warrants and stock
options........................... 20,345 201 201
Cash dividends...................... (16,086) (16,086)
Adjustment to conform the year-ends of
Pooled Companies.................... 2,235 2,235
Cumulative translation adjustments.... 207 207
Net income............................ 31,167 31,167
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1995............... 51,199,357 51 57,015 (133) 69,562 126,495
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offerings.................... 14,352,068 14 174,723 174,737
Acquisitions........................ 11,120,163 11 68,607 68,618
Exercise of stock options, including
tax benefits...................... 95,025 1,023 1,023
Transactions of Pooled Companies:
Issuances of common stock for cash
and repayment of debt............. 872,249 1 8,297 8,298
Capital contributions............... 500 500
Exercise of warrants and stock
options........................... 978,923 1 1,752 1,753
Cash and stock dividends............ 846,638 1 1,361 (32,017) (30,655)
Undistributed earnings of Subchapter S
corporations acquired in pooling-of-
interests business combinations..... 6,628 (6,628)
Adjustment to conform the year-ends of
Pooled Companies.................... 8,898 8,898
Cumulative translation adjustments.... 903 903
Net income............................ 34,176 34,176
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1996............... 79,464,423 79 319,906 770 73,991 394,746
</TABLE>
(Continued)
F-43
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
-------------------------- PAID-IN TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK
------------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996................ 79,464,423 $ 79 $ 313,278 $ 770 $ 80,619
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 13,023,497 13 275,699
Direct equity investment............. 1,875,000 2 38,111
Acquisitions......................... 8,685,450 9 166,071
Exercise of stock options, including
tax benefits....................... 197,742 2,843
Employee stock purchase plan......... 229,998 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 409,631 6,859
Capital contributions................ 12,342 1,857
Exercise of warrants and stock
options............................ 478,616 1 1,979
Retirement of common stock........... 102,305 (443) (34)
Cash dividends paid and declared..... (20,931)
Undistributed earnings of Subchapter S
corporations acquired in
pooling-of-interests business
combinations......................... 57,640 (57,640)
Adjustment to conform the year-ends of
Pooled Companies..................... 286
Cumulative translation adjustments..... (6,353)
Net income............................. 57,288
------------- ----- ------------ ----------- ---------- -----------
Balance at April 26, 1997................ 104,479,004 104 867,039 (5,583) 59,588
Unaudited data:
Issuance of common stock, net of
associated expenses in conjunction
with:
Acquisitions......................... 27,792,099 28 585,509
Repayment of debt.................... 28,179 570
Exercise of stock options, including
tax benefits....................... 609,494 1 7,600
Employee stock purchase plan......... 169,723 2,805
Share adjustments at Pooled
Companies............................ (36,520)
Cumulative translation adjustments..... (107,439)
Net income............................. 62,700
------------- ----- ------------ ----------- ---------- -----------
Balance at January 24, 1998
(unaudited)............................ 133,041,979 $ 133 $ 1,463,523 $ (113,022) $ 122,288
------------- ----- ------------ ----------- ---------- -----------
------------- ----- ------------ ----------- ---------- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance at April 30, 1996................ $ 394,746
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 275,712
Direct equity investment............. 38,113
Acquisitions......................... 166,080
Exercise of stock options, including
tax benefits....................... 2,843
Employee stock purchase plan......... 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 6,859
Capital contributions................ 1,857
Exercise of warrants and stock
options............................ 1,980
Retirement of common stock........... (477)
Cash dividends paid and declared..... (20,931)
Undistributed earnings of Subchapter S
corporations acquired in
pooling-of-interests business
combinations.........................
Adjustment to conform the year-ends of
Pooled Companies..................... 286
Cumulative translation adjustments..... (6,353)
Net income............................. 57,288
------------
Balance at April 26, 1997................ 921,148
Unaudited data:
Issuance of common stock, net of
associated expenses in conjunction
with:
Acquisitions......................... 585,537
Repayment of debt.................... 570
Exercise of stock options, including
tax benefits....................... 7,601
Employee stock purchase plan......... 2,805
Share adjustments at Pooled
Companies............................
Cumulative translation adjustments..... (107,439)
Net income............................. 62,700
------------
Balance at January 24, 1998
(unaudited)............................ $1,472,922
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements
F-44
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Income from discontinued operations....................... (15,675) (15,778) (26,800) (20,411) (25,464)
Depreciation and amortization............................. 6,521 10,999 36,102 23,233 41,787
Non-recurring acquisition costs........................... 8,057 8,001 7,316
Payments of restructuring costs........................... (1,900)
Unrealized foreign currency gain.......................... (3,420) (3,420)
Deferred income taxes..................................... (367) (196) (1,035) 3,600 73
Extraordinary losses...................................... 701 1,450 612
Equity in net income of affiliate......................... (782) (265) (878)
Gain on sale of investment................................ (1,059)
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in business
combinations):
Accounts receivable..................................... (18,911) 969 (26,237) (32,154) (29,940)
Inventories............................................. (6,130) 1,861 (3,400) (6,718) (14,417)
Prepaid expenses and other current assets............... (1,417) (23,780) (6,059) (1,539) (3,909)
Accounts payable........................................ 7,349 2,802 (26,692) (22,922) 2,245
Accrued liabilities..................................... 5,204 (565) 7,396 (1,771) 5,699
----------- --------- --------- ----------- -----------
Net cash provided by (used in) operating activities... 7,741 19,246 15,812 (9,247) 34,937
----------- --------- --------- ----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received............. (15,993) (89,223) (345,319) (323,813) (33,642)
Payments of acquisition costs............................... (7,283) (5,343) (4,094) (3,871)
Additions to property and equipment, net of disposals....... (11,049) (17,868) (34,036) (15,891) (28,200)
Investment in affiliate..................................... (41,270) (41,270) (40,773)
Proceeds from sale of investment............................ 5,729
Other....................................................... 867 (5,687) 2,013 (5,476) 3,190
----------- --------- --------- ----------- -----------
Net cash used in investing activities................. (26,175) (120,061) (423,955) (390,544) (97,567)
----------- --------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock...................... 32,811 180,230 318,899 41,868 8,239
Proceeds from issuance of long-term debt.................... 6,553 139,040 225,387 224,080 457
Payments of long-term debt.................................. (3,643) (13,143) (174,788) (163,112) (10,647)
Net advances to discontinued operations..................... (111,891) (76,021) (99,213)
Proceeds from (payments of) short-term debt, net............ 3,433 (39,077) 24,132 259,705 172,000
Payments to terminate credit facility....................... (261) (261)
Payments of dividends at Pooled Companies................... (7,700) (8,287) (6,158) (6,122)
Capital contributed by stockholders of Pooled Companies..... 400 1,814 1,814
Adjustment to conform fiscal year-ends of certain Pooled
Companies................................................. 601 (1,397) 286 286
Capital contributed by Combined Company stockholder......... 1,500
Payments to stockholders of Combined Companies.............. (11,300)
----------- --------- --------- ----------- -----------
Net cash provided by financing activities............. 22,255 257,766 277,420 282,237 70,836
----------- --------- --------- ----------- -----------
Effect of exchange rates on cash and cash equivalents......... (180) (121) (511) (345) (3,159)
----------- --------- --------- ----------- -----------
Cash provided by (used in) discontinued operations............ 3,549 1,707 (8,223) (3,170) (3,815)
----------- --------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.......... 7,190 158,537 (139,457) (121,069) 1,232
Cash and cash equivalents at beginning of period.............. 17,756 24,946 183,483 183,483 44,026
----------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period.................... $ 24,946 $ 183,483 $ 44,026 $ 62,414 $ 45,258
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 7,731 $ 3,426 $ 36,536 $ 28,980 $ 26,962
Income taxes paid......................................... 7,044 7,814 22,734 18,852 24,017
</TABLE>
F-45
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company issued common stock, notes payable and cash in connection with
certain business combinations accounted for under the purchase method during
fiscal 1995, 1996 and 1997 and the nine months ended January 25, 1997 and
January 24, 1998. The fair values of the assets and liabilities of the acquired
companies at the dates of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable............................................. $ 15,350 $ 70,640 $ 99,747 $ 88,202 $ 27,284
Inventories..................................................... 10,331 49,602 115,995 119,584 18,970
Prepaid expenses and other current assets....................... 956 8,412 20,874 13,559 15,806
Property and equipment.......................................... 3,248 30,442 94,112 107,202 52,695
Intangible assets............................................... 21,079 119,493 490,011 432,219 371,606
Other assets.................................................... (1,149) 51,698 7,748 5,174 34,759
Short-term debt................................................. (8,253) (95,971) (20,612) (12,819) (8,755)
Accounts payable................................................ (9,180) (44,034) (99,753) (89,338) (20,058)
Accrued liabilities............................................. (3,297) (19,719) (52,464) (81,506) (13,870)
Long-term debt.................................................. (905) (11,635) (153,448) (115,017) (20,320)
Other long-term liabilities and minority interest............... (437) (7,751) (1,296) (8,262) (357)
----------- ----------- ----------- ----------- -----------
Net assets acquired..................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
The acquisitions were funded as follows:
Common stock.................................................... $ 8,750 $ 61,167 $ 155,595 $ 135,185 $ 424,118
Debt............................................................ 3,000 787
Cash............................................................ 15,993 89,223 345,319 323,813 33,642
----------- ----------- ----------- ----------- -----------
Total....................................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Noncash transactions:
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited) the Company issued 291,671, 384,630 and 28,179 shares of common
stock, respectively, to repay $2,470, $6,359 and $570 of indebtedness,
respectively.
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited), the Company recorded additional paid-in capital of
approximately $426, $1,250 and $2,168, respectively, related to the tax
benefit on stock options exercised.
- - During fiscal 1996, one Pooled Company converted $1,385 of debt to common
stock.
- - During fiscal 1996, one Pooled Company paid a dividend of $9,851 through the
issuance of 846,638 shares of common stock
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--BUSINESS ORGANIZATION
U.S. Office Products Company ("U.S. Office Products" and the "Company") was
founded in October 1994. The Company is a supplier of a broad range of office
and educational products and business services to corporate, commercial,
industrial and educational customers. The Company operates throughout the United
States, as well as in New Zealand, Australia and Canada and, through a 49% owned
affiliate, in the United Kingdom.
NOTE 2--FORMATION OF COMPANY
Concurrent with the closing of its initial public offering in February 1995,
the Company acquired four companies (the "Combined Companies") for a combination
of its common stock and cash and acquired two companies in business combinations
accounted for under the purchase method. Because of the substantial ongoing
interest of the stockholders of the Combined Companies in U.S. Office Products,
the assets and liabilities of the Combined Companies were combined on a
historical cost basis. The capital stock of the Combined Companies is included
in additional paid-in capital.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products,
the Combined Companies and the companies acquired in business combinations
accounted for under the purchase method (the "Purchased Companies") from their
respective acquisition dates and give retroactive effect to the results of the
companies acquired in business combinations accounted for under the
pooling-of-interests method (the "Pooled Companies") for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DEFINITION OF FISCAL YEAR
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1997," "fiscal 1996" and "fiscal
1995" refer to the Company's fiscal years ended April 26, 1997 and April 30,
1996 and 1995, respectively. On August 20, 1996, the Company's Board of
Directors approved a change in the Company's fiscal year-end, effective for the
1997 fiscal year, from April 30 to the last Saturday in April.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Investments in less than 50% owned entities
are accounted for under the equity method. All significant intercompany
transactions and accounts are eliminated in consolidation.
F-47
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Substantially all goodwill is amortized
on a straight line basis over estimated useful lives of 25 to 40 years.
