<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 25, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ------------------------
Commission File Number 000-25372
U.S. OFFICE PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 52-1906050
(State of other jurisdiction (I.R.S. Employer
incorporation or organization.) Identification No.)
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
(Address of principal executive offices) (Zip Code)
(202) 339-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of September 8, 1998, there were 36,517,184 shares of common stock
outstanding.
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet.....................................................3
July 25, 1998 (unaudited) and April 25, 1998
Consolidated Statement of Operations...........................................4
For the three months ended July 25, 1998 (unaudited) and
July 26, 1997 (unaudited)
Consolidated Statement of Cash Flows...........................................5
For the three months ended July 25, 1998 (unaudited) and
July 26, 1997 (unaudited)
Notes to Consolidated Financial Statements.....................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...........................35
Item 6. Exhibits and Reports on Form 8-K..............................................35
Signatures...............................................................................37
Exhibit Index............................................................................38
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
<TABLE>
<CAPTION>
July 25, April 25,
1998 1998
------ --------------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,447 $ 52,021
Accounts receivable, less allowance for doubtful
accounts of $9,556 and $8,639, respectively 311,876 310,527
Inventories 224,322 228,671
Prepaid expenses and other current assets 130,046 117,150
------------- -------------
Total current assets 693,691 708,369
Property and equipment, net 227,116 228,715
Intangible assets, net 903,316 923,024
Other assets 212,889 194,701
Net assets from discontinued operations:
Amounts to become receivable upon the Distributions 132,145
All other net assets 354,473
Total assets $ 2,037,012 $ 2,541,427
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 12,923 $ 368,227
Accounts payable 154,388 162,718
Accrued compensation 41,833 43,013
Other accrued liabilities 94,801 81,411
------------- -------------
Total current liabilities 303,945 655,369
Long-term debt 1,200,016 382,174
Other long-term liabilities and minority interests 17,803 17,753
------------- -------------
Total liabilities 1,521,764 1,055,296
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares
authorized, none outstanding
Common stock, $.001 par value, 500,000,000 shares authorized, 36,686,119 and
33,460,864 shares issued, 36,517,184 and 33,460,864 shares outstanding, and
168,935 and none held in treasury, respectively 37 33
Additional paid-in capital 677,851 1,472,125
Accumulated other comprehensive loss (148,430) (112,803)
Retained earnings (deficit) (14,210) 126,776
------------- -------------
Total stockholders' equity 515,248 1,486,131
------------- -------------
Total liabilities and stockholders' equity $ 2,037,012 $ 2,541,427
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
</TABLE>
Page 3
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
July 25, July 26,
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 651,949 $ 614,814
Cost of revenues 474,285 444,032
----------- -----------
Gross profit 177,664 170,782
Selling, general and administrative expenses 148,822 142,865
Amortization expense 5,959 4,115
Strategic Restructuring Plan costs 97,503
Operating restructuring costs 8,726
----------- -----------
Operating income (loss) (83,346) 23,802
Interest expense 18,888 8,467
Interest income (366) (582)
Other income (410) (1,383)
----------- -----------
Income (loss) from continuing operations before provision
for (benefit from) income taxes and extraordinary items (101,458) 17,300
Provision for (benefit from) income taxes (17,915) 8,265
----------- -----------
Income (loss) from continuing operations before
extraordinary items (83,543) 9,035
Income (loss) from discontinued operations, net
of income taxes (1,294) 10,951
----------- -------------
Income (loss) before extraordinary items (84,837) 19,986
Extraordinary items - loss on early termination
of debt instruments, net of income taxes 269
----------- -----------
Net income (loss) $ (85,106) $ 19,986
----------- -----------
----------- -----------
Basic income (loss) per share data:
Income (loss) from continuing operations before
extraordinary items $ (2.38) $ 0.34
Income (loss) from discontinued operations (0.04) 0.41
Extraordinary items (0.01)
-----------
Net income (loss) $ (2.43) $ 0.75
----------- -----------
----------- -----------
Diluted income (loss) per share data:
Income (loss) from continuing operations before
extraordinary item $ (2.38) $ 0.33
Income (loss) from discontinued operations (0.04) 0.41
Extraordinary items (0.01)
----------- -----------
Net income (loss) $ (2.43) $ 0.74
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
July 25, July 25,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (85,106) $ 19,986
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
(Income) loss from discontinued operations 1,294 (10,951)
Depreciation and amortization 14,617 13,493
Strategic Restructuring Plan costs 70,380
Deferred income taxes (152) 234
Extraordinary loss 269
Equity in net income of affiliate (860) (425)
Gain on sale of investment (1,059)
Changes in assets and liabilities (net of assets acquired and liabilities
assumed in business combinations):
Accounts receivable (5,246) 3,592
Inventory (857) 327
Prepaid expenses and other current assets (13,509) 3,772
Accounts payable (3,493) (10,668)
Accrued liabilities 15,307 7,520
------------- -----------
Net cash provided by (used in) operating activities (7,356) 25,821
------------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received (11,822) (41,226)
Additions to property and equipment, net of disposals (12,928) (10,922)
Proceeds from sale of investment 5,729
Payments of acquisition costs (3,431)
Other (785) (102)
------------- -----------
Net cash used in investing activities (25,535) (49,952)
------------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net 1,153,265 79
Repurchase of common stock in Equity Tender (1,000,000)
Proceeds from (payment of) short-term debt, net (359,960) 116,603
Proceeds from issuance of common stock, net 321,745 2,808
Payments on long-term debt (212,695) (3,404)
Net repayments by (advances to) discontinued operations 118,864 (83,517)
------------- -----------
Net cash provided by financing activities 21,219 32,569
------------- -----------
Effect of exchange rates on cash and cash equivalents (384) (411)
------------- -----------
Cash used in discontinued operations (12,518) (2,019)
------------- -----------
Net increase (decrease) in cash and cash equivalents (24,574) 6,008
Cash and cash equivalents at beginning of period 52,021 44,026
------------- -----------
Cash and cash equivalents at end of period $ 27,447 $ 50,034
------------- -----------
------------- -----------
</TABLE>
Page 5
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except share amounts)
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Three Months Ended
------------------
July 25, July 26,
1998 1997
-------- --------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 19,554 $ 2,158
Income taxes paid $ 879 $ 9,961
</TABLE>
The Company issued common stock and cash in connection with certain business
combinations accounted for under the purchase method for the three months
ended July 25, 1998 and July 26, 1997. The estimated fair values of the
assets and liabilities at the dates of the acquisitions are presented as
follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------
July 25, July 26,
1998 1997
-------- --------
<S> <C> <C>
Accounts receivable $ 1,938 $ 13,888
Inventory 1,666 6,911
Prepaid expenses and other current assets 5,187 782
Property and equipment 651 40,736
Intangible assets 9,762 71,785
Other assets 718
Short-term debt (654) (6,177)
Accounts payable (813) (8,184)
Accrued liabilities (2,237) (2,804)
Long-term debt (48) (17,111)
Other long-term liabilities and minority interests (3,630) (2,289)
----------- -----------
Net assets acquired $ 11,822 $ 98,255
----------- -----------
----------- -----------
</TABLE>
The acquisitions accounted for under the purchase method were funded as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------
July 25, July 26,
1998 1997
-------- --------
<S> <C> <C>
Common stock $ $ 57,029
Cash 11,822 41,226
----------- -----------
Total $ 11,822 $ 98,255
----------- -----------
----------- -----------
</TABLE>
Non-cash transactions:
- During the three months ended July 25, 1998, the Company issued 2,025,185
shares of common stock in exchange for $130,989 of the 5 1/2% convertible
subordinated notes due 2001.
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
U. S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 25, 1998
(In thousands, except ratios and per share amounts)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products
Company (the "Company" or "U.S. Office Products"), and the companies acquired in
business combinations accounted for under the purchase method (the "Purchased
Companies") from their respective acquisition dates.
In June 1998, the Company completed a comprehensive restructuring plan (the
"Strategic Restructuring Plan") that was approved by the Company's Board of
Directors in January 1998. The principal elements of the Strategic Restructuring
Plan were:
- - Equity Tender Offer. Pursuant to a self-tender offer (the "Equity
Tender"), the Company repurchased approximately 9,259 shares of its common
stock, including approximately 1,140 that were issued on exercise of vested
and unvested options for common stock at $108.00 per share (or in the case
of stock options, at $108.00 per share minus the exercise price of the
options). The Company repurchased the shares for $934,569 in cash. During
the three months ended July 25, 1998, the Company recorded compensation
expense of $58,678 (substantially all of which was a non-cash expense and
$50,832 of which related to continuing operations), before the related
benefit from income taxes, related to the participation of stock options in
the Equity Tender.
- - Spin-Off Distributions. After acceptance of the shares in the Equity
Tender, the Company distributed to U.S. Office Products' stockholders the
shares of four separate companies (collectively, the "Spin-Off Companies"):
Aztec Technology Partners, Inc. (one share for every 1.25 shares of U.S.
Office Products common stock held), Workflow Management, Inc. (one share
for every 1.875 of U.S. Office Products common stock held), School
Specialty, Inc. (one share for every 2.25 shares of U.S. Office Products
common stock held) and Navigant International, Inc. (one share for every
2.5 shares of U.S. Office Products common stock held). The distributions of
the shares of the Spin-Off Companies are referred to as the
"Distributions." The Spin-Off Companies hold U.S. Office Products' former
technology solutions, print management, educational supplies and corporate
travel services businesses, respectively.
- Equity Investment. After the Distributions, an affiliate ("Investor") of
an investment fund managed by Clayton, Dubilier & Rice, Inc., a private
investment firm, acquired the following equity securities of the Company
for $270,000: (i) 9,090 shares (24.9%) of the Company's common stock, (ii)
special warrants (the "Special Warrants") entitling Investor to purchase
additional common stock in certain circumstances intended to permit
Investor to maintain its 24.9% equity ownership position, and (iii)
warrants (the "Warrants") entitling Investor to purchase additional shares
of common stock for $405,000 equal to the number of shares of common stock
it purchased outright plus the number of shares it acquires or is entitled
to acquire pursuant to the Special Warrants. The Warrants are exercisable
at any time after June 10, 2000 until June 10, 2010. Investor did not
acquire any interests in the Spin-Off Companies.
Page 7
<PAGE>
In conjunction with the Strategic Restructuring Plan, U.S. Office Products
completed the following financing transactions (the "Financing Transactions") in
June 1998:
- - Pursuant to a tender offer, the Company repurchased $222,215 of its 5 1/2%
convertible subordinated notes due 2003 (the "2003 Notes") for a purchase
price of 94.5% of the principal amount and accrued interest on such notes.
The Company recorded an extraordinary gain of $12,222, before provision for
income taxes, on the early extinguishment of the 2003 Notes. In addition,
during the three months ended July 25, 1998, the Company recorded a
non-cash extraordinary expense of $5,174, before benefit from income taxes,
related to the write-off of debt issue costs capitalized in connection with
the issuance of the 2003 Notes.
- - Pursuant to an exchange offer, the Company exchanged $130,989 of its 5
1/2% convertible subordinated notes due 2001 (the "2001 Notes") for 2,025
shares of common stock at an exchange rate of approximately 15.461 shares
of U.S. Office Products common stock for each $1 principal amount of the
2001 Notes, which effectively reduced the conversion price of the 2001
Notes from $76.00 to $64.68 while the exchange offer was open (the "2001
Notes Exchange"). As a result, during the three months ended July 25, 1998,
the Company recorded a non-cash expense of $20,436 related to the reduction
in the conversion price of the 2001 Notes. In addition, during the three
months ended July 25, 1998, the Company recorded a non-cash extraordinary
expense of approximately $2,911, before benefit from income taxes, related
to the write-off of debt issue costs capitalized in connection with the
issuance of the 2001 Notes.
- - The Company entered into a new $1,225,000 senior secured bank credit
facility (the "Credit Facility") that consists of the following (i) a
$200,000 seven-year multi-draw loan facility; (ii) a $250,000 seven-year
revolving credit facility; (iii) a $100,000 seven-year term loan facility;
and (iv) a $675,000 eight-year term loan facility. As a result of the
Company entering into the Credit Facility, the Company terminated its
former credit facility which resulted in the Company recording a non-cash
extraordinary expense of approximately $4,720, before benefit from income
taxes, during the three months ended July 25, 1998, related to the
write-off of debt issue costs capitalized in connection with the former
credit facility.
- - The Company issued and sold $400,000 in 9 3/4% senior subordinated notes
due 2008 (the "2008 Notes") in a private placement at 99.583% of the
principal amount.
As a result of the Strategic Restructuring Plan, the Company's consolidated
financial statements reflect the results of those companies owned by the
Spin-Off Companies (and thus included in the Distributions) as discontinued
operations through June 9, 1998, the effective date of the Distributions. See
Note 2, "Discontinued Operations." The Company's continuing operations consist
of its North American Office Products Group (which includes office supply,
office furniture, and office coffee, beverage, and vending service businesses)
("NAOPG"), Mail Boxes Etc. ("MBE") which the Company acquired in November 1997,
the Company's operations in New Zealand and Australia, and the Company's 49%
interest in Dudley Stationery Limited, a U.K. contract stationer. The NAOPG
operates primarily in the United States; it also includes three coffee and
beverage businesses located in Canada.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim
periods a fair presentation of such operations. All such adjustments are of a
normal recurring nature. Operating results for interim periods are not
necessarily indicative of results that may be expected for the year as a
whole. It is suggested that these consolidated financial statements be read
in conjunction with the Company's audited consolidated financial statements
for the fiscal year ended April 25, 1998, included in the Company's Annual
Report on Form 10-K. The Company's consolidated financial statements
(including the consolidated financial statements for the three months ended
July 26, 1997) reflect (i) the Spin-Off Companies as discontinued operations;
and (ii) the change in accounting treatment of 22 business combinations
completed during fiscal 1998, from the pooling-of-interests method to the
purchase method.
Page 8
<PAGE>
NOTE 2 - DISCONTINUED OPERATIONS
As a result of the Strategic Restructuring Plan, the Spin-Off Companies are
reflected as discontinued operations for all periods presented in the Company's
consolidated financial statements. The Spin-Off Companies began operating as
independent companies on June 10,1998.
The income (loss) from discontinued operations included in the consolidated
statement of operations represents the sum of the results of the Spin-Off
Companies for the periods they were included in the results of the Company and
is summarized as follows:
<TABLE>
<CAPTION>
Corporate Total
Print Travel Educational Technology Discontinued
Management Services Supplies Solutions Operations
---------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Three months ended July 25, 1998:
Revenues $ 41,132 $ 19,346 $ 40,785 $ 30,951 $ 132,214
Operating income (loss) (1,601) 14 1,836 403 652
Income (loss) before provision for
(benefit from) income taxes (2,043) (108) 1,069 381 (701)
Provision for (benefit from)
income taxes (732) 158 703 464 593
Income (loss) from discontinued
operations, net of income taxes (1,311) (266) 366 (83) (1,294)
Three months ended July 26, 1997:
Revenues $ 82,163 $ 19,530 $ 87,029 $ 42,730 $ 231,452
Operating income 4,772 2,455 12,156 2,818 22,201
Income before provision for
income taxes 4,331 2,341 10,841 2,796 20,309
Provision for income taxes 1,938 1,198 5,012 1,210 9,358
Income from discontinued
operations, net of income taxes 2,393 1,143 5,829 1,586 10,951
</TABLE>
The results of the Spin-Off Companies include allocations of interest expense,
at U.S. Office Products' weighted average interest rates, and do not include any
allocations of corporate overhead from U.S. Office Products during the periods
presented.
The all other net assets from discontinued operations included in the Company's
consolidated balance sheet at April 25, 1998, represents the sum of the net
assets of the Spin-Off Companies as of April 25, 1998, and are summarized as
follows:
<TABLE>
<CAPTION>
Corporate Total
Print Travel Educational Technology Discontinued
Management Services Supplies Solutions Operations
<S> <C> <C> <C> <C> <C>
April 25, 1998:
Current assets $ 90,961 $ 21,993 $ 99,643 $ 66,835 $ 279,432
Property, plant and equipment, net 33,210 18,008 22,553 5,831 79,602
Intangible assets, net 14,014 87,590 99,613 63,829 265,046
Other assets 8,259 852 34 574 9,719
Current liabilities (57,434) (18,643) (54,642) (33,363) (164,082)
Long-term liabilities (30,250) (16,523) (63,415) (5,056) (115,244)
--------- --------- --------- --------- ---------
Net assets of discontinued
operations $ 58,760 $ 93,277 $ 103,786 $ 98,650 $ 354,473
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Page 9
<PAGE>
The amounts to become receivable upon the Distributions reflected in the April
25, 1998 balance sheet were recovered from the Spin-Off Companies in connection
with the Distributions. No balance sheet amounts have been provided as of July
25, 1998, as the Distributions were completed on June 9, 1998, and therefore,
the Spin-Off Companies were not included in the Company's consolidated balance
sheet at July 25, 1998.