Management periodically evaluates the recoverability of goodwill, which would be
adjusted for a permanent decline in value, if any, by comparing anticipated
undiscounted future cash flows from operations to net book value.
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's wholly-owned foreign subsidiary has entered into forward
foreign currency exchange contracts (the "Exchange Contracts") with
counterparties to hedge the exposure of foreign currency fluctuations to the
extent permissible by hedge accounting requirements. In order to qualify for
hedge accounting, a foreign currency transaction must be designated as, and
effective as, a hedge of a firm foreign currency commitment or an existing
foreign currency denominated asset or liability. Gains and losses on Exchange
Contracts designated to firm foreign currency commitments are deferred and
accounted for as an adjustment to the purchase price of the asset, while gains
and losses on Exchange Contracts designated
F-48
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to an underlying asset or liability are reported as other income or loss in the
Company's financial statements. The offsetting transaction loss or gain
resulting from the foreign currency denominated asset or liability is also
reflected in other income or loss in the Company's financial statements. At
April 26, 1997, the Exchange Contracts, in the notional amount of $3,319, hedge
certain foreign currency denominated firm purchase commitments. The Exchange
Contracts generally have maturity dates of 60 days or less. Discounts or
premiums on the Exchange Contracts are amortized over the life of the contracts.
The Company's wholly-owned foreign subsidiary also entered into interest
rate swap agreements (the "Swap Agreements") with counterparties to convert the
interest rates associated with certain outstanding debt from variable rates to
fixed rates. In order to qualify for hedge accounting, an interest rate swap
must be designated to a specific debt and there must be a high correlation
between the interest rate component of the value of the swap and changes in the
variable interest rates on the underlying debt. The Swap Agreements were
specifically designated and were fully correlated with changes in the variable
interest rates on the underlying debt. The notional amount of the Swap
Agreements was $43,000 at April 30, 1996. Amounts to be paid or received under
the Swap Agreements are accrued as interest rates change and are recognized over
the life of the Swap Agreements as an adjustment to interest expense. During
fiscal 1997, the Swap Agreements were terminated at the time of the
extinguishment of the underlying debt, resulting in a loss of $117 and was
included in other income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using the following methods and assumptions:
- - The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value;
- - The fair values of the 5 1/2% Convertible Subordinated Notes due 2001 and the
5 1/2% Convertible Subordinated Notes due 2003 are based on quoted market
prices;
- - The carrying amounts of the Company's debt, other than the 5 1/2% Convertible
Subordinated Notes due 2001 and the 5 1/2% Convertible Subordinated Notes
due 2003, approximate fair value, estimated by discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar types
of borrowing arrangements.
INCOME TAXES
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Certain
companies acquired in pooling-of-interests transactions elected to be taxed as
Subchapter S corporations, and accordingly, no federal income taxes were
recorded by those companies for periods prior to their acquisition by U.S.
Office Products.
F-49
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TAXES ON UNDISTRIBUTED EARNINGS
No provision is made for U.S. income taxes on earnings of subsidiary
companies which the Company controls but does not include in the consolidated
federal income tax return since it is management's practice and intent to
permanently reinvest the earnings of these subsidiaries.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. The Company also leases equipment to customers under both short-term and
long-term lease agreements. Revenue related to short-term leases is recognized
on a monthly basis over the life of the lease. Certain long-term leases qualify
as sales-type leases and, accordingly, the present value of the future lease
payments is recognized as income upon delivery of the equipment to the customer.
The Company, through its wholly-owned subsidiary Mail Boxes Etc. ("MBE"),
enters into area and individual franchise agreements in the United States and
master license agreements in other countries. Area franchise agreements grant
the area franchisee the exclusive right to market individual franchise centers
for the Company in the area franchisee's territory. The area franchisee
generally receives a commission on the individual franchises sold as well as a
share of the royalties earned by the Company from centers in the area
franchisee's territory. Individual franchise agreements grant the individual
franchisee the exclusive right to open and operate a franchise center in the
individual franchisee's territory.
Franchise fee revenue is recognized upon the completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is complete. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant obligations that must be completed before any
revenue is recognized are: all operating manuals are provided and training is
completed. Revenue is recognized using the installment method when the revenue
is collectible over an extended period and no reasonable basis exists for
estimating collectibility.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
F-50
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, investment banking fees,
recognition of transaction related obligations and various other acquisition
related costs.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance costs related to the Company's
employees in accordance with EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring)."
ACCRUED ACQUISITION COSTS
The Company accrues the direct external costs incurred in conjunction with
the consummation of business combinations and the costs incurred to consolidate
acquired operations into existing Company facilities, including the external
costs and liabilities to close redundant facilities and severance and relocation
costs related to the acquired entity's employees in accordance with EITF Issue
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the Consolidated Statement of Income as a
component of selling, general and administrative expenses. During fiscal 1995,
1996 and 1997, the Company incurred advertising expenses of $3,309, $7,233 and
$14,355, respectively.
NET INCOME PER SHARE
Net income per share is calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The adoption of SFAS 121 did not have a material effect on the Company's
consolidated operating results or financial position.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
during fiscal 1997. Under the provisions of SFAS 123, companies can elect to
account for stock-based compensation plans using a fair-value based method or
continue measuring compensation expense for those plans using the intrinsic
value method prescribed in APB Opinion No. 25. The Company has elected to
continue using the intrinsic value method to account for stock-based
compensation plans. Pro forma disclosures of net
F-51
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income and net income per share, as if the fair value-based method of accounting
defined in SFAS 123 has been applied, are presented in Note 15.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of January 24, 1998 and the results
of operations and of cash flows for the nine months ended January 25, 1997 and
January 24, 1998, as presented in the accompanying unaudited consolidated
financial data.
NOTE 4--STRATEGIC RESTRUCTURING PLAN
In January 1998, the Company's Board of Directors (the "Board") approved a
comprehensive restructuring plan (the "Strategic Restructuring Plan"). The
principal elements of the Strategic Restructuring Plan are (i) a self-tender
offer by the Company (the "Equity Self-Tender") to purchase 37,037 shares of
Company common stock (including shares that may be issued on exercise of stock
options) at $27.00 per share and the incurrence of significant additional debt
to pay a portion of the purchase price of the shares in the Equity Self Tender;
(ii) after acceptance of shares in the Equity Self Tender, the pro rata
distribution to U.S. Office Products stockholders of shares of four companies
(the "Spin-Off Companies") that will conduct the Company's current print
management, corporate travel services, educational supplies and technology
solutions businesses (the "Distributions"); and (iii) following acceptance of
shares in the Equity Self Tender and the record date for the Distributions, the
sale to an affiliate of an investment fund managed by Clayton, Dubilier & Rice,
Inc. ("Investor") of equity interests in U.S. Office Products. In these
transactions, Investor will not acquire any equity interest in the Spin-Off
Companies. The Distributions are expected to be tax-free to both the Company and
its stockholders (except for any cash in lieu of fractional shares received by
stockholders). As part of the financing for the Strategic Restructuring Plan,
the Company is expanding its bank credit facility, issuing new subordinated
indebtedness and offering to repurchase or reduce the conversion price on
convertible notes previously issued. The Company expects the Strategic
Restructuring Plan to be completed in the second calendar quarter of 1998. The
transactions are subject to a number of conditions, including financing,
approval of the Company's stockholders and receipt of regulatory approvals.
DISCONTINUED OPERATIONS
As a result of the Strategic Restructuring Plan, the Spin-Off Companies are
reflected as discontinued operations for all periods presented in the Company's
consolidated financial statements. The income from discontinued operations
included in the consolidated statement of income represents the sum of the
results
F-52
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
of the Company's Print Management, Corporate Travel Services, Educational
Supplies and Technology Solutions divisions for the periods presented and is
summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FISCAL 1995:
Revenues..................................... $ 139,732 $ 34,569 $ 119,510 $ 88,999 $ 382,810
Operating income............................. 5,571 2,905 4,479 8,199 21,154
Income before provision for income taxes..... 3,982 2,992 1,558 8,097 16,629
Provision for income taxes................... 317 18 218 401 954
Income from discontinued operations,
net of income taxes........................ 3,665 2,974 1,340 7,696 15,675
FISCAL 1996:
Revenues..................................... $ 314,999 $ 45,267 $ 150,343 $ 114,293 $ 624,902
Operating income............................. 12,455 3,068 2,484 9,252 27,259
Income (loss) before provision for (benefit
from) income taxes......................... 6,933 2,863 (3,194) 10,631 17,233
Provision for (benefit from) income taxes.... (33) 565 173 750 1,455
Income (loss) from discontinued operations,
net of income taxes........................ 6,966 2,298 (3,367) 9,881 15,778
FISCAL 1997:
Revenues..................................... $ 334,220 $ 57,677 $ 191,746 $ 136,278 $ 719,921
Operating income............................. 16,426 5,668 10,295 11,198 43,587
Income before provision for income taxes..... 11,224 5,450 6,375 10,914 33,963
Provision for (benefit from) income taxes.... 3,651 1,353 (2,034) 4,193 7,163
Income from discontinued operations,
net of income taxes........................ 7,573 4,097 8,409 6,721 26,800
NINE MONTHS ENDED JANUARY 25, 1997
(UNAUDITED):
Revenues..................................... $ 244,764 $ 41,527 $ 159,977 $ 101,295 $ 547,563
Operating Income............................. 14,750 3,105 10,839 8,448 37,142
Income before provision for income taxes..... 10,259 3,031 7,878 8,182 29,350
Provision for income taxes................... 2,249 551 4,085 2,054 8,939
Income from discontinued operations net of
income taxes............................... 8,010 2,480 3,793 6,128 20,411
</TABLE>
F-53
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED JANUARY 24, 1998
(UNAUDITED):
Revenues..................................... $ 257,777 $ 80,707 $ 247,880 $ 142,512 $ 728,876
Operating Income............................. 14,028 5,719 21,349 11,630 52,726
Income before provision for income taxes..... 12,577 5,522 16,916 11,644 46,659
Provision for income taxes................... 5,629 2,794 7,734 5,038 21,195
Income from discontinued operations net of
income taxes............................... 6,948 2,728 9,182 6,606 25,464
</TABLE>
The results of the Spin-Off Companies include allocations of interest
expense, at U.S. Office Products' weighted average interest rates, based upon
the average intercompany debt outstanding during the periods presented.
Intercompany debt allocated to the Spin-Off Companies generally is comprised of
funding provided to the Spin-Off Companies by U.S. Office Products for
acquisitions and acquisition related expenses, repayments of long-term and
short-term debt of acquired companies, payments of direct operating expenses of
the Spin-Off Companies and the net results of daily advances and sweeps of cash
by the Company to keep each Spin-Off Company's cash balance at or near zero on a
daily basis. To the extent that the sum of the intercompany funding and
third-party debt outstanding exceeded the amount of debt to be allocated to the
Spin-Off Companies pursuant to the investment agreement with Investor, such
excess amounts have been characterized as divisional equity. The results of the
Spin-Off Companies do not include any allocations of corporate overhead from
U.S. Office Products during the periods presented.