NOTE 3 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the three months ended July 25, 1998 were
as follows:
<TABLE>
<CAPTION>
<S> <C>
Stockholders' equity balance at April 25, 1998 $ 1,486,131
Issuances of common stock in conjunction with:
Exercise of stock options, including tax benefits 66,288
Employee stock purchase plan, net of expenses 999
2001 Notes Exchange 152,425
Equity Investment by Investor, net of expenses 254,675
Repurchase of common stock in
Equity Tender (1,000,000)
Stock options participating in Equity Tender 57,708
Adjustments related to the Distributions (381,095)
Comprehensive loss (121,883)
-----------
Stockholders' equity balance at July 25, 1998 $ 515,248
-----------
-----------
</TABLE>
The adjustments related to the Distributions amount in the above table
consists of reductions in additional paid-in capital and retained earnings of
$326,365 and $55,880, respectively, and a decrease in accumulated other
comprehensive loss of $1,150.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," effective April 26, 1998. SFAS No. 130
requires cumulative translation adjustment, which prior to adoption was reported
separately in stockholders' equity, to be included in other comprehensive loss.
The components of comprehensive loss are as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------
July 25, July 26,
1998 1997
-------- --------
<S> <C> <C>
Net income (loss) $ (85,106) $ 19,986
Other comprehensive loss:
Cumulative translation adjustment (36,777) (39,376)
------------ -------------
Comprehensive income (loss) $ (121,883) $ (19,390)
------------ -------------
------------ -------------
</TABLE>
On June 10, 1998, the Company effected a one-for-four reverse split of its
common stock whereby each four shares of common stock were exchanged for one
share of common stock. All share and per share data appearing in these
consolidated financial statements and notes hereto have been retroactively
adjusted for this split.
NOTE 4 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board 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 adopted SFAS No. 128 during Fiscal 1998 and has
restated all prior period EPS data. The following information presents the
Company's computations of basic and diluted EPS from continuing operations
before extraordinary items for the periods presented in the consolidated
statement of operations.
Page 10
<PAGE>
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
<S> <C> <C> <C>
Three months ended July 25, 1998:
Basic loss per share $ (83,543) 35,073 $(2.38)
--------- -------- -------
Effect of dilutive employee stock options
Diluted loss per share $ (83,543) 35,073 $(2.38)
--------- -------- -------
--------- -------- -------
</TABLE>
The basic and diluted loss per share amounts, for the three month period ended
July 25, 1998, were calculated using the same number of shares outstanding
since, as a result of the net loss for such period, all of the Company's
employee stock options and the two series of convertible debt securities
outstanding during such period were anti-dilutive.
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
<S> <C> <C> <C>
Three months ended July 26, 1997:
Basic income per share $ 9,035 26,579 $ 0.34
-------
Effect of dilutive employee stock options 459
--------- -------- -------
Diluted income per share $ 9,035 27,038 $ 0.33
--------- -------- -------
--------- -------- -------
</TABLE>
The Company had additional employee stock options and two series of convertible
debt securities outstanding during the three month period ended July 26, 1997
that were not included in the computation of diluted EPS because they were
anti-dilutive.
NOTE 5 - BUSINESS COMBINATIONS
In fiscal 1998, the Company completed a total of 73 business combinations (51
related to continuing operations and 22 related to discontinued operations), all
of which were accounted for under the purchase method. During the three months
ended July 25, 1998, the Company completed a total of 11 business combinations
(all related to continuing operations), all of which were accounted for under
the purchase method.
NOTE 6 - PRO FORMA RESULTS OF OPERATIONS
The following presents the unaudited pro forma results of operations of the
Company for the three month periods ended July 25, 1998 and July 26, 1997, as
if the Strategic Restructuring Plan, the Financing Transactions and all of
the purchase acquisitions related to continuing operations completed since
the beginning of fiscal 1998 had been consummated at the beginning of fiscal
1998. The pro forma results of operations, compared to the historical actual
results, reflect (i) substantially higher amortization expenses as compared
to prior periods (as a result of reclassifying 12 business combinations as
purchase acquisitions (including the Company's acquisition of MBE), rather
than under the pooling-of-interests method, as the Company had expected when
it completed those acquisitions); (ii) substantially higher interest expense,
as a result of increased borrowing that the Company incurred to help finance
the cost of the Equity Tender; and (iii) substantially higher effective
income tax rates, due to increased non-deductible goodwill expense and the
Company's inability to account for the acquisition of subchapter S
corporations under the pooling-of-interests method.
Page 11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------------
July 25, July 26,
1998 1997
-------- --------
<S> <C> <C>
Revenues $ 657,551 $ 694,206
Income (loss) from continuing operations
before extraordinary items (6,118) 1,292
Basic income (loss) per share from
continuing operations (0.17) 0.04
Diluted income (loss) per share from
continuing operations (0.17) 0.03
</TABLE>
The pro forma results of operations are prepared for comparative purposes only
and do not necessarily reflect the results that would have occurred had the
acquisitions occurred at the beginning of fiscal 1998 or the results that may
occur in the future.
NOTE 7 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial information for
the Company, showing guarantor subsidiaries and non-guarantor subsidiaries
separately. The financial information shown in the "Guarantor Subsidiaries"
column represents the financial information of the domestic subsidiaries that
are guarantors of the Credit Facility and the 2008 Notes. The guarantor
subsidiaries are wholly-owned subsidiaries of the Company and the guarantees are
full, unconditional and joint and several. Separate financial statements of the
guarantor subsidiaries are not presented because management believes that
separate financial statements would not provide additional meaningful
information to investors.
Page 12
<PAGE>
Balance Sheets
<TABLE>
<CAPTION>
July 25, 1998
----------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 3,657 $ 10,851 $ 12,939 $ $ 27,447
Accounts receivable, less allowance for ....
doubtful accounts......................... (950) 226,010 86,816 311,876
Inventory................................... 121,326 103,061 (65)(b) 224,322
Prepaid expenses and other current
assets.................................... 38,714 41,278 49,825 229 (b) 130,046
------------- -------------- ------------- ------------- -------------
Total current assets.................... 41,421 399,465 252,641 164 693,691
Property and equipment, net.................... 11,944 104,358 111,369 (555)(b) 227,116
Intangible assets, net......................... 568,532 334,784 903,316
Investment in subsidiaries..................... 948,723 (948,723)(a)
Other assets................................... 112,127 30,167 70,595 212,889
------------- -------------- ------------- ------------- -------------
Total assets............................ $ 1,114,215 $ 1,102,522 $ 769,389 $ (949,114) $ 2,037,012
------------- -------------- ------------- ------------- -------------
------------- -------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................. $ 10,000 $ 1,709 $ 1,214 $ $ 12,923
Short-term intercompany balances............ 117,571 (119,212) 1,641
Accounts payable............................ 6,365 83,952 64,071 154,388
Accrued compensation........................ 5,191 20,676 15,966 41,833
Other accrued liabilities................... 24,445 10,060 60,296 94,801
------------- -------------- ------------- ------------- -------------
Total current liabilities............... 163,572 (2,815) 143,188 303,945
Long-term debt................................. 1,192,361 4,755 2,900 1,200,016
Other long-term liabilities and minority
interests.................................... 13,927 3,559 317 17,803
Long-term intercompany balances................ (662,938) 258,674 404,361 (97)(b)
------------- -------------- ------------- ------------- -------------
Total liabilities....................... 706,922 264,173 550,766 (97) 1,521,764
------------- -------------- ------------- -------------- -------------
Stockholders' equity:
Common stock................................ 37 37
Additional paid-in capital.................. 650,699 715,886 259,989 (948,723)(a) 677,851
Accumulated other comprehensive loss........ (79,113) (69,317) (148,430)
Retained earnings (deficit)................. (164,330) 122,463 27,951 (294)(b) (14,210)
Total stockholders' equity.............. 407,293 838,349 218,623 (949,017) 515,248
------------- -------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity $ 1,114,215 $ 1,102,522 $ 769,389 $ (949,114) $ 2,037,012
------------- -------------- ------------- ------------- -------------
------------- -------------- ------------- ------------- -------------
</TABLE>
Page 13
<PAGE>
<TABLE>
<CAPTION>
April 25, 1998
----------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Total
ASSETS
Current assets:
Cash and cash equivalents................... $ 19,684 $ 15,743 $ 16,594 $ $ 52,021
Accounts receivable, less allowance for ....
doubtful accounts......................... 219,046 91,481 310,527
Inventory................................... 118,553 110,248 (130) (b) 228,671
Prepaid expenses and other current
assets.................................... 29,799 34,753 52,598 117,150
------------- -------------- ------------- ------------- -------------
Total current assets.................... 49,483 388,095 270,921 (130) 708,369
Property and equipment, net.................... 11,441 101,671 116,103 (500) (b) 228,715
Intangible assets, net......................... 567,010 356,014 923,024
Investment in subsidiaries..................... 1,140,020 (1,140,020) (a)
Other assets................................... 97,683 30,334 66,684 194,701
Net assets of discontinued operations:
Amounts to become receivable upon the
Distributions............................. 132,145 132,145
All other net assets........................ 354,473 354,473
------------- -------------- ------------- ------------- -------------
Total assets............................ $ 1,430,772 $ 1,087,110 $ 1,164,195 $ (1,140,650) $ 2,541,427
------------- -------------- ------------- ------------- -------------
------------- -------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................. $ 365,000 $ 1,859 $ 1,368 $ $ 368,227
Short-term intercompany balances............ 66,027 (100,324) 34,297
Accounts payable............................ 2,303 85,712 74,703 162,718
Accrued compensation........................ 4,218 20,918 17,877 43,013
Other accrued liabilities................... (26,456) 60,113 47,988 (234) (b) 81,411
------------- -------------- ------------- ------------- -------------
Total current liabilities............... 411,092 68,278 176,233 (234) 655,369
Long-term debt................................. 373,750 5,083 3,341 382,174
Other long-term liabilities and minority
interests.................................... 13,908 3,510 335 17,753
Long-term intercompany balances................ (651,930) 195,242 456,785 (97) (b)
------------- -------------- ------------- -------------
Total liabilities....................... 146,820 272,113 636,694 (331) 1,055,296
------------- -------------- ------------- ------------- -------------
Stockholders' equity:
Common stock................................ 33 33
Additional paid-in capital.................. 1,417,917 709,266 484,962 (1,140,020) (a) 1,472,125
Accumulated other comprehensive loss........ (66,472) (46,331) (112,803)
Retained earnings (deficit)................. (67,526) 105,731 88,870 (299) (b) 126,776
------------- -------------- ------------- ------------- -------------
Total stockholders' equity.............. 1,283,952 814,997 527,501 (1,140,319) 1,486,131
------------- -------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity $ 1,430,772 $ 1,087,110 $ 1,164,195 $ (1,140,650) $ 2,541,427
------------- -------------- ------------- ------------- -------------
------------- -------------- ------------- ------------- -------------
</TABLE>
Page 14
<PAGE>
Statements of Operations
<TABLE>
<CAPTION>
For the Three Months Ended July 25, 1998
----------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... $ $ 460,457 $ 199,334 $ (7,842) (c) $ 651,949
Cost of revenues............................... (773) 344,648 138,226 (7,816) (c) 474,285
------------- -------------- ------------- ------------- -------------
Gross profit............................ 773 115,809 61,108 (26) 177,664
Selling, general and administrative
expenses..................................... 8,066 88,555 52,238 (37) (c) 148,822
Amortization expense........................... 3,739 2,220 5,959
Strategic Restructuring Plan costs............. 96,948 555 97,503
Restructuring costs............................ 6,316 2,410 8,726
------------- -------------- ------------- ------------- -------------
Operating income (loss)................. (104,241) 16,644 4,240 11 (83,346)
Interest expense............................... 20,905 (10,291) 8,274 18,888
Interest income................................ (52) (163) (151) (366)
Other (income) expense........................ 157 (567) (410)
------------- -------------- ------------- ------------- -------------
Income (loss) from continuing operations
before provision for (benefit from) income
taxes and extraordinary items................ (125,094) 26,941 (3,316) 11 (101,458)
Provision for (benefit from) income taxes...... (32,515) 14,165 430 5 (c) (17,915)
------------- -------------- ------------- -------------- -------------
Income (loss) from continuing operations
before extraordinary items ................. (92,579) 12,776 (3,746) 6 (83,543)
Loss from discontinued operations,
net of income taxes.......................... (1,294) (1,294)
------------- -------------- ------------- -------------- -------------
Income (loss) before extraordinary items....... (92,579) 12,776 (5,040) 6 (84,837)
Extraordinary items - loss on early
termination of debt facilities, net of
income taxes................................. 269 269
------------- -------------- ------------- ------------- -------------
Net income (loss).............................. $ (92,848) $ 12,776 $ (5,040) $ 6 $ (85,106)
------------- -------------- ------------- ------------- -------------
------------- -------------- ------------- ------------- -------------
</TABLE>
Page 15
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended July 26, 1997
----------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... $ $ 390,376 $ 227,050 $ (2,612) (c) $ 614,814
Cost of revenues............................... (215) 291,186 155,608 (2,547) (c) 444,032
------------- -------------- ------------- ------------- -------------
Gross profit............................ 215 99,190 71,442 (65) 170,782
Selling, general and administrative
expenses..................................... 4,869 78,042 59,980 (26) (c) 142,865
Amortization expense........................... 1,855 2,260 4,115
------------- -------------- ------------- ------------- -------------
Operating income (loss)................. (4,654) 19,293 9,202 (39) 23,802
Interest expense............................... 6,660 (1,432) 3,239 8,467
Interest income................................ 836 (917) (501) (582)
Other income................................... (1,085) (192) (106) (1,383)
------------- -------------- ------------- ------------- -------------
Income (loss) from continuing operations
before provision for (benefit from) income
taxes ....................................... (11,065) 21,834 6,570 (39) 17,300
Provision for (benefit from) income taxes...... (4,460) 9,991 2,752 (18) (c) 8,265
------------- -------------- ------------- ------------- -------------
Income (loss) from continuing operations....... (6,605) 11,843 3,818 (21) 9,035
Income from discontinued operations,
net of income taxes.......................... 10,951 10,951
------------- -------------- ------------- ------------- -------------
Net income (loss).............................. $ (6,605) $ 11,843 $ 14,769 $ (21) $ 19,986
------------- -------------- ------------- ------------- -------------
------------- -------------- ------------- ------------- -------------
</TABLE>
Page 16
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months Ended July 25, 1998
----------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities........... $ (29,050) $ 14,175 $ 7,574 $ (55)(d) $(7,356)
Cash flows from investing activities........... (7,499) (6,335) (11,756) 55 (d) (25,535)
Cash flows from financing activities........... 20,522 (12,732) 13,429 21,219
Effect of exchange rates on cash and cash
equivalents.................................. (384) (384)
Cash used in discontinued operations........... (12,518) (12,518)
------------- -------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents................................... (16,027) (4,892) (3,655) (24,574)
Cash and cash equivalents at beginning
of period.................................... 19,684 15,743 16,594 52,021
------------- -------------- ------------- ------------- -------------
Cash and cash equivalents at end of period..... $ 3,657 $ 10,851 $ 12,939 $ $ 27,447
------------- -------------- ------------- ------------- -------------
------------- -------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended July 26, 1997
----------------------------------------------------------------------------------
U.S. Office Non-
Products Company Guarantor Guarantor Consolidating Consolidated
(Parent Company) Subsidiaries Subsidiaries Adjustments Total
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Total
Cash flows from operating activities........... $ (12,760) $ 24,079 $ 14,624 $ (122) (d) $ 25,821
Cash flows from investing activities........... 5,774 (6,813) (49,132) 219 (d) (49,952)
Cash flows from financing activities.......... 7,489 (18,530) 43,707 (97) 32,569
Effect of exchange rates on cash and cash
equivalents.................................. (411) (411)
Cash used in discontinued operations........... (2,019) (2,019)
------------- -------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents.................................. 503 (1,264) 6,769 6,008
Cash and cash equivalents at beginning
of period.................................... 13,210 7,758 23,058 44,026
Cash and cash equivalents at end of period..... $ 13,713 $ 6,494 $ 29,827 $ $ 50,034
------------- -------------- ------------- ------------- -------------
------------- -------------- ------------- ------------- -------------
</TABLE>
The "U.S. Office Products Company (Parent Company)" column in the foregoing
condensed consolidating financial information reflects equity method accounting
for the Company's investment in subsidiaries.
Consolidating adjustments to the condensed consolidating balance sheets
include the following:
(a) Elimination of investments in subsidiaries.
(b) Elimination of intercompany profit in inventory and property and
equipment.
Consolidating adjustments to the condensed consolidating statements of
income include the following:
(c) Elimination of intercompany sales.
Consolidating adjustments to the condensed consolidating statements of
cash flows include the following:
(d) Elimination of intercompany profits.
NOTE 8 - SUBSEQUENT EVENTS
Subsequent to July 25, 1998 and through September 4, 1998, the Company has
completed one business combination for an aggregate cash purchase price of
$7,658.