The other net assets of the discontinued operations included in the
Company's consolidated balance sheet represent the sum of the net assests of the
Company's Print Management, Corporate Travel Services, Educational Supplies and
Technology Solutions divisions for the periods presented and are summarized as
follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
APRIL 30, 1996:
Current assets............................... $ 78,071 $ 6,103 $ 38,557 $ 25,640 $ 148,371
Property, plant and equipment, net........... 32,703 7,948 7,647 1,756 50,054
Intangible assets, net....................... 879 5,456 7,142 13,477
Other assets................................. 6,029 539 777 875 8,220
Current liabilities.......................... (56,532) (7,402) (42,670) (22,344) (128,948)
Long-term liabilities........................ (34,065) (6,869) (15,766) (800) (57,500)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 27,085 $ 5,775 $ (4,313) $ 5,127 $ 33,674
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
</TABLE>
F-54
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
APRIL 26, 1997:
Current assets............................... $ 81,310 $ 6,935 $ 55,709 $ 30,542 $ 174,496
Property, plant and equipment, net........... 34,175 7,953 14,478 2,164 58,770
Intangible assets, net....................... 705 7,112 20,824 28,641
Other assets................................. 7,807 581 359 2,005 10,752
Current liabilities.......................... (66,413) (11,886) (39,712) (20,530) (138,541)
Long-term liabilities........................ (7,208) (5,218) (35,052) (3,218) (50,696)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 50,376 $ 5,477 $ 16,606 $ 10,963 $ 83,422
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
JANUARY 24, 1998 (UNAUDITED):
Current assets............................... $ 85,326 $ 22,609 $ 86,676 $ 64,618 $ 259,229
Property, plant and equipment, net........... 31,063 19,406 20,489 5,074 76,032
Intangible assets, net....................... 1,995 85,525 94,651 63,891 246,062
Other assets................................. 8,473 1,002 2,595 508 12,578
Current liabilities.......................... (58,449) (20,236) (35,529) (31,252) (145,466)
Long-term liabilities........................ (10,530) (15,957) (63,307) (12,558) (102,352)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 57,878 $ 92,349 $ 105,575 $ 90,281 $ 346,083
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
</TABLE>
The amounts to become receivable upon the Distributions reflected in the
unaudited January 24, 1998 Consolidated Balance Sheet are expected to be
recovered from the Spin-Off Companies in connection with the Distributions.
PURCHASE ACCOUNTING RESTATEMENT
On December 24, 1997, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission which included audited supplemental
consolidated financial statements (the "Supplemental Financial Statements"). The
Supplemental Financial Statements gave retroactive effect to 20 fiscal 1998
business combinations, including the Mail Boxes Etc. acquisition, which were
originally accounted for under the pooling-of-interests method.
As a result of the Strategic Restructuring Plan and as required by generally
accepted accounting principles, the Company has restated its consolidated
financial statements for all periods to account for these acquisitions (as well
as two subsequent business combinations originally accounted for under the
pooling-of-interests method) under the purchase method. In relation to amounts
reflected in the Supplemental Financial Statements, this restatement and the
reclassification of assets and liabilities for discontinued operations, as
discussed above, had the combined effect of reducing the Company's reported
total assets at April 26, 1997 by $267,430 and reported net income for fiscal
1995, 1996 and 1997 by $10,602 (or $0.23 per share), $14,998 (or $0.22 per
share) and $17,811 (or $0.20 per share), respectively. Additionally, the
restatement of the 22 business combinations as purchase transactions gave rise
to approximately
F-55
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
$422.8 million of goodwill, associated with both continuing and discontinued
operations, during the nine months ended January 24, 1998.
NOTE 5--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1996 and 1997, the Company issued 8,440,852 and 22,108,776 shares
of common stock, respectively, to acquire 14 companies (the "1996 Poolings") and
40 companies, including 25 companies related to the continuing operations (the
"1997 Poolings"), respectively, in business combinations accounted for under the
pooling-of-interests method. The Company's consolidated financial statements
give retroactive effect to the acquisitions of the Pooled Companies for all
periods presented. Certain of the Pooled Companies previously reported on fiscal
years ending other than April 30, 1996 and April 26, 1997.
Commencing on May 1, 1995 and 1996, the year-ends of the 1996 Poolings and
the 1997 Poolings were changed to April 30, 1996 and April 26, 1997,
respectively, resulting in adjustments to retained earnings of $2,235, $8,898
and $286 during fiscal 1995, 1996 and 1997, respectively. Following is a summary
of the results related to the adjustments to retained earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- ---------- ----------
Revenues....................................................................... $ 55,126 $ 245,737 $ (9,907)
Costs and expenses............................................................. 52,891 236,839 (10,193)
--------- ---------- ----------
Net adjustment............................................................. $ 2,235 $ 8,898 $ 286
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F-56
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the separate results, in each of the periods
presented, of U.S. Office Products (excluding the results of Pooled Companies
prior to the dates on which they were acquired), and the Pooled Companies up to
the dates on which they were acquired:
<TABLE>
<CAPTION>
U.S. OFFICE POOLED
PRODUCTS COMPANIES COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
FOR THE YEAR ENDED APRIL 30, 1995:
Revenues.............................................................. $ 120,479 $ 538,015 $ 658,494
Income from continuing operations before extraordinary items.......... $ 1,514 $ 13,978 $ 15,492
FOR THE YEAR ENDED APRIL 30, 1996:
Revenues.............................................................. $ 488,670 $ 572,858 $ 1,061,528
Income from continuing operations before extraordinary items.......... $ 7,828 $ 11,271 $ 19,099
FOR THE YEAR ENDED APRIL 26, 1997:
Revenues.............................................................. $ 1,906,496 $ 209,458 $ 2,115,954
Income from continuing operations before extraordinary items.......... $ 27,978 $ 3,960 $ 31,938
FOR THE NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Revenues.............................................................. $ 1,300,421 $ 197,899 $ 1,498,320
Income from continuing operations before extraordinary items.......... $ 19,677 $ 5,716 $ 25,393
FOR THE NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Revenues.............................................................. $ 1,930,113 $ $ 1,930,113
Income from continuing operations before extraordinary items.......... $ 37,236 $ $ 37,236
</TABLE>
PURCHASE METHOD
In fiscal 1995, in addition to the acquisitions of the Combined Companies,
the Company made six acquisitions, including five related to continuing
operations, accounted for under the purchase method for an aggregate purchase
price of $29,849, consisting of $18,099 of cash, $3,000 of notes payable and
1,312,500 shares of common stock with a market value of $8,750. The total assets
related to these six acquisitions were $72,192, including goodwill of $21,079.
The results of these acquisitions have been included in the Company's results
from their respective dates of acquisition.
In fiscal 1996, the Company made 34 acquisitions, including 31 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $206,937, consisting of $130,178 of cash, $8,141 of debt and
11,120,163 shares of common stock with a market value of $68,618. The total
assets related to these 34 acquisitions were $414,113, including goodwill of
$127,870. The results of these acquisitions have been included in the Company's
results from their respective dates of acquisition.
In fiscal 1997, the Company made 77 acquisitions, including 71 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $520,891 consisting of $354,811 of cash, and 8,685,450 shares
of common stock with a market value of $166,080. The total assets related to
these 77 acquisitions were $861,647, including goodwill of $506,386. The results
of these acquisitions have been included in the Company's results from their
respective dates of acquisition.
F-57
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 30, 1996 and April 26, 1997 and
includes the Company's consolidated financial statements, which give retroactive
effect to the acquisitions of the Pooled Companies for all periods presented,
and the results of the Purchased Companies as if all such purchase acquisitions
had been made at the beginning of fiscal 1996. The results presented below
include certain pro forma adjustments to reflect the amortization of intangible
assets, adjustments in executive compensation and the inclusion of a federal
income tax provision on all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
<S> <C> <C>
APRIL 30, APRIL 26,
1996 1997
------------ ------------
Revenues.................................................................... $ 2,413,720 $ 2,496,519
Income from continuing operations before extraordinary items................ 35,361 48,825
Income per share from continuing operations before extraordinary items...... 0.30 0.42
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1996 or the
results which may occur in the future.
EQUITY INVESTMENT IN AFFILIATE
In November 1996, the Company acquired a 49% equity interest in Dudley
Stationery Limited ("Dudley"), which is being accounted for under the equity
method. Under the terms of the agreement, the Company agreed to invest
approximately $80 million for working capital into Dudley over a two-year
period. The Company has currently invested approximately $41.3 million of the
total $80 million in Dudley which is included in other assets on the
Consolidated Balance Sheet. The Company has included its share of Dudley's net
income as a component of other income on the Consolidated Statement of Income.
NOTE 6--ACCRUED ACQUISITION COSTS
In conjunction with the acquisitions of the fiscal 1997 Purchased Companies,
the Company accrued the direct external costs incurred in conjunction with the
consummation of the acquisitions and the costs to consolidate acquired
operations into existing Company facilities, including the external costs
associated with closing redundant facilities of acquired companies, and
severance and relocation costs related to the acquired companies' employees.
As of the consummation date of an acquisition, the Company begins to assess
and formulate a plan to exit activities of the acquired companies. Typically,
this involves evaluating the facilities of the Company and the acquired
companies in the specific geographic areas, determining which of the acquired
facilities will be exited and identifying employee groups that will be
terminated or relocated. In most cases, the facilities are closed and the
employees terminated within one year of the completion of the plan.
F-58
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--ACCRUED ACQUISITION COSTS (CONTINUED)
The following table sets forth the Company's accrued acquisition costs for
the periods ended April 30, 1996, April 26, 1997 and January 24, 1998:
<TABLE>
<CAPTION>
EMPLOYEE DISPOSAL OF
REDUNDANT SEVERANCE & ASSETS &
FACILITIES RELOCATION OTHER TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30, 1996................... $ $ $ $
Additions................................. 1,593 2,484 6,712 10,789
----------- ------ ----------- ---------
Balance at April 26, 1997................... 1,593 2,484 6,712 10,789
Unaudited data:
Additions................................. 1,442 3,244 4,686
Utilizations.............................. (256) (141) (5,400) (5,797)
----------- ------ ----------- ---------
Balance at January 24, 1998................. $ 1,337 $ 3,785 $ 4,556 $ 9,678
----------- ------ ----------- ---------
----------- ------ ----------- ---------
</TABLE>
NOTE 7--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs for the periods ended April 30, 1996, April 26, 1997 and
January 24, 1998:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE- DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30 1995:
Additions.............................. $ 682 $ 682
Utilizations........................... (682) (682)
------ ----- ----------- ---------
Balance at April 30, 1996................
Additions.............................. 1,337 308 2,556 4,201
Utilizations........................... (302) (229) (2,150) (2,681)
------ ----- ----------- ---------
Balance at April 26, 1997................ 1,035 79 406 1,520
Unaudited data:
Utilizations........................... (937) (79) (348) (1,364)
------ ----- ----------- ---------
Balance at January 24, 1998.............. $ 98 $ $ 58 $ 156
------ ----- ----------- ---------
------ ----- ----------- ---------
</TABLE>
F-59
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- ----------
<S> <C> <C>
Land........................................................................... $ 4,878 $ 31,934
Buildings...................................................................... 32,140 44,814
Furniture and fixtures......................................................... 42,340 121,701
Warehouse equipment............................................................ 23,290 24,726
Equipment under capital leases................................................. 7,308 8,602
Leasehold improvements......................................................... 8,653 16,107
----------- ----------
118,609 247,884
Less: Accumulated depreciation................................................. (41,080) (65,251)
----------- ----------
Net property and equipment..................................................... $ 77,529 $ 182,633
----------- ----------
----------- ----------
</TABLE>
Depreciation expense for fiscal years 1995, 1996 and 1997 was $4,906, $7,926
and $20,699, respectively.
NOTE 9--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill......................................................... $ 136,338 $ 625,074 $ 928,365
Other............................................................ 2,549 3,063 3,915
---------- ---------- ------------
138,887 628,137 932,280
Less: Accumulated amortization................................... (3,747) (16,663) (28,558)
---------- ---------- ------------
$ 135,140 $ 611,474 $ 903,722
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
Amortization expense for fiscal years 1995, 1996, 1997 and the nine months
ended January 24, 1998 was $801, $2,711, $12,416 and $13,830, respectively.