Page 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. When used in this Report, the words
"anticipate," "believe," "estimate," "intend," "may," "will," "expect" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include those discussed under the heading
"-Factors Affecting the Company's Business." The Company does not undertake any
obligation to revise these forward-looking statements to reflect any future
events or circumstances.
Introduction
The Strategic Restructuring Plan
The following discussion should be read in conjunction with the consolidated
historical financial statements, including the related notes thereto,
appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the
Company's audited consolidated financial statements for the fiscal year ended
April 25, 1998, including the related notes thereto, included in the
Company's Annual Report on Form 10-K. The Company's consolidated financial
statements (including the consolidated financial statements for the three
months ended July 26, 1997) reflect (i) the results of the businesses that
were spun off to stockholders in June 1998 as part of the Company's
comprehensive restructuring plan (the "Strategic Restructuring Plan") as
discontinued operations; and (ii) as a result of the adoption of the
Strategic Restructuring Plan, the change in accounting treatment of 22
business combinations completed during fiscal 1998, from the
pooling-of-interests method to the purchase method, which resulted in the
recording of approximately $422.8 million of additional goodwill (including
$293.7 million related to continuing operations). In addition, except as
otherwise noted, the following discussion gives effect to the one-for-four
reverse stock split (the "Reverse Stock Split") completed by the Company in
June 1998 in conjunction with the completion of the Strategic Restructuring
Plan.
In June 1998, the Company completed the Strategic Restructuring Plan. The
principal elements of the Strategic Restructuring Plan were:
- - Equity Tender Offer. Pursuant to a self-tender offer (the "Equity
Tender"), the Company repurchased 9,259,261 shares (37,037,042 shares prior
to the Reverse Stock Split) of its common stock, including 1,140,186 shares
(4,560,743 shares prior to the Reverse Stock Split) that were issued on
exercise of vested and unvested options for common stock at $108.00 per
share ($27.00 per share prior to the Reverse Stock Split) (or in the case
of stock options, at $108.00 per share ($27.00 per share prior to the
Reverse Stock Split) minus the exercise price of the options). The Company
repurchased the shares for $934.6 million in cash. During the three months
ended July 25, 1998, the Company recorded a compensation expense of
approximately $58.7 million (substantially all of which was a non-cash
expense and $50.8 million of which related to continuing operations),
before the related benefit from income taxes, related to the participation
of stock options in the Equity Tender.
- - Spin-Off Distributions. After acceptance of the shares in the Equity
Tender, the Company distributed to U.S. Office Products' stockholders the
shares of four separate companies (collectively, the "Spin-Off Companies"):
Aztec Technology Partners, Inc. (one share for every 1.25 shares (5.0
shares prior to the Reverse Stock Split) of U.S. Office Products common
stock held), Workflow Management, Inc. (one share for every 1.875 shares
(7.5 shares prior to the Reverse Stock Split) of U.S. Office Products
common stock held), School Specialty, Inc. (one share for every 2.25 shares
(9.0 shares prior to the Reverse Stock Split) of U.S. Office Products
common stock held) and Navigant International, Inc. (one share for every
2.5 shares (10.0 shares prior to the Reverse Stock Split) of U.S. Office
Products common stock held). The distributions of the shares of the
Spin-Off Companies are referred to as the "Distributions." The Spin-Off
Companies operate U.S. Office Products' former technology solutions, print
management, educational supplies and corporate travel services businesses,
respectively.
Page 18
<PAGE>
- - Equity Investment. After the Distributions, an affiliate ("Investor") of
an investment fund managed by Clayton, Dubilier & Rice, Inc., a private
investment firm, acquired the following equity securities of the Company
for $270.0 million: (i) approximately 9,090,326 shares (24.9%) of the
Company's common stock, (ii) special warrants (the "Special Warrants")
entitling Investor to purchase additional common stock in certain
circumstances intended to permit Investor to maintain its 24.9% equity
ownership position, and (iii) warrants (the "Warrants") entitling Investor
to purchase additional shares of common stock for $405 million equal to the
number of shares of common stock it purchased outright plus the number of
shares it acquires or is entitled to acquire pursuant to the Special
Warrants. The Warrants are exercisable at any time after June 10, 2000
until June 10, 2010. Investor did not acquire any interests in the Spin-Off
Companies.
In conjunction with the Strategic Restructuring Plan, U.S. Office Products
completed the following financing transactions (the "Financing Transactions") in
June 1998:
- - Pursuant to a tender offer, the Company repurchased $222.2 million of its
5 1/2% convertible subordinated notes due 2003 (the "2003 Notes") for a
purchase price of 94.5% of the principal amount and accrued interest on the
2003 Notes. As a result, during the three months ended July 25, 1998, the
Company recorded an extraordinary gain of $12.2 million, before provision
for income taxes, on the early extinguishment of the 2003 Notes. In
addition, during the three months ended July 25, 1998, the Company recorded
a non-cash extraordinary expense of approximately $5.2 million, before
benefit from income taxes, related to the write-off of debt issue costs
capitalized in connection with the issuance of the 2003 Notes.
- - Pursuant to an exchange offer, the Company exchanged $131.0 million of its
5 1/2% convertible subordinated notes due 2001 (the "2001 Notes") for
2,025,185 shares of common stock at an exchange rate of approximately
15.461 shares of U.S. Office Products common stock for each $1,000
principal amount of the 2001 Notes, which effectively reduced the
conversion price of the 2001 Notes from $76.00 to $64.68 ($19.00 and $16.17
prior to the Reverse Stock Split) while the exchange offer was open. As a
result, during the three months ended July 25, 1998, the Company recorded a
non-cash expense of $20.4 million related to the reduction in the
conversion price of the 2001 Notes. In addition, during the three months
ended July 25, 1998, the Company recorded a non-cash extraordinary expense
of approximately $2.9 million, before benefit from income taxes, related to
the write-off of debt issue costs capitalized in connection with the
issuance of the 2001 Notes.
- - The Company entered into a new $1,225.0 million senior secured bank credit
facility (the "Credit Facility") that consists of the following (i) a
$200.0 million seven-year multi-draw loan facility; (ii) a $250.0 million
seven-year revolving credit facility; (iii) a $100.0 million seven-year
term loan facility; and (iv) a $675.0 million eight-year term loan
facility. As a result of the Company entering into the Credit Facility, the
Company terminated its former credit facility which resulted in the Company
recording a non-cash extraordinary expense of approximately $4.7 million,
before benefit from income taxes, during the three months ended July 25,
1998, related to the write-off of debt issue costs capitalized in
connection with the former credit facility.
- - The Company issued and sold $400.0 million in 9 3/4% senior subordinated
notes due 2008 (the "2008 Notes") in a private placement at 99.583% of the
principal amount.
As a result of the Strategic Restructuring Plan, the Company's consolidated
financial statements reflect the results of those companies owned by the
Spin-Off Companies (and thus included in the Distributions) as discontinued
operations through June 9, 1998, the effective date of the Distributions.
Page 19
<PAGE>
The Restructured U.S. Office Products Company
As a result of the completion of the Strategic Restructuring Plan, the Company
consists of three operating divisions: the North American Office Products Group,
which includes office supplies, office furniture, and breakroom products and
services (office coffee, beverage, and vending services) ("NAOPG"); Mail Boxes
Etc. ("MBE"), which the Company acquired in November 1997; and the Company's
operations in New Zealand and Australia (owned principally through Blue Star
Group Limited). The Company also holds a 49% equity interest in Dudley
Stationery Limited, a U.K. contract stationer. These businesses make up the
Company's continuing operations.
The NAOPG operates primarily in the United States; it also includes three coffee
and beverage businesses located in Canada.
The Company's continuing operations derive revenues primarily from the sale of a
wide variety of office supplies, office furniture, and other office products,
including office coffee, beverage, and vending products and services to
corporate, commercial and industrial customers. Cost of revenues represents the
purchase price for office supplies, office furniture, and other office products
and includes occupancy and delivery costs and is reduced by rebates and
discounts on inventory when such inventory is sold. Selling, general and
administrative expenses represent product marketing and selling costs, customer
service and product design costs, warehouse costs, and other administrative
expenses.
The Company's strategy is to focus more on expanding existing operations and
improving their profitability and less on growth through acquisitions. The
Company believes that the majority of its future acquisitions will be of smaller
businesses and that, as a result, acquisitions will account for a much smaller
percentage of the Company's overall revenue growth than in the past. The Company
also expects (as reflected in the results for the first quarter of the 1999
fiscal year) that it will report net income and net income per share amounts
that are significantly less than the amounts that have been reported in prior
fiscal quarters and years. Management believes that this will be the result
primarily of three factors: (i) substantially higher amortization expenses as
compared to prior periods (as a result of reclassifying 12 business combinations
as purchase acquisitions (including the acquisition of MBE), rather than under
the pooling-of-interests method, as the Company had originally intended); (ii)
substantially higher interest expense, as a result of increased borrowing that
the Company incurred to help finance the cost of the Equity Tender and the
Financing Transactions; and (iii) higher effective income tax rates, due to
increased non-deductible goodwill expense and lower income before provision for
income taxes. Rather than net income and net income per share, management
believes that a more meaningful indication of the Company's performance will be
cash flows from operations and earnings before interest expense, provision for
income taxes, depreciation expense and amortization expense ("EBITDA"). The
Company expects to focus substantial attention on operating strategies intended
to increase EBITDA both in absolute terms and as a percentage of revenues. As
the Company derives approximately one-third of its revenues from operations in
New Zealand and Australia, the Company's results of operations, cash flows and
financial position will continue to be affected by fluctuations in foreign
currency exchange rates, which have deteriorated significantly in New Zealand
and Australia since the beginning of fiscal 1998. See "-- Liquidity and Capital
Resources" and "--Factors Affecting the Company's Business."
Page 20
<PAGE>
Consistent with the objectives of the Strategic Restructuring Plan and as
part of the Company's increased focus on operational matters, the Company is
pursuing cost reduction measures including the elimination of duplicative
facilities, the consolidation of certain operating functions, and the
deployment of common information systems. In implementing these cost
reduction measures, the Company has incurred, and will in the future incur,
certain operating restructuring costs. This operating restructuring relates
primarily to the establishment by the Company of its District Fulfillment
Centers, which are large centralized warehouses conducting operations that
service entire geographic territories previously served by multiple smaller
business operations. In June 1998, the Company estimated that these operating
restructuring costs would total $80-105 million, and the Company expressed an
intention to record all of these charges, on a one-time basis, in the first
quarter of the 1999 fiscal year. Upon review of formal plans to implement
this operating restructuring, the Company's senior management concluded that
the plans warranted further review and refinement before they could be
approved and implemented. Accordingly, management elected to approve only a
small number of restructuring plans that actually were being implemented
during the first fiscal quarter. The Company recorded a one-time operating
restructuring charge of approximately $8.7 million in the quarter, reflecting
the costs of such plans. Management expects to complete its review and
revision of the remaining operating restructuring plans and to obtain final
approval of such plans prior to the end of the 1998 calendar year. At that
time, management expects to announce the total anticipated operating
restructuring charge and to provide an expected schedule of plan
implementation and recognition of the associated restructuring charges.
Management expects that the total operating restructuring charge, including
the $8.7 million charge recorded in the first quarter in fiscal 1999, will be
less than the original estimate of $80-$105 million. Of the $8.7 million
charge recorded in the first quarter, approximately $1.3 million reflects
non-cash items. Management estimates that two-thirds to three-quarters of the
remaining operating restructuring charges will be cash charges that will be
incurred over time as the restructuring is completed. For additional
information on operating restructuring charges, including charges related
specifically to the completion of the Strategic Restructuring Plan, see
"--Consolidated Results of Operations."
Except where specifically noted, the discussion of financial condition and
results of operations that appears below covers only the Company's continuing
operations. For additional information about the results of discontinued
operations, see Note 2 to the Notes to the Company's consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
The Company's financial condition and results of operations have changed
dramatically from the Company's inception in October 1994 to July 25, 1998 as a
result of the Company's aggressive acquisition program and the completion of the
Strategic Restructuring Plan. The Company completed 238 business combinations
(195 related to continuing operations and 43 related to discontinued operations)
from its inception through the end of fiscal 1998, 54 of which were accounted
for under the pooling-of-interests method (39 related to continuing operations
and 15 related to discontinued operations). As a result of the Board's adoption
of the Strategic Restructuring Plan in January 1998, all 73 business
combinations completed during fiscal 1998 were accounted for under the purchase
method. Prior to the adoption of the Strategic Restructuring Plan, 22 of the
fiscal 1998 business combinations had been accounted for under the
pooling-of-interests method (12 related to continuing operations, including the
acquisition of MBE, and 10 related to discontinued operations). Following
adoption of the Strategic Restructuring Plan, the Company restated its
historical consolidated financial statements to account for these 22 business
combinations under the purchase method. The Company's consolidated financial
statements give retroactive effect to the business combinations accounted for
under the pooling-of-interests method during fiscal 1997 and 1996 and include
the results of companies acquired in business combinations accounted for under
the purchase method from their respective acquisition dates.
Page 21
<PAGE>
Due to the Company's growth through acquisitions, year-to-year comparisons of
the historical results of the Company's operations have been affected primarily
by the addition of acquired companies. In most instances, dollar increases in
the various revenue and expense components of the Company's results are due
primarily to growth from acquisitions. However, the increases in interest
expense are directly related to the increase in debt, and the interest rates
associated with such debt, resulting from the completion of certain elements of
the Strategic Restructuring Plan. Neither the magnitude nor the source of such
year-to-year changes is necessarily indicative of changes that will occur in the
future. As noted above, the Company's strategy is to focus more on improving and
expanding existing operations, and less on acquisitions as a means of growth.
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.
Consolidated Results of Operations
Three Months Ended July 25, 1998 Compared to Three Months Ended July 26, 1997
Consolidated revenues increased 6.0%, from $614.8 million for the three months
ended July 26, 1997, to $651.9 million for the three months ended July 25, 1998.
This increase was primarily due to acquisitions. Revenues for the three months
ended July 25, 1998 include revenues from 62 companies acquired in business
combinations accounted for under the purchase method after the beginning of the
first quarter of fiscal 1998 (the "Purchased Companies"). Revenues for the three
months ended July 26, 1997 include revenues from 14 of such Purchased Companies
for a portion of such period. This increase was partially offset by a decline in
international revenues as a result of the devaluation of the New Zealand and
Australian dollars against the U.S. dollar (the "USD"). Because revenues
generated in New Zealand and Australia contributed approximately one-third of
the Company's consolidated revenues during this period, management estimates
that currency devaluation had the effect of reducing the Company's increase in
reported consolidated revenues (in U.S. dollar terms) by approximately 9.0%.
On a pro forma basis, adjusted for the devaluation of the New Zealand and
Australian dollars, revenues increased 3.0%.
International revenues decreased 12.2%, from $226.5 million, or 36.8% of
consolidated revenues, for the three months ended July 26, 1997, to $198.9
million, or 30.5% of consolidated revenues, for the three months ended July 25,
1998. International revenues consisted primarily of revenues from New Zealand
and Australia, with the balance from Canada. This decrease is due exclusively to
the devaluation of the New Zealand and Australian dollars against the USD. The
following table details the declines in the average exchanges rates of the New
Zealand and Australian dollars versus the USD for the three months ended July
25, 1998 and July 26, 1997:
Average Exchange Rates
for the Three Months Ended
--------------------------
July 25, July 26,
1998 1997 Decline
-------------- ------------- ---------
<TABLE>
<S> <C> <C> <C>
New Zealand dollar $ .53 $ .68 $ (.15)
Australian dollar $ .63 $ .76 $ (.13)
</TABLE>
International revenues in New Zealand and Australia, calculated in their local
currencies, increased 13.4% for the three months ended July 25, 1998, as
compared to the three months ended July 26, 1997. This increase was due
primarily to the inclusion, in the revenues for the three months ended July 25,
1998, of revenues from 29 companies that were acquired in business combinations
accounted for under the purchase method after the beginning of the first quarter
of fiscal 1998. Revenues from seven such companies were included in revenues for
a portion of the three months ended July 26, 1997.
Page 22
<PAGE>
Gross profit increased 4.0%, from $170.8 million for the three months ended
July 26, 1997, to $177.7 million for the three months ended July 25, 1998.
The increase in gross profit is directly related to the increase in revenues.
As a percentage of revenues, gross profit decreased from 27.8% for the three
months ended July 26, 1997, to 27.3% for the three months ended July 25,
1998. The decline in gross profit as a percentage of revenues is the result
of a number of factors, including: (i) merchandising changes that were made
in connection with the implementation of the Company's 1998 office products
catalog, which it distributed to customers in January 1998; (ii) a slight
change in product mix (an increase in furniture sales, which typically carry
a lower gross profit margin than other products that the Company sells);
(iii) the Strategic Restructuring Plan diverted some management attention
away from operating issues during the fourth quarter of last fiscal year and
the first quarter of this fiscal year; (iv) significant competitive pressures
on portions of the Company's technology business in New Zealand; and (v) the
increased cost of importing certain inventory into New Zealand, as a result
of the decline in the value of the New Zealand dollar. The Company has
implemented measures that it believes address the factors that have been
responsible for the majority of the declines in gross margin. These include
making changes in merchandising decisions for the Company's 1999 office
products catalog, which will be distributed to customers in late September
and October of 1998. The decline in gross margin as a percentage of revenue
was less in the first quarter than the decline that occurred in the fourth
quarter of last fiscal year, and the Company expects that its corrective
actions will lead to improved margins in the future, although such
expectations are subject to the effect of changes in the value of the New
Zealand dollar, continued competitive pressures in the technology business in
New Zealand and other factors discussed under "-Factors Affecting the
Company's Business."