F-60
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Credit facilities with banks, average interest rates of 7.6% at April 26, 1997 and
7.8% at April 30, 1996.......................................................... $ 1,020 $ 140,090
Annual renewal loans provided by banks and other financial institutions of foreign
subsidiary secured by lease receivables of foreign subsidiary. Interest rates
ranging from 7.8% to 10.2% at April 30, 1996.................................... 67,660
Bank lines of credit of foreign subsidiary operations secured by assets of those
operations. Interest rates ranging from 9.2% to 9.8% at April 30, 1996......... 12,731
Other............................................................................. 4,749 1,367
Current maturities of long-term debt.............................................. 8,014 2,668
---------- ----------
Total short-term debt....................................................... $ 94,174 $ 144,125
---------- ----------
---------- ----------
</TABLE>
The Company currently has an agreement under which a syndicate of financial
institutions, led by Bankers Trust Company, as Agent (the "Bank"), is providing
the Company with a $500 million credit facility (the "Credit Facility") bearing
interest, at the Company's option, at the Bank's base rate plus an applicable
margin of up to 1.25%, or a eurodollar rate plus an applicable margin of up to
2.5%. The availability under the Credit Facility is subject to certain
sublimits including $100 million for working capital loans and $400 million for
acquisition loans. The Credit Facility is secured by a majority of the assets
of the Company and its subsidiaries and contains customary covenants, including
financial covenants with respect to the Company's consolidated leverage and
interest coverage ratios, capital expenditures, payment of dividends and
purchases and sales of assets, and customary default provisions, including
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy. The Company was in compliance with or obtained
waivers relating to these covenants at April 26, 1997. At April 26, 1997, the
balance outstanding under the Credit Facility was $140,090 and included five
eurodollar contracts, expiring within 30 days, totaling $105,000 at an average
interest rate of 7.2%.
F-61
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Convertible Subordinated Notes due 2003, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$31.60 per share, subject to adjustment in certain events....................... $ 230,000
Convertible Subordinated Notes due 2001, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$19.00 per share, subject to adjustment in certain events....................... $ 143,750 143,750
Notes payable, secured by certain assets of the Company, interest rates ranging
from 8.0% to 10.0%, maturities from October 1996 through 2003................... 13,384
Other............................................................................. 22,370 3,610
Capital lease obligations......................................................... 4,740 5,517
---------- ----------
184,244 382,877
Less: Current maturities of long-term debt........................................ (8,014) (2,668)
---------- ----------
Total long-term debt........................................................ $ 176,230 $ 380,209
---------- ----------
---------- ----------
</TABLE>
The 2003 Notes are redeemable, in whole or in part, at the Company's option
at specified redemption prices on or after May 22, 1998, but may not be redeemed
prior to May 15, 1999 unless the closing price of the common stock is at least
150% of the conversion price for a period of time prior to the notice of
redemption. Costs incurred in connection with the issuance of the 2003 Notes
are included in other assets and are being amortized over the seven year period
of maturity. The fair value of the 2003 Notes at April 26, 1997, based upon
quoted market prices, totaled $184,000.
The 2001 Notes are redeemable, in whole or in part, at the Company's option
at specified redemption prices on or after February 3, 1998, but may not be
redeemed prior to February 2, 1999 unless the closing price of the common stock
is at least 150% of the conversion price for a period of time prior to the
notice of redemption. Costs incurred in connection with the issuance of the
2001 Notes are included in other assets and are being amortized over the five
year period of maturity. The fair value of the 2001 Notes at April 26, 1997,
based upon quoted market prices, totaled $147,344.
F-62
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $ 2,668
1999.............................................................. 2,211
2000.............................................................. 1,524
2001.............................................................. 144,436
2002.............................................................. 219
Thereafter........................................................ 231,819
---------
$ 382,877
---------
---------
</TABLE>
NOTE 11--INCOME TAXES
Domestic and foreign income from continuing operations before provision for
income taxes and extraordinary items consist of the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Domestic......................................................................... $ 16,099 $ 22,139 $ 38,024
Foreign.......................................................................... 2,193 2,992 21,853
--------- --------- ---------
Total...................................................................... $ 18,292 $ 25,131 $ 59,877
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Income taxes currently payable:
Federal...................................................................... $ 2,126 $ 4,632 $ 18,776
State........................................................................ 232 351 1,987
Foreign...................................................................... 809 1,245 8,211
--------- --------- ---------
3,167 6,228 28,974
--------- --------- ---------
Deferred income tax expense (benefit)............................................ (367) (196) (1,035)
--------- --------- ---------
Total provision for income taxes........................................... $ 2,800 $ 6,032 $ 27,939
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-63
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory.................................................................................. $ 1,386 $ 708
Allowance for doubtful accounts............................................................ 1,325 1,253
Accrued liabilities........................................................................ 2,971 6,091
--------- ---------
Total current deferred tax assets...................................................... 5,682 8,052
--------- ---------
Long-term deferred tax liabilities:
Property and equipment..................................................................... (4,457) (2,357)
Intangible assets.......................................................................... (1,063) (961)
Internal Revenue Service tax assessment.................................................... (3,383) (3,383)
Other...................................................................................... 2,717 4,243
--------- ---------
Total long-term deferred tax liabilities................................................. (6,186) (2,458)
--------- ---------
Net deferred tax asset (liability)....................................................... $ (504) $ 5,594
--------- ---------
--------- ---------
</TABLE>
The Internal Revenue Service ("IRS") tax assessment relates to the deferral
of a gain on the sale of land and a building by a subsidiary of the Company. The
IRS has determined that a portion of the gain recorded by the subsidiary does
not qualify for deferral and has assessed the Company additional taxes. The
subsidiary has recorded a deferred tax liability, including interest, as a
result of the assessment. The Company has filed an appeal with the IRS relating
to the above assessment; however, the IRS has not yet responded to the appeal.
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate........................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit.............................. 1.3 1.4 3.3
Subchapter S corporation income not subject to
corporate level taxation......................................................... (27.2) (26.1) (3.3)
Foreign earnings not subject to U.S. taxes......................................... (4.2) (4.1) (12.8)
Nondeductible goodwill............................................................. 2.7 3.7 4.9
Nondeductible acquisition costs.................................................... 8.4 4.7
Foreign taxes...................................................................... 4.4 4.9 13.7
Other.............................................................................. 3.3 0.8 1.2
----------- ----------- -----------
Effective income tax rate.......................................................... 15.3% 24.0% 46.7%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to these acquisitions by the Company.
F-64
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the specific Pooled Companies had been subject to
federal income taxes for the entire periods presented.
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED
-----------------
APRIL 26,
1997
-----------------
<S> <C>
Income from continuing operations before extraordinary items per consolidated statement of
income....................................................................................... $ 31,938
Pro forma income tax provision adjustment...................................................... 1,976
-------
Pro forma income from continuing operations before extraordinary items......................... $ 29,962
-------
-------
</TABLE>
NOTE 12--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998................................................................... $ 953 $ 46,645
1999................................................................... 1,662 38,434
2000................................................................... 1,055 30,700
2001................................................................... 697 20,514
2002................................................................... 470 15,458
Thereafter............................................................. 3,433 53,778
--------- ----------
Total minimum lease payments........................................... 8,270 $ 205,529
----------
----------
Less: Amounts representing interest.................................... (2,753)
---------
Present value of net minimum lease payments............................ $ 5,517
---------
---------
</TABLE>
Rent expense for all operating leases for fiscal 1995, 1996 and 1997 was
$12,587, $19,023 and $40,183, respectively.
NOTE 13--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
F-65
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements.
NOTE 14--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue
Code. The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service. In fiscal 1997, the Company's matching contribution expense was
$1,195.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For fiscal 1995, 1996 and 1997, the
subsidiaries incurred expenses totaling $2,023, $2,138 and $1,398, respectively,
related to these plans.
NOTE 15--STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 requires the dual
presentation of basic and diluted EPS on the face of the statement of income.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company has adopted SFAS No. 128 during the nine months
ended January 24, 1998 and has restated all prior period EPS data. The following
information presents the
F-66
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's computations of basic and diluted EPS from continuing operations
before extraordinary items for the periods presented in the consolidated
statement of income.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -------------
<S> <C> <C> <C>
FISCAL 1995:
Basic EPS.............................................................. $ 15,492 45,562 $ .34
---
---
Effect of dilutive employee stock options.............................. 142
------------ -------------
Diluted EPS............................................................ $ 15,492 45,704 $ .34
------------ ------------- ---
------------ ------------- ---
FISCAL 1996:
Basic EPS.............................................................. $ 19,099 67,545 $ .28
---
---
Effect of dilutive employee stock options.............................. 829
------------ -------------
Diluted EPS............................................................ $ 19,099 68,374 $ .28
------------ ------------- ---
------------ ------------- ---
FISCAL 1997:
Basic EPS.............................................................. $ 31,938 90,026 $ .35
---
---
Effect of dilutive employee stock options.............................. 1,735
------------ -------------
Diluted EPS............................................................ $ 31,938 91,761 $ .35
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Basic EPS.............................................................. $ 25,393 85,978 $ .30
---
---
Effect of dilutive employee stock options.............................. 1,846
------------ -------------
Diluted EPS............................................................ $ 25,393 87,824 $ .29
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Basic EPS.............................................................. $ 37,236 114,758 $ .32
---
---
Effect of dilutive employee stock options.............................. 2,427
------------ -------------
Diluted EPS............................................................ $ 37,236 117,185 $ .32
------------ ------------- ---
------------ ------------- ---
</TABLE>
The Company had additional employee stock options and two series of
convertible debt securities outstanding during the periods presented that were
not included in the computation of diluted EPS because they were anti-dilutive.
COMMON STOCK
In November 1994, the Board of Directors of the Company approved a one
thousand-for-one split of the Company's common stock and changed the par value
of common stock from $1 per share to $.001 per share. The consolidated
financial statements have been adjusted to reflect the stock split. In February
1996, the Company's stockholders approved the amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 25,000,000 to 100,000,000 shares. In August 1996,
the Company's stockholders approved the amendment to the
F-67
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's Restated Certified of Incorporation to increase the number of
authorized shares of common stock from 100,000,000 to 500,000,000.
In October 1997, the Board of Directors of the Company approved a three for
two split of the Company's common stock. The financial statements give
retroactive effect for the split for all periods presented.
STOCK COMPENSATION PLANS
In October 1994, the Board of Directors and the Company's stockholders
approved the Company's 1994 Long-Term Compensation Plan (the "Plan"). The
purpose of the Plan is to provide officers, key employees and consultants with
additional incentives by increasing their ownership interests in the
Company. The maximum number of options to purchase common stock granted in any
calendar or fiscal year under the Plan, as amended, is equal to 20% of the
aggregate number of shares of the Company's common stock outstanding at the time
an award is granted, less, in each case, the number of shares subject to
previously outstanding awards under the Plan.
In August 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Non-Employee Directors' Stock Plan (the "Directors'
Plan"). The purpose of the Directors' Plan is to promote ownership by
non-employee directors of a greater proprietary interest in the Company, thereby
aligning such directors' interests more closely with the interests of
stockholders of the Company. A total of 750,000 shares of common stock has been
reserved for issuance under the Directors' Plan. At April 26, 1997, options to
acquire 108,000 shares of common stock have been granted under the Directors'
Plan.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans. Accordingly, because the exercise prices of the options have equaled the
market price on the date of grant, no compensation expense has been recognized
for stock options granted. Had compensation cost for the Company's stock
options been recognized based upon the fair value of the stock options on the
grant date under the methodology prescribed by SFAS 123, the Company's net
income and net income per share would have been impacted as indicated in the
following table. The pro forma results shown below reflect only the impact of
options granted in fiscal 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
--------------------
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Income from continuing operations:
As reported..................................................... $ 18,398 $ 30,488
Pro forma....................................................... 16,339 17,842
Income from continuing operations per share:
As reported:
Basic......................................................... $ 0.27 $ 0.33
Diluted....................................................... 0.27 0.33
Pro forma:
Basic......................................................... $ 0.24 $ 0.20
Diluted....................................................... 0.24 0.19
</TABLE>
F-68
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Expected life of option.................................................. 7 years 7 years
Risk free interest rate.................................................. 6.58% 6.66%
Expected volatility of USOP stock........................................ 58.5% 44.0%
</TABLE>
The weighted-average fair value of options granted was $12.44 and $17.06 for
fiscal 1996 and 1997, respectively.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1994.......... 125,498 $ 0.45 125,498 $ 0.45
Granted.......................... 944,250 5.95
Canceled......................... (10,500) 6.67
------------
Balance at April 30, 1995.......... 1,059,248 5.29 177,998 1.89
Granted.......................... 4,146,886 12.55
Exercised........................ (95,025) 6.25
Canceled......................... (24,300) 8.47
------------
Balance at April 30, 1996.......... 5,086,809 11.18 324,798 3.77
Granted.......................... 6,729,165 20.41
Exercised........................ (197,744) 8.39
Canceled......................... (73,444) 12.65
------------
Balance at April 26, 1997.......... 11,544,786 $ 16.60 1,598,228 $ 10.10
------------
------------
</TABLE>
The following table summarizes information about stock options outstanding
at April 26, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE EXERCISABLE PRICE
- ------------------------------- ------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.45 to $6.67................. 884,498 7.2 years $ 5.09 476,630 $ 4.32
$6.68 to $13.33................ 2,660,398 7.9 years 9.33 702,303 9.70
$13.34 to $20.00............... 4,234,986 9.3 years 17.55 313,866 16.25
$20.01 to $26.67............... 3,737,004 9.3 years 23.27 105,429 20.65
$26.68 to $29.92............... 27,900 9.1 years 28.13
------------ ----------
$0.45 to $29.92................ 11,544,786 8.7 years $ 16.60 1,598,228 $ 10.10
------------ ----------
------------ ----------
</TABLE>
F-69
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The options outstanding information includes 125,498, 58,802 and 343,488
options to acquire common stock at exercise prices of $.45, $10.59 and $10.70,
respectively, which were granted at certain Pooled Companies prior to their
respective acquisitions by the Company.
Non-qualified options granted to employees are generally exercisable
beginning one year from the date of grant in cumulative yearly amounts of 25% of
the shares under option and generally expire ten years from the date of grant.
NOTE 16--SEGMENT REPORTING
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
NEW ZEALAND
NORTH AND
AMERICA AUSTRALIA TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
FISCAL 1995:
Revenues.......................................... $ 629,920 $ 28,574 $ 658,494
Operating income.................................. 18,133 1,429 19,562
Identifiable assets of continuing operations at
year-end........................................ 220,878 5,512 226,390
FISCAL 1996:
Revenues.......................................... $ 984,387 $ 77,141 $ 1,061,528
Operating income.................................. 25,540 3,533 29,073
Identifiable assets of continuing operations at
year-end........................................ 584,170 188,134 772,304
FISCAL 1997:
Revenues.......................................... $ 1,415,161 $ 700,793 $ 2,115,954
Operating income.................................. 56,126 28,708 84,834
Identifiable assets of continuing operations at
year-end........................................ 782,615 753,254 1,535,869
</TABLE>
The amounts listed above as identifiable assets of continuing operations at
year-end differ from the total asset amounts presented on the Consolidated
Balance Sheet since net assets of discontinued operations of $33,514, $33,674
and $171,122 at April 30, 1995 and 1996 and April 26, 1997, respectively, were
excluded from the above analysis but are included in total assets on the
Company's Consolidated Balance Sheet.
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during fiscal 1996 and 1997
in the Company's Quarterly Reports on Form 10-Q as a result of the restatement
of the financial statements to give retroactive effect to the results of the
F-70
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
companies acquired during fiscal 1996 and 1997 in business combinations
accounted for under the pooling-of-interests method and as a result of the
reporting of the results of Spin-Off Companies as discontinued operations.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit.................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................ 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items........................... 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations...... 3,387 5,550 7,727 (886) 15,778
Net income...................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.24
Net income.................................. 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.23
Net income.................................. 0.08 0.15 0.20 0.07 0.50
</TABLE>
F-71
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
Revenues........................................ $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
<S> <C> <C> <C> <C> <C>
Gross profit.................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................ 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items........................... 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations............. 9,475 8,933 2,003 6,389 26,800
Net income...................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.31
Net income.................................. 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.29
Net income.................................. 0.20 0.20 0.12 0.12 0.62
Pro forma income from continuing operations
before extraordinary items (see Note 11)...... 6,431 9,166 8,225 6,140 29,962
Pro forma basic income per share from continuing
operations before extraordinary item.......... 0.08 0.11 0.09 0.06 0.33
Pro forma diluted income per share from
continuing operations before extraordinary
item.......................................... 0.08 0.10 0.09 0.06 0.33
</TABLE>
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED)
In January 1998, U.S. Office Products announced its intention to complete
the Strategic Restructuring Plan described in Note 4. In addition, subsequent to
April 26, 1997 and through March 9, 1998, the Company has completed 42 business
combinations related to continuing operations for an aggregate purchase price of
$502.3 million, consisting of approximately $79.8 million of cash and 20.4
million shares of the Company's common stock with an aggregate market value on
the dates of acquisition of approximately $422.5 million. In addition, on
December 22, 1997, U.S. Office Products made an additional equity investment of
$40.8 million in Dudley Stationery Limited, its 49% owned independent office
products dealer in the United Kingdom, to fund additional acquisitions at
Dudley.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the Strategic Restructuring Plan and the
acquisitions described above had been consummated as of
F-72
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
the beginning of fiscal 1997. The results presented below include certain pro
forma adjustments to reflect (i) substantially higher amortization expenses as
compared to prior periods (as a result of reclassifying 12 business combinations
as purchase acquisitions (including the Company's acquisition of Mail Boxes
Etc.), rather than under the pooling-of-interests method, as the Company had
expected when it completed those acquisitions); (ii) substantially higher
interest expense, as a result of increased borrowing that the Company expects to
incur to help finance the cost of the Tender Offer; and (iii) higher effective
income tax rates, due to increased non-deductible goodwill expense and the
Company's inability to acquire subchapter S corporations in pooling-of-interests
transactions:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED NINE MONTHS ENDED
APRIL 26, 1997 JANUARY 24, 1998
---------------- ------------------
<S> <C> <C>
Revenues............................................... $ 2,794,009 $ 2,070,655
Income from continuing operations before extraordinary
items................................................ 11,332 11,186
Basic income per share from continuing operations
before extraordinary items........................... 0.08 0.08
Diluted income per share from continuing operations
before extraordinary items........................... 0.08 0.08
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
On April 14, 1998, a stockholder purporting to represent a class composed of
all U.S. Office Products' stockholders filed an action in the Delaware Chancery
Court. The action claims that the Directors breached their fiduciary duty to the
stockholders of U.S. Office Products by changing the terms of the Equity-Self
Tender to include employee stock options. The complaint seeks injunctive relief,
damages and attorneys fees. The Company believes that this lawsuit is without
merit and intends to vigorously contest it.
F-73
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Mail Boxes Etc.
We have audited the accompanying consolidated balance sheets of Mail Boxes
Etc. as of April 30, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mail Boxes Etc.
at April 30, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended April 30, 1997,
in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
/s/ ERNST & YOUNG LLP
--------------------------------------------
Ernst & Young LLP
San Diego, California
June 6, 1997
</TABLE>
F-74
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
APRIL 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................................. $ 3,992 $ 1,416
Restricted cash--franchisee deposits...................................................................... 1,613 2,073
Short-term investments.................................................................................... 27,342 21,825
Accounts receivable, net of allowance for doubtful accounts of $1,334 and $1,507, at April 30, 1997 and
1996, respectively...................................................................................... 6,547 6,799
Receivable from National Media Fund....................................................................... 250 770
Inventories............................................................................................... 447 544
Current portion of notes receivable....................................................................... 6,048 6,756
Current portion of net investment in sales-type leases.................................................... 2,322 2,414
Deferred income taxes..................................................................................... 1,272 1,846
Re-acquired area and center rights held for resale........................................................ 629 638
Other..................................................................................................... 1,394 1,063
--------- ---------
Total current assets.................................................................................. 51,856 46,144
Notes receivable, net..................................................................................... 12,977 10,831
Net investment in sales-type leases....................................................................... 6,067 7,518
Property and equipment:
Land.................................................................................................... 1,200 1,200
Building and improvements............................................................................... 5,076 4,201
Office furniture and equipment.......................................................................... 4,307 4,018
Vehicles................................................................................................ 209 209
--------- ---------
Total property and equipment.......................................................................... 10,792 9,628
Less accumulated depreciation and amortization.......................................................... 4,831 4,247
--------- ---------
Net property and equipment.............................................................................. 5,961 5,381
Excess of cost over assets acquired, net of accumulated amortization of $607 and $549 at April 30, 1997
and 1996, respectively.................................................................................. 383 441
Re-acquired area rights, net of accumulated amortization of $511 and $240 at April 30, 1997 and 1996,
respectively............................................................................................ 6,443 3,240
Deferred income taxes..................................................................................... 1,249 1,307
Other assets.............................................................................................. 739 904
--------- ---------
Total Assets.......................................................................................... $ 85,675 $ 75,766
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................................................................... $ 1,363 $ 2,096
Franchisee deposits....................................................................................... 2,097 2,619
Royalties, referrals and commissions payable.............................................................. 1,760 2,515
Accrued employee expenses and related taxes............................................................... 2,390 1,963
Other accrued expenses.................................................................................... 1,550 2,012
Income taxes payable...................................................................................... 769 838
Current maturities of long term debt...................................................................... 692 958
--------- ---------
Total current liabilities............................................................................. 10,621 13,001
Long-term debt, net of current maturities................................................................... 3,916 1,402
Commitments and contingencies...............................................................................
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and outstanding.............