Selling, general and administrative expenses increased 4.2%, from $142.9 million
for the three months ended July 26, 1997, to $148.8 million for the three months
ended July 25, 1998, primarily due to the inclusion of the results of the
Purchased Companies. Selling, general and administrative expenses as a
percentage of revenues decreased from 23.2% for the three months ended July 26,
1997, to 22.8% for the three months ended July 25, 1998. The decrease in
selling, general and administrative expenses as a percentage of revenues was due
to several factors, including (i) a shift in revenue mix, primarily as a result
of acquisitions, to revenues from products and services traditionally having
lower selling, general and administrative expenses; (ii) reductions in selling,
general and administrative expenses by the Company through the consolidation of
certain redundant facilities and job functions; and (iii) reductions in the
costs of many general and administrative expenses incurred by the Company
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 44.8%, from $4.1 million for the three months
ended July 26, 1997, to $6.0 million for the three months ended July 25, 1998.
This increase is due exclusively to the increase in the number of acquisitions
accounted for under the purchase method, including the 12 acquisitions that were
originally planned to be accounted for under the pooling-of-interest method but
were restated as purchase acquisitions as a result of the Strategic
Restructuring Plan (including the acquisition of MBE, which was completed in
November 1997).
EBITDA increased from $37.3 million, for the three months ended July 26, 1997,
to $37.5 million, for the three months ended July 25, 1998. EBITDA
represents earnings before interest, income taxes, depreciation,
amortization, Strategic Restructuring Plan costs, restructuring costs and
extraordinary items. EBITDA is provided because it is a measure commonly used
by analysts and investors to determine a company's ability to incur and
service debt. EBITDA is not a measurement of performance under generally
accepted accounting principles and should not be considered an alternative to
net income as a measure of performance or to cash flow as a measure of
liquidity. EBITDA is not necessarily comparable with similarly titled
measures for other companies.
Page 23
<PAGE>
In conjunction with the completion of the Strategic Restructuring Plan, the
Company incurred non-recurring costs from continuing operations of
approximately $97.5 million, $70.4 million of which were non-cash. In
addition, approximately $11.7 million in such costs were incurred by the
Spin-Off Companies and were included in results of discontinued operations.
These Strategic Restructuring Plan costs are consistent with the Company's
earlier estimate that the costs of the Strategic Restructuring Plan would
total approximately $110.0 million. The Strategic Restructuring Plan costs
related to continuing operations consisted of: (i) compensation expense of
approximately $50.8 million ($49.9 million of which was non-cash) related to
the difference between the exercise prices of employee stock options
underlying shares that were accepted in the Equity Tender and the $108.00 per
share ($27.00 per share prior to the Reverse Stock Split) purchase price in
the Equity Tender; (ii) professional fees (including accounting, legal,
investment banking and printing fees) of approximately $26.2 million; and
(iii) a non-cash expense of approximately $20.5 million resulting from the
issuance of 301,646 incremental shares of common stock (with a market value
of $67.75 per share on the date of issuance) related to the temporary,
effective reduction in the conversion price of the 2001 Notes from $76.00 to
$64.68 per share ($19.00 and $16.17 per share prior to the Reverse Stock
Split) on approximately $131.0, principal amount, of the 2001 Notes, which
the Company made as part of the exchange offer for the 2001 Notes. See the
description of the Strategic Restructuring Plan and the Financing
Transactions in "-Introduction."
The Company recorded operating restructuring costs of $8.7 million during the
three months ended July 25, 1998, related to the approval and commencement of
restructuring plans at a limited number of operating locations. These plans
relate primarily to the District Fulfillment Centers that are now coming on
line and that will be added through the remainder of this fiscal year. The
Company is continuing to develop and review additional plans and expects to
record operating restructuring related costs in the future. See
"-Introduction."
Interest expense, net of interest income, increased 134.9%, from $7.9 million
for the three months ended July 26, 1997, to $18.5 million for the three months
ended July 25, 1998. This increase is due primarily to the completion of the
Strategic Restructuring Plan and the Financing Transactions in June 1998. This
resulted in a significant increase in both the amount of debt outstanding and
the average interest rate related to such debt. At July 25, 1998, the Company
had total debt outstanding of approximately $1,212.9 million at an average
interest rate of approximately 9.2%.
The Company expects that interest expense will be higher in future quarters
than in the three months ended July 25, 1998, as the impact of the increased
debt resulting from the completion of the Strategic Restructuring Plan and
the Financing Transactions was only included in the results for the three
months ended July 25, 1998 for approximately half of the period. Although
Note 6 of the notes to the Company's consolidated financial statements
indicated that, on a pro forma basis, the Company would have had a net loss
of $6.1 million from continuing operations before extraordinary items for the
three months ended July 25, 1998, the Company had pro forma EBITDA for such
period of $37.9 million, which was significantly greater than the pro forma
interest expense of $27.1 million. The pro forma loss for the three months
ended July 25, 1998, also included approximately $8.7 million in one-time
operating restructuring charges which, net of the benefit from income taxes,
accounted for approximately $5.6 million of the net loss. See "-Liquidity
and Capital Resources" and "-Factors Affecting the Company's Business."
Other income decreased from $1.4 million for the three months ended July 26,
1997, to $410,000 for the three months ended July 25, 1998. Other income
includes the Company's 49% share of the net income of Dudley, in which the
Company has a 49% equity investment, and miscellaneous other income and expense
items. The decrease is due primarily to the recording of a gain on the sale of
an investment during the three months ended July 26, 1997. This was partially
offset by higher net income at Dudley.
Page 24
<PAGE>
Provision for (benefit from) income taxes changed from an income tax
provision of $8.3 million for the three months ended July 26, 1997 to an
income tax benefit of $17.9 million for the three months ended July 25, 1998,
reflecting effective income tax (benefit) rates of 47.8% and (17.7%),
respectively. The provision for income taxes for the three month period ended
July 26, 1997 reflects the recording of an income tax provision at the
federal statutory rate of 35.0%, plus appropriate state, local and foreign
taxes. In addition, the effective tax rate was increased to reflect the
incurrence of non-deductible goodwill amortization expense. The benefit from
income taxes for the three months ended July 25, 1998 reflects the net impact
of (i) an income tax provision of 65.0% on the results from continuing
operations, excluding the aggregate $106.2 million of Strategic Restructuring
Plan costs ($97.5 million) and operating restructuring costs ($8.7 million);
and (ii) an income tax benefit on approximately half of the aggregate $106.2
million of Strategic Restructuring Plan costs and operating restructuring
costs, as the Company believes that approximately half of such costs will be
deductible for income tax purposes. The 65.0% effective tax rate discussed
above reflects the recording of an income tax provision at the federal
statutory rate of 35.0%, plus appropriate state, local and foreign taxes. The
effective tax rate was also increased to reflect the incurrence of
non-deductible goodwill amortization expense.
Income (loss) from discontinued operations changed from income of $11.0 million
for the three months ended July 26, 1997, to a loss of $1.3 million for the
three months ended July 25, 1998. See Note 2 of the Company's Notes to
Consolidated Financial Statements.
The extraordinary loss, net of income taxes, of $269,000 represents the
aggregate of several extraordinary items, all of which involve indebtedness that
the Company either repaid or converted into equity in connection with the
Strategic Restructuring Plan and the Financing Transactions. The primary
components of this extraordinary loss are: (i) the pre-tax non-cash write-offs
of $5.2 million, $4.7 million and $2.9 million of debt issue costs incurred in
conjunction with the issuance of the 2003 Notes, the former credit facility and
the issuance of the 2001 Notes, respectively; and (ii) a pre-tax gain of $12.2
million related to the early extinguishment of $222.2 million of 2003 Notes at a
purchase price of 94.5% of the principal amount. See "-Introduction."
Liquidity and Capital Resources
At July 25, 1998, the Company had cash of $27.4 million and working capital of
$389.7 million. The Company's capitalization, defined as the sum of long-term
debt and stockholders' equity, at July 25, 1998, was approximately $1.7 billion.