Common stock, no par value, 40,000,000 shares authorized, with 11,300,273 and 11,139,698 shares issued and
outstanding at April 30, 1997 and 1996, respectively.................................................... 16,728 14,944
Retained earnings......................................................................................... 54,410 46,419
--------- ---------
Total shareholders' equity............................................................................ 71,138 61,363
--------- ---------
Total liabilities and shareholders' equity............................................................ $ 85,675 $ 75,766
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-75
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Revenues:
Royalty and marketing fees..................................................... $ 35,254 $ 30,947 $ 24,673
Franchise fees................................................................. 9,915 8,557 8,670
Sales of supplies and equipment................................................ 12,775 10,839 10,020
Interest income on leases and other............................................ 8,687 6,975 5,424
Company centers................................................................ 1,206 1,789 1,564
--------- --------- ---------
Total Revenues............................................................... 67,837 59,107 50,351
Cost and expenses:
Franchise operations........................................................... 18,463 14,881 12,506
Franchise development.......................................................... 6,383 5,883 5,090
Cost of supplies and equipment sold............................................ 9,585 8,465 7,915
Marketing...................................................................... 6,219 4,068 4,630
General and administrative..................................................... 9,060 10,293 7,878
Company centers................................................................ 1,265 1,842 1,598
Litigation settlement expenses................................................. 5,000
--------- --------- ---------
Total cost and expenses...................................................... 55,975 45,432 39,617
--------- --------- ---------
Operating income................................................................. 11,862 13,675 10,734
Interest on investments and other................................................ 963 674 447
--------- --------- ---------
Income before provision for income taxes......................................... 12,825 14,349 11,181
Provision for income taxes....................................................... 4,834 5,620 4,411
--------- --------- ---------
Net income................................................................... $ 7,991 $ 8,729 $ 6,770
--------- --------- ---------
--------- --------- ---------
Net income per common share...................................................... $ 0.68 $ 0.77 $ 0.60
--------- --------- ---------
--------- --------- ---------
Weighted average common and common equivalent shares outstanding................. 11,780 11,403 11,357
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-76
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, April 30, 1994................................................ 11,569 $ 19,195 $ 30,920 $ 50,115
Exercise of employee stock options and other........................... 146 928 928
Common stock repurchased............................................... (657) (5,681) (5,681)
Income tax benefit from stock option activity.......................... 13 13
Net income............................................................. 6,770 6,770
--------- --------- --------- ---------
Balance, April 30, 1995................................................ 11,058 14,455 37,690 52,145
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 221 2,135 2,135
Common stock repurchased............................................... (140) (1,922) (1,922)
Income tax benefit from stock option activity.......................... 276 276
Net income............................................................. 8,729 8,729
--------- --------- --------- ---------
Balance, April 30, 1996................................................ 11,139 14,944 46,419 61,363
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 180 1,590 1,590
Common stock repurchased............................................... (19) (410) (410)
Income tax benefit from stock option activity.......................... 604 604
Net income............................................................. 7,991 7,991
--------- --------- --------- ---------
Balance, April 30, 1997................................................ 11,300 $ 16,728 $ 54,410 $ 71,138
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-77
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net income........................................................................ $ 7,991 $ 8,729 $ 6,770
Adjustments to reconcile net income to net cash provided from operating
activities:
Depreciation and amortization................................................... 1,046 1,030 1,024
Gain on sale of equipment under sales type lease agreements..................... (429) (558) (681)
Increase (decrease) in allowance for doubtful accounts.......................... (530) 880 1,236
Loss (gain) on disposal of property and equipment............................... (7) 4 122
Deferred income taxes........................................................... 632 (1,054) (1,023)
Changes in assets and liabilities:
Restricted cash................................................................. 460 (459) (252)
Accounts and notes receivable................................................... (760) (1,049) (7,386)
Receivable from National Media Fund............................................. 520 830 (1,600)
Assets leased to franchisees and inventories.................................... (1,338) (1,235) (1,999)
Re-acquired area and center rights held for resale.............................. 109 378 261
Other current assets............................................................ (331) (58) 421
Other assets.................................................................... (38) 152 173
Accounts payable................................................................ (733) 945 419
Franchisee deposits............................................................. (522) 466 747
Royalties, referrals and commissions payable.................................... (755) 66 610
Accrued employee expenses and related taxes..................................... 427 500 697
Other accrued expenses.......................................................... (369) 838 821
Income taxes payable............................................................ 535 397 730
--------- --------- ---------
Net cash flows provided from operating activities............................. 5,908 10,802 1,090
Investing Activities:
Net change in short-term investments............................................ (5,517) (11,773) 389
Additions to property and equipment............................................. (1,292) (472) (477)
Principal payments received on sales-type leases................................ 3,407 3,628 3,223
Re-acquired area rights......................................................... (439) (185) (887)
--------- --------- ---------
Net cash flows provided from (used in) investing activities..................... (3,841) (8,802) 2,248
Financing Activities:
Borrowing under line of credit.................................................. 1,630 3,720 3,800
Repayments under line of credit................................................. (2,150) (4,550) (2,200)
Repayments on notes payable..................................................... (354) (146) (54)
Repurchase of common stock...................................................... (410) (1,922) (5,681)
Proceeds from the issuance of common stock...................................... 1,793 1,923 937
--------- --------- ---------
Net cash flows provided from (used in) financing activities..................... 509 (975) (3,198)
--------- --------- ---------
Increase in cash and cash equivalents............................................... 2,576 1,025 140
Cash and cash equivalents at beginning of year...................................... 1,416 391 251
--------- --------- ---------
Cash and cash equivalents at end of year............................................ $ 3,992 $ 1,416 $ 391
--------- --------- ---------
--------- --------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for Income taxes...................................... $ 3,762 $ 6,348 $ 5,479
</TABLE>
F-78
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest expense.................................................................... $ 261 $ 155 $ 98
Supplemental Schedule of Non-Cash Activities:
Equipment sold under sales-type leases.......................................... $ 1,864 $ 2,232 $ 2,724
Cost of equipment sold under sales-type leases.................................. $ 1,435 $ 1,674 $ 2,043
Notes payable issued in connection with re-acquired area rights................. $ 3,123 $ 185 $ 1,495
Accounts and notes forgiven in connection with re-acquired area rights.......... $ 104 $ 468
Exchange of area rights......................................................... $ 260
</TABLE>
See accompanying notes.
F-79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Mail Boxes Etc. ("MBE" or "the Company") was incorporated in November 1983
as a California corporation. It operates domestically through one wholly-owned
subsidiary, Mail Boxes Etc. USA, Inc. This subsidiary grants territorial
franchise rights for the operation or sale of service centers specializing in
postal, packaging, business and communication services. The purchase price paid
by the Company to acquire this subsidiary exceeded the subsidiary's net assets
by $0.9 million; the excess is being amortized on the straight-line method over
20 years.
The Company acquired a majority interest in the master license for the
United Kingdom during FY96. During FY97 MBE acquired the remaining interest in
the United Kingdom and operated this entity as a wholly-owned subsidiary,
MBE-UK. All accounts of this foreign subsidiary have been measured using U.S.
dollars as the functional currency. The gains and losses arising from the
measurement of the foreign subsidiary's account have not been significant. At
the end of FY97, the MBE Master License for the United Kingdom was sold to a
group comprised of the individual principal owners of the MBE Master License for
Canada and several other MBE Area and Individual Franchisees.
The Company provides franchisees with a system of business training, advice
regarding site location, marketing, advertising programs and management support
designed to assist the franchisee in opening and operating MBE Centers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
REVENUE RECOGNITION
The Company enters into area and individual franchise agreements in the
United States and master license agreements in other countries.
Area franchise agreements grant the area franchisee the exclusive right to
market individual franchise centers for the Company in the area franchisee's
territory. The area franchisee generally receives a commission on individual
franchises sold as well as a share of future royalties earned by the Company
from centers in the area franchisee's territory. Individual franchise agreements
grant the individual franchisee the exclusive right to open and operate a
franchise center in the individual franchisee's territory.
Franchise fee revenue is recognized upon completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is completed. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant initial obligations that must be completed before
any revenue is recognized are: all operating manuals are provided and training
is completed.
F-80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue is recognized using the installment method when the revenue is
collectable over an extended period and no reasonable basis exists for
estimating collectability.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
In FY95, the National Media Fund was created to administer national
advertising programs. The National Media Fund is managed by a committee of area
franchisees, individual franchisees and MBE. Certain advertising fees, based on
franchisees' sales (as defined), are collected by the Company for the National
Media Fund. Such advertising fees are not included in the accompanying financial
statements. As of April 30, 1997 and 1996, the Company had advanced $250
thousand and $770 thousand to the National Media Fund, respectively, to fund
certain national advertising programs.
These advances, including interest, are repaid to the Company based on the
collection of the advertising fees and availability of funds.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers cash equivalents to be those instruments which have
original maturities of three months or less.
In accordance with Financial Accounting Standards Board Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities for which the Company
does not have the intent or the ability to hold to maturity are classified as
available for sale along with the Company's investments in equity securities.
Securities classified as available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. At April 30, 1997 and 1996, the Company had no investments
that were classified as trading or held to maturity as defined by Statement No.
115.
Realized gains and losses are included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available for sale is included in interest income.
The following is a summary of cash and cash equivalents and the estimated
fair value of available for sale securities by balance sheet classification at
April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents Cash.............................................................. $ 351 $ 1,339
Money market fund....................................................................... 3,641 77
Short-term investments:
U.S. Government securities.............................................................. 5,842 4,000
Mutual fund preferred equity securities................................................. 21,500 17,825
--------- ---------
Total cash, cash equivalents and short-term investments..................................... $ 31,334 $ 23,241
--------- ---------
--------- ---------
</TABLE>
F-81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimated fair value of each investment approximates the amortized cost,
and therefore, there are no unrealized gains or losses as of April 30, 1997 or
1996.
"Restricted cash-franchisee deposits" is the amount that prospective
franchisees have deposited into a separate account managed by MBE. When all of
the requirements for recognizing revenue for an individual, area or master
license sale are completed (see the "Revenue Recognition" section of Note 1),
then the deposit amount is transferred from this separate account into MBE's
regular account and the revenue from the sale is recognized. If MBE's
obligations are not completed then these deposits are usually refundable. The
account, "Franchisee deposits", in the liability section of the balance sheet
includes the restricted cash deposit amount and other deposits received from its
franchisees.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt and equity instruments of
financial institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments. Receivables from franchisees include trade
receivables, lease receivables and notes receivable. Credit is extended based on
an evaluation of the franchisee's financial condition. Sales-type leases are
collateralized by the leased equipment and fixtures.
Trade receivables are not collateralized. However, the center ownership
transfer process requires that all amounts owed be paid when a center ownership
is transferred.
Notes receivable from area franchisees and master licensees are
collateralized by the area rights or master license rights, respectively. The
Company has provided for estimated credit losses.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of resources and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories consist of supplies and equipment held for resale to franchisees
and equipment held for lease. Inventories are recorded at the lower of cost
(first-in, first-out method) or market.
RE-ACQUIRED INDIVIDUAL AND AREA FRANCHISE RIGHTS
The Company repurchases franchise rights for two primary reasons. The
Company may repurchase area rights with the intention of developing a better
support system and then reselling the areas within a short period of time. The
Company may acquire individual center rights to upgrade the Center and then
resell it within a short period of time. The Company had an investment of
approximately $629 thousand and $638 thousand in such individual and area rights
at April 30, 1997 and 1996, respectively. The Company may also repurchase the
area rights with the primary intention of retaining the royalties normally
shared with the former area franchisees and maintaining such rights as long-term
investments. The area
F-82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
repurchases have been accounted for as purchases. The Company records these area
repurchases at cost less accumulated amortization. Periodically the Company
assesses the fair value of these areas based on estimated cash flows to
determine if an impairment in the value has occurred and an adjustment is
necessary. As of April 30, 1997 no adjustment is necessary. The Company had an
investment of $6.4 million and $3.2 million in such area rights at April 30,
1997 and 1996, respectively. Area franchise rights held as long-term investments
are amortized over a period of 20 years.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Building................................................... 31.5 years
12.5--31.5
Building improvements...................................... years
Office furniture and equipment............................. 3-5 years
Vehicles................................................... 3 years
</TABLE>
EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's stock options generally equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
ACCOUNTING FOR ASSET IMPAIRMENT
The Company adopted Statement of Financial Accounting Standards No. 121
(SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", effective May 1, 1995. SFAS No. 121
required impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. There was no effect on the financial
statements from the adoption of SFAS No. 121.
NET INCOME PER COMMON SHARE
Earnings per share are based on the weighted average number of common shares
and common share equivalents (stock options) outstanding during the period.
F-83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
2. NOTES RECEIVABLE
Notes receivable consist of the following at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Notes with interest rates ranging from 8%-14%, from individual franchisees, due at varying
dates through 2005........................................................................ $ 11,688 $ 11,170
Notes with interest rates ranging from 8%-14%, from area franchisees, due at varying dates
through 2005.............................................................................. 7,252 6,611
Notes with interest rates ranging from 8.5%--11.75%, from master licensees, due at varying
dates through 2004........................................................................ 1,728 1,806
--------- ---------
20,668 19,587
Less portion due within one year............................................................ (6,048) (6,756)
Less allowance for uncollectible notes...................................................... (1,643) (2,000)
--------- ---------
$ 12,977 $ 10,831
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:..................................... $ 1,997 $ 2,041
--------- ---------
--------- ---------
</TABLE>
Scheduled principal maturities for notes receivable as of April 30, 1997,
are as follows (in thousands): 1998--$6,048; 1999--$4,164; 2000--3,384;
2001--$2,582; 2002--$1,997; and thereafter $2,493
At April 30, 1997, the Company was obligated to fund approximately $281
thousand under certain financing programs offered to franchisees.
3. NET INVESTMENT IN SALES--TYPE LEASES
The Company leases various types of office and computer equipment to
franchisees under three to eight-year lease agreements. The following summarizes
the components of the net investment in sales-type leases at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Total minimum lease payments to be received................................................. $ 10,980 $ 13,241
Less unearned income........................................................................ (2,591) (3,309)
--------- ---------
Net investment in sales-type leases......................................................... 8,389 9,932
Less portion due within one year............................................................ (2,322) (2,414)
--------- ---------
$ 6,067 $ 7,518
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:......................................... $ 1,203 $ 1,420
--------- ---------
--------- ---------
</TABLE>
Annual minimum lease payments subsequent to April 30, 1997, are as follows
(in thousands): 1998-- $3,307; 1999--$2,736; 2000 -$2,031; 2001--$1,330;
2002--$778; and thereafter--$798.
4. DEBT
The Company has a line of credit with a bank which allows maximum borrowings
of $7 million. As of April 30, 1997, $250 thousand has been borrowed and $6.750
million is available for borrowing under the line of credit. The line of credit
is unsecured and bears interest at a rate based on LIBOR plus certain basis
F-84
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
4. DEBT (CONTINUED)
points (6.81% at April 30, 1997). The agreement expires on September 1, 1998, at
which time all outstanding borrowing can be converted to a three-year term loan,
which would be payable in equal monthly installments. The line of credit
agreement contains various covenants, including limitations on additional
indebtedness and maintaining certain financial ratios.
5. NOTES PAYABLE
Long-term debt consists of notes payable to former area franchisees in
connection with the repurchase of area franchise rights. Payments are made in
monthly installments of $51 thousand including interest at 8% to 8.5% per annum.
Aggregate principal maturities on notes payable at April 30, 1997 are as follows
(in thousands): 1998 ---$442; 1999--$452; 2000--$447; 2001--$457; 2002--$463;
and thereafter-- $2,097.
6. INCOME TAXES
The provision for income taxes consists of the following for each of the
years ended April 30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal............................................................................ $ 3,297 $ 5,324 $ 4,352
State.............................................................................. 905 1,344 1,088
--------- --------- ---------
4,202 6,668 5,440
Deferred:
Federal............................................................................ 557 (913) (890)
State.............................................................................. 75 (135) (139)
--------- --------- ---------
632 (1,048) (1,029)
--------- --------- ---------
$ 4,834 $ 5,620 $ 4,411
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has derived tax deductions measured by the excess of the market
value over the option price at the date employee stock options were exercised.
The cumulative related tax benefit of approximately $1.4 million has been
credited to common stock. Significant components of the Company's deferred tax
assets for federal and state income taxes as of April 30 are:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Valuation reserves................................................................... $ 1,884 $ 2,646 $ 1,679
State taxes.......................................................................... 247 339 295
Deferred compensation................................................................ 390 168 131
--------- --------- ---------
Total deferred tax assets............................................................ $ 2,521 $ 3,153 $ 2,105
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
6. INCOME TAXES (CONTINUED)
A reconciliation between the amount of tax computed by multiplying income
before taxes by the applicable statutory rates and the amount of reported taxes
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate....................................................................... 34.0% 35.0% 34.0%
State tax, net of federal tax benefit................................................ 5.0% 5.5% 5.6%
Other................................................................................ (1.3%) (1.3%) (0.1%)
--- --- ---
37.7% 39.2% 39.5%
--- --- ---
--- --- ---
</TABLE>
7. STOCK OPTIONS
The Company has granted options to directors, officers and key employees
under stock option plans to purchase shares of the Company's common stock.
Options are generally granted at prices equal to the fair market value of
the shares at the date of grant and are generally exercisable in equal
increments over three to five years, commencing one year after the date of
grant. At April 30, 1997, 473 thousand options were exercisable and the Company
had nearly 2.6 million shares available for future grant under the stock option
plan for employees and 160 thousand shares available for future grant under the
stock option plan for outside directors.
A summary of the Company's stock option activity and related information is
as follows (shares in thousands):
<TABLE>
<CAPTION>
FY97
----------------------------
<S> <C> <C>
NUMBER OF WGTD. AVG.
SHARES EXERCISED PRICE
----------- ---------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year...................................................... 1,113 $ 9.85
Granted............................................................................... 489 $ 17.54
Exercised............................................................................. (180) $ 9.97
Forfeited............................................................................. (169) $ 13.12
----- ------
Outstanding at the end of the year.................................................... 1,253 $ 12.39
----- ------
Exercisable at the end of the year.................................................... 473* $ 10.75
----- ------
</TABLE>
- ------------------------
* Because of the Merger Agreement with U.S. Office Products described in Note
13, all stock options granted prior to May 22, 1997 (the date of the Merger
Agreement), will become vested and fully exercisable prior to the Merger. If
the Merger is not consummated, all options that were accelerated solely as a
result of the Merger Agreement, but were not exercised, will revert back to
their original vesting schedule.
F-86
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
FY96
--------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 914 $ 9.93
Granted................................................................................ 441 $ 9.17
Exercised.............................................................................. (221) $ 8.70
Forfeited.............................................................................. (21) $ 13.30
----- ------
Outstanding at the end of the year..................................................... 1,113 $ 9.85
----- ------
Exercisable at the end of the year..................................................... 394 $ 12.49
----- ------
</TABLE>
<TABLE>
<CAPTION>
FY95
----------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
------------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 847 $ 9.90
Granted................................................................................ 258 $ 7.81
Exercised.............................................................................. (146) $ 6.29
Forfeited.............................................................................. (45) $ 9.31
----- ------
Outstanding at the end of the year..................................................... 914 $ 9.93
----- ------
Exercisable at the end of the year..................................................... 408 $ 10.77
----- ------
</TABLE>
Adjusted pro forma information regarding net income and earnings-per-share
is required by SFAS 123, and has been determined as if the Company had accounted
for its employee and non-employee directors stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using the "Black Scholes" method for option pricing with the
following weighted-average assumptions for FY97 and FY96: 1) risk free interest
rates of 6%; 2) dividend yields of 0%; 3) volatility factors of the expected
market value of the Company's common stock of .395; and a weighted-average
expected life of the options of 5 years.
For purposed of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information would have been as follows (in
thousands):
<TABLE>
<CAPTION>
FY97 FY96
----------- -------------
<S> <C> <C>
Adjusted pro forma net income.......................................................... $ 7,403 $ 8,549
Adjusted pro forma earnings-per-share.................................................. $ 0.63 $ 0.75
</TABLE>
The results above are not likely to be representative of the effects of
applying FAS 123 on reported net income or loss for future years as these
amounts reflect the expense for only one or two years vesting.
F-87
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
The following summarizes information about the Company's stock options
outstanding at April 30, 1977 (number of options in thousands):
<TABLE>
<CAPTION>
SHARES SUBJECT TO OUTSTANDING OPTIONS
- ------------------------------------------------------------------------------ EXERCISABLE
OPTION WGTD. AVE ---------------------------------------
RANGE OF SHARES REMAINING WGTD. AVE. NUMBER WGTD. AVE.
EXERCISE PRICE OUTSTANDING LIFE EXER. PRICE EXERCISABLE EXER. PRICE
- -------------------------------------------------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$4.13 ...................................... 8 1.0 yrs $ 4.13 8 $ 4.13
$6.81--$ 8.25..................................... 390 7.5 $ 7.84 112 $ 7.57
$9.00--$10.50..................................... 278 4.6 $ 10.00 195 $ 9.96
$11.50--$14.50.................................... 145 4.8 $ 13.80 140 $ 13.78
$16.50--$23.13.................................... 432 9.1 $ 17.70 18 $ 18.27
----- ----------- ----------- ----- -----------
1,253 473
</TABLE>
8. FRANCHISE FEES
Franchise fees consist of the following for each of the years ended April
30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Individual franchises................................................................ $ 7,240 $ 6,397 $ 6,774
Area franchises...................................................................... 296 292 58
Master licenses & international fees................................................. 1,062 957 1,170
Transfer and renewal fees............................................................ 1,317 911 668
--------- --------- ---------
$ 9,915 $ 8,557 $ 8,670
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. ROYALTY EXPENSES
Royalties shared with area franchisees are included in franchise operations
in the accompanying consolidated statements of income and are as follows (in
thousands): 1997--$12,875; 1996--$11,686; and 1995--$9,689.
10. EMPLOYEE BENEFIT PLANS
In November 1988, the Company adopted an amended and restated Stock Purchase
and Salary Savings Plan (Plan) covering substantially all employees that have
been employed for at least six months and meet other age and eligibility
requirements. Employees may contribute up to ten percent of compensation per
year (subject to a maximum limit by federal tax law) into various funds.
Profit sharing contributions by the Company to the Plan are made at the
discretion of the Board of Directors and were $240 thousand, $450 thousand, and
$420 thousand for the years ended April 30, 1997, 1996 and 1995, respectively.
At the discretion of the Board of Directors, the Company may also make annual
matching contributions to the Plan. Matching contributions for 1997, 1996 and
1995 were $214 thousand, $162 thousand, and $136 thousand, respectively and
equal to 50% of the employee's contributions.
F-88
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has entered into an employment agreement with its chief
executive officer, under which the Company agreed to obtain a split dollar life
insurance policy for his benefit. The Company contributed $100 thousand in both
FY97 and FY96 toward the funding of this policy. The Company has retained an
equity interest in this policy equal to the extent of its contributions.
Consequently, there is no effect on the Company's earnings as a result of these
contributions.
Contributions after FY97 will be determined annually by the Board of
Directors.
11. LITIGATION
On November 6, 1996, the Company entered into a comprehensive settlement of
various lawsuits and claims made by certain franchisees in several lawsuits
being pursued in San Diego County Superior Court. Under the settlement
agreement, the Company paid $4 million in cash and will deliver an aggregate
amount of 39,080 shares of its common stock over a period of two years. The
settlement expense reflected in the Company's financial results is $5 million.
The Company is still involved in various lawsuits and claims from its
franchisees and former employees in the course of conducting its business. While
the Company intends to vigorously defend these actions, management is unable to
make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation. It is possible that the
Company's results of operations in a particular quarter or annual period could
be materially adversely affected by an ultimate unfavorable outcome of certain
pending litigation. Management believes, however, that the ultimate outcome of
all pending litigation should not have a material adverse effect on the
Company's financial position or liquidity.
12. RELATED PARTY TRANSACTIONS
Nearly 40% of the franchisees' gross sales and almost 50% of their
subject-to-royalty revenues are generated by selling UPS Services. The Company
receives royalty revenue based on revenues earned by the franchisees. The
Company recognized royalty and marketing fee revenues generated from UPS
services of $16.9 million, $14.9 million, and $11.8 million for the years ended
April 30, 1997, 1996, and 1995, respectively.
13. SUBSEQUENT EVENTS
On May 22, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with U.S. Office Products Company ("USOP"), pursuant to
which a newly-formed, wholly-owned subsidiary of USOP will be merged (the
"Merger") with and into MBE, with MBE to be the surviving corporation. Once the
merger is completed, MBE will be a wholly-owned subsidiary of USOP. Consummation
of the Merger is subject to certain conditions, including the approval of the
principal terms of the transaction by the Company's shareholders.
14. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information includes all adjustments which
management considers necessary for a fair statement of such information. For
interim quarterly financial statements, the provision for
F-89
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
14. QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
income taxes is estimated using the best available information for projected
results for the entire year (in thousands, except for per share data).
<TABLE>
<CAPTION>
FY97 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues......................................................... $ 14,779 $ 17,047 $ 18,838 $ 17,173
Total cost and expenses................................................ 11,634 18,078 13,204 13,059
Provision for (benefit from) income taxes.............................. 1,331 (341) 2,310 1,534
Net income (loss)...................................................... 2,070 (470) 3,557 2,834
Earnings (loss) per share.............................................. .18 (0.04) .30 .24
</TABLE>
<TABLE>
<CAPTION>
FY96 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues......................................................... $ 12,803 $ 15,097 $ 16,164 $ 15,093
Total cost and expenses................................................ 10,279 11,804 11,870 11,479
Provision for (benefit from) income taxes.............................. 1,036 1,345 1,751 1,488
Net income (loss)...................................................... 1,622 2,091 2,708 2,308
Earnings (loss) per share.............................................. .14 .18 .24 .20
</TABLE>
F-90
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
1997
------------
<S> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents......................................................................... $ 1,059
Restricted cash--franchisee deposits.............................................................. 1,923
Short-term investments............................................................................ 31,354
Accounts receivable, net.......................................................................... 7,806
Inventories....................................................................................... 533
Current portion of notes receivable............................................................... 8,998
Current portion of net investment in sales-type leases............................................ 3,388
Deferred income taxes............................................................................. 1,272
Re-acquired area and center rights held for resale................................................ 612
Other............................................................................................. 1,637
------------
Total current assets............................................................................ 58,582
Notes receivable, net............................................................................. 18,131
Net investment in sales-type leases............................................................... 5,133
Property and equipment, net....................................................................... 6,686
Excess of cost over assets acquired, net.......................................................... 268
Re-acquired area rights........................................................................... 1,157
Deferred income taxes............................................................................. 1,249
Other assets...................................................................................... 958
------------
Total assets.................................................................................... $ 92,164
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................................. $ 1,952
Franchisee deposits............................................................................... 2,395
Royalties, referrals and commissions payable...................................................... 2,760
Accrued employee expenses and related taxes....................................................... 2,089
Other accrued expenses............................................................................ 2,038
Income taxes payable.............................................................................. 1,523
Current maturities of debt and notes payable...................................................... 274
------------
Total current liabilities....................................................................... 13,031
Long-term debt, net of current maturities........................................................... 2,448
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and outstanding.....
Common stock, no par value, 40,000,000 shares authorized, with 11,422,091 shares issued
outstanding at October 31, 1997................................................................. 18,340
Retained earnings................................................................................. 58,345
------------
Total shareholders' equity...................................................................... 76,685
------------
Total liabilities and shareholders' equity.................................................... $ 92,164
------------
------------
</TABLE>
See accompanying notes.
F-91
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
<S> <C> <C> <C> <C>
10/31/97 10/31/96 10/31/97 10/31/96
--------- --------- --------- ---------
Revenue:
Royalty and marketing fees........................................ $ 8,466 $ 7,985 $ 17,161 $ 15,586
Franchise fees.................................................... 3,802 2,736 6,144 4,531
Sales of supplies and equipment................................... 3,537 3,899 6,049 6,929
Interest income on leases and other............................... 2,537 2,163 4,413 4,151
Company centers................................................... 204 264 458 630
--------- --------- --------- ---------
Total revenues................................................ 18,546 17,047 34,225 31,827
Cost and Expenses:
Franchise operations.............................................. 4,515 4,328 8,598 8,488
Franchise development............................................. 1,840 1,742 3,316 2,954
Cost of supplies and equipment sold............................... 2,552 2,912 4,396 5,189
Marketing......................................................... 1,773 1,713 3,048 3,061
General and administrative........................................ 3,251 2,099 5,591 4,341
Company centers................................................... 197 284 459 680
Litigation settlement expenses.................................... 5,000 5,000
Non recurring charges............................................. 2,510
--------- --------- --------- ---------
Total cost and expenses....................................... 14,128 18,078 27,918 29,713
--------- --------- --------- ---------
Operating Income (loss)............................................... 4,418 (1,031) 6,307 2,114
Interest on investments and other..................................... 309 220 631 476
--------- --------- --------- ---------
Income (loss) before provision (benefit) for income taxes............. 4,727 (811) 6,938 2,590
Provision for income taxes............................................ 1,881 (341) 3,003 990
--------- --------- --------- ---------
Net income (loss)............................................. $ 2,846 $ (470) $ 3,935 $ 1,600
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per common share:................................... $ .24 $ (.04) $ .33 $ .14
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common and common equivalent shares outstanding...... 12,101 11,198 12,088 11,774
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-92
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Operating Activities:
Net income................................................................................. $ 3,935 $ 1,600
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization............................................................ 556 523
Gain on sale of re-acquired area rights.................................................. (2,644) (339)
Gain on sale of equipment under sales-type lease agreements.............................. (166) (241)
Changes in assets and liabilities:
Restricted cash.......................................................................... (310) 80
Accounts and notes receivable............................................................ (1,792) 461
Receivable from National Media Fund...................................................... 250 770
Assets leased to franchisees and inventories............................................. (675) (1,032)
Re-acquired area and center rights (held for resale)..................................... (143) (86)
Other current assets..................................................................... (243) (1,447)
Other assets............................................................................. (127) (191)
Accounts payable......................................................................... 589 288
Franchisee deposits...................................................................... 298 89
Royalties, referrals and commissions payable............................................. 1,000 (26)
Accrued employee expenses and related taxes.............................................. (301) (929)
Other accrued expenses................................................................... 488 4,806
Income taxes payable..................................................................... 754 (838)
--------- ---------
Net cash flows provided from operating activities...................................... 1,469 3,488
Investing Activities:
Net change in short-term investments..................................................... (4,012) (2.840)
Additions to property and equipment...................................................... (1,106) (215)
Principal payments received on sales-type leases......................................... 624 1,777
--------- ---------
Net cash flows (used in) investment activities......................................... (4,494) (1,278)
Financing Activities:
Borrowings under revolving loan.......................................................... 930
Repayments under revolving loan.......................................................... (250) (1,700)
Repayments on notes payable.............................................................. (1,270) (136)
Repurchase of common stock............................................................... (112) (283)
Proceeds from the issuance of common stock............................................... 1,724 945
--------- ---------
Net cash flows provided from (used in) financing activities............................ 92 (244)
Increase in cash and cash equivalents........................................................ (2,933) 1,966
Cash and cash equivalents at beginning of period............................................. 3,992 1,416
--------- ---------
Cash and cash equivalents at end of period................................................... $ 1,059 $ 3,382
--------- ---------
--------- ---------
Supplemental Disclosure for Cash Flow Information:
Cash paid during the period for income taxes............................................. $ 2,240 $ 3,270
Interest................................................................................. 164 85
Supplemental Schedule with Non-Cash Investment and Financing Activities:
Equipment sold under sales-type agreements............................................... $ 755 $ 1,048
Additions to debt for acquisition of Area rights......................................... 597 1,780
</TABLE>
See accompanying notes.
F-93
<PAGE>
MAIL BOXES ETC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. BASIS OF PRESENTATION:
NOTE 1. PRESENTATION
The condensed consolidated balance sheet as of October 31, 1997, the
condensed consolidated statements of operations for the three-month periods and
six-month periods ended October 31, 1997 and 1996, and the condensed
consolidated statements of cash flows for the six-month periods then ended have
been prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations, and cash flows
have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. In addition, certain Risk Factors may also
impact future financial reports. It is suggested that the condensed consolidated
financial statements contained in this report be read in conjunction with the
financial statements and notes thereto included in the 1997 Annual Report on
Form 10-K, as well as the Risk Factors discussed in the Form 10-K Report. The
results of operations for the quarter ended October 31, 1997 are not necessarily
indicative of the operating results for the full year.
NOTE 2. SUBSEQUENT EVENT
During November 1997, Mail Boxes Etc. was acquired by U.S. Office Products.
U.S. Office Products issued approximately 15.4 million shares of its common
stock in exchange for all the outstanding shares of Mail Boxes Etc.,
representing an exchange ratio of 1.349 shares of U.S. Office Products common
stock for each share of Mail Boxes Etc. common stock.
F-94
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
SPECIAL MEETING OF STOCKHOLDERS
MAY 22, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Revoking all prior proxies, the undersigned, a stockholder of U.S. OFFICE
PRODUCTS COMPANY (the "Company"), hereby appoints Mark D. Director and Donald
H. Platt, and each of them, attorneys and agents of the undersigned, with
full power of substitution, to vote all shares of the common stock, par value
$.001 per share (the "Common Stock"), of the undersigned in the Company at
the Special Meeting of Stockholders of the Company to be held on May 22,
1998 at 10:00 a.m., local time, and at any adjournment thereof, as fully and
effectively as the undersigned could do if personally present and voting,
hereby approving, ratifying and confirming all that said attorneys and agents
or their substitutes may lawfully do in place of the undersigned as indicated
on reverse side.
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON ANY OTHER
MATTERS WHICH MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY ADJOURNMENT
THEREOF.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED. IF NO
DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE PROPOSED EQUITY
INVESTMENT AND FOR THE ONE-FOR-FOUR REVERSE STOCK SPLIT.
(Continued, and to be dated and signed on other side)
<PAGE>
/X/ Please mark your votes
as in this example using
dark ink only.
<TABLE>
<S> <C> <C> <C>
FOR AGAINST ABSTAIN
1. Approval of the Equity Investment by CDR-PC Acquisition, L.L.C. / / / / / /
FOR AGAINST ABSTAIN
2. Approval to amend U.S. Office Products' certificate / / / / / /
of incorporation to effect a one-for-four reverse stock
split of U.S. Office Products' common stock.
</TABLE>
Should the undersigned be present and elect to vote at the Special Meeting or
at any adjournment thereof and after notification to the Secretary of the
Company at the Special Meeting of the stockholder's decision to terminate
this proxy, then the power of said attorneys and proxies shall be deemed
terminated and of no further force and effect. This proxy may also be revoked
by sending written notice to the Secretary of the Company at the address set
forth on the Notice of Special Meeting of Stockholders, or by the filing of a
later proxy prior to a vote being taken on a particular proposal at the
Special Meeting.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY,
USING THE ENCLOSED ENVELOPE
PLEASE CHECK HERE IF YOU PLAN TO ATTEND THE SPECIAL MEETING. / /
____________________ __________________________ Date:____________, 1998
Signature Signature, if held jointly
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporation name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