In June 1998, the Company completed the Strategic Restructuring Plan. See
"--Introduction." The Company financed the aggregate cost of purchasing
shares in the Equity Tender, repurchasing $222.2 million of the 2003 Notes,
and repaying its former credit facility with the proceeds of the Equity
Investment, the net proceeds from the sale and issuance of the 2008 Notes and
borrowings under the Credit Facility. The Company also incurred significant
transaction (including financing) costs and expenses. See "--Results of
Operations." In connection with the completion of the Strategic Restructuring
Plan, the Company incurred approximately $400.0 million of additional
indebtedness, and the weighted average annual interest rate on all
outstanding indebtedness increased from approximately 6.8% prior to
completion of the Strategic Restructuring Plan to approximately 9.2% after
completion of the Strategic Restructuring Plan. At July 25, 1998, the Company
had $785.0 million outstanding under its Credit Facility. Under the terms of
the current financial covenants, which include restrictions based upon pro
forma EBITDA, as of July 25, 1998, the Company had the ability to draw down
up to an additional $80.3 million under its Credit Facility. Additional pro
forma EBITDA, through operating improvements or acquisitions, would increase
borrowing availability under the Credit Facility.
Page 25
<PAGE>
Upon completion of the Strategic Restructuring Plan, the Company terminated and
repaid the balance outstanding under its former $500.0 million credit facility
and entered into the Credit Facility. The Credit Facility provides for an
aggregate principal amount of $1,225.0 million, consisting of (i) a seven-year
multi-draw term loan facility totaling $200.0 million, (ii) a seven-year
revolving credit facility totaling $250.0 million, (iii) a seven-year term loan
facility totaling $100.0 million, and (iv) an eight-year term loan facility
totaling $675.0 million. In connection with the completion of the Strategic
Restructuring Plan and the Financing Transactions, the Company borrowed the full
amount of the two single-draw term loan facilities. The multi-draw facility and
the revolving facility remain available for future borrowings. Interest rates on
such borrowings bear interest, at the Company's option, at the lending bank's
base rate plus an applicable margin of up to 1.50%, or a eurodollar rate plus an
applicable margin of up to 2.50%. The Company's obligations under the Credit
Facility are guaranteed by its present domestic subsidiaries; future material
domestic subsidiaries will also be required to guarantee these obligations. The
Credit Facility is secured by substantially all of the assets of the Company and
its domestic subsidiaries; future material domestic subsidiaries also will be
required to pledge their assets as security. The Company was required to enter
into arrangements to ensure that the effective interest rate paid by the Company
on at least 50% of the aggregate amount outstanding under the Credit Facility
and the 2008 Notes was at a fixed rate of interest. As a result, the Company has
entered into interest rate swap arrangements to limit the LIBOR-based interest
rate exposure on $500.0 million of the outstanding balance under the Credit
Facility to rates ranging from 5.7% to 6.0%. The interest rate swap agreements
expire over a period ranging from 2001 to 2003. As a result of these swap
agreements (and including the fixed-rate 2008 Notes), the Company has fixed the
interest rates on $900 million (75%) of the long-term debt outstanding at July
25, 1998.
The Credit Facility includes, among others, restrictions on the Company's
ability to incur additional indebtedness, sell assets, pay dividends, or engage
in certain other transactions, and requirements that the Company maintain
certain financial ratios, and other provisions customary for loans to highly
leveraged companies, including representations by the Company, conditions to
funding, cost and yield protections, restricted payment provisions, amendment
provisions and indemnification provisions. The Credit Facility is subject to
mandatory prepayment in a variety of circumstances, including upon certain asset
sales and financing transactions, and also from excess cash flow (as defined in
the Credit Facility).
The 2008 Notes are unsecured but are guaranteed by the Company's present
domestic subsidiaries; future material domestic subsidiaries will be required
to guarantee the 2008 Notes. The indenture governing the 2008 Notes places
restrictions on the Company's ability to incur indebtedness, to make certain
payments, investments, loans and guarantees and to sell or otherwise dispose
of a substantial portion of its assets to, or merge or consolidate with,
another entity. The eight-year term loan facility contains negative covenants
and default provisions substantially similar to those contained in the
indenture governing the 2008 Notes.
During the three months ended July 25, 1998, the New Zealand and Australian
dollars weakened against the USD. The New Zealand exchange rate declined from
U.S. $.56 at April 25, 1998 to U.S. $.52 at July 25, 1998. The Australian
exchange rate declined from U.S. $.65 at April 25, 1998 to U.S. $.62 at July 25,
1998. This resulted in a reduction in stockholders' equity, through a cumulative
translation adjustment, of approximately $45.5 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 July 25, 1998, the New
Zealand and Australian dollars have continued to weaken against the USD. As of
September 7, 1998, the New Zealand dollar equaled U.S. $0.51 and the Australian
dollar equaled U.S. $0.59. See "--Factors Affecting the Company's
Business--Operations Outside the United States."
Page 26
<PAGE>
As a result of the Company's increased indebtedness, a portion of the cash
flows from the Company's international operations will be required to service
debt and interest payments. The Company expects that it will incur additional
costs with respect to accessing cash flows from international operations
including such items as New Zealand and Australian withholding and other
taxes and foreign currency hedging costs. During the three months ended July
25, 1998, the Company entered into foreign currency forward contracts against
the New Zealand dollar with an aggregate notional amount of approximately
$30.0 million expiring in January through April 1999. The effect of these
foreign currency forward contracts is to limit the foreign currency exposure
on approximately $30.0 million of the Company's net investment in its New
Zealand subsidiary at rates of U.S. $.48 to U.S. $.51.
The Company anticipates its cash on hand, cash flows from operations and
borrowings available from the Credit Facility will be sufficient to meet its
liquidity requirements for its operations, capital expenditures and
additional debt service obligations for the remainder of the fiscal year. The
Company does not currently anticipate that any possible restructuring costs
related to the Company's planned cost reduction measures, coupled with the
expected effects of such cost reduction measures, would have a material
adverse effect on the Company's liquidity or cash flows. See "-Introduction,"
"-Factors Affecting the Company's Business-Change in Strategic Focus and
Business and Growth Strategies" and "-Factors Affecting the Company's
Business-Challenges of Business Integration." The Company anticipates capital
expenditures of approximately $40.0 million in both fiscal 1999 and fiscal
2000. The anticipated capital expenditures will support the Company's
District Fulfillment Center program, computer system upgrades and maintenance
of the Company's existing infrastructure.
During the three months ended July 25, 1998, net cash used in operating
activities was $7.4 million. This use of cash includes the payment of
approximately $16.0 million of costs related to the Strategic Restructuring
Plan. If such one-time Strategic Restructuring Plan costs were not included,
net cash provided by operating activities would have been $8.6 million for
the three months ended July 25, 1998. Net cash used in investing activities
was $25.5 million, including $11.8 million used for acquisitions and $12.9
million used for additions to property and equipment. Net borrowings
increased approximately $450 million during the three months ended July 25,
1998, primarily to fund the Strategic Restructuring Plan and Financing
Transactions, and also to fund the purchase prices of acquisitions and
additions to property and equipment during the period. In addition, the
Company received approximately $254.0 million from Investor related to the
Equity Investment, net of expenses, and $118.9 million from discontinued
operations in repayment of intercompany loan balances outstanding at the date
of the Distributions. Discontinued operations used $12.5 million of cash
during the three months ended July 25, 1998.
During the three months ended July 26, 1997, net cash provided by operating
activities was $25.8 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 $50.0 million,
including $41.2 million used for acquisitions and $10.9 million used for
additions to property and equipment, partially offset by $5.7 million received
on the sale of an investment. Net borrowings increased $113.2 million during the
three months ended July 26, 1997, primarily to fund the purchase prices of
acquisitions and to repay higher-cost debt assumed in acquisitions. Discontinued
operations used $2.0 million of cash during the three months ended July 25,
1997.
Year 2000 Compliance
The Company has commenced a process to assess Year 2000 compliance of its
systems and the systems of major vendors and third party service providers, and
to remediate any non-compliance of its systems. The Company's process
involves the following three phases:
Phase One--Inventory and Planning
The Company completed this phase in May 1998. In this phase, the Company
inventoried all hardware and software that potentially is susceptible to Year
2000 problems, prepared plans for assessing compliance and for completing
remediation, and prepared vendor and supplier compliance surveys.
Page 27
<PAGE>
Phase Two--Assessment
In this phase, the Company is assessing which of its systems are Year 2000
compliant, obtaining compliance statements from hardware and software vendors,
supply manufacturers and service trading partners, and planning for remediation
of non-compliant systems. The Company expects to complete this phase in November
1998.
Phase Three--Remediation and Testing
In this phase, the Company will deploy plans for elimination, upgrade,
replacement or modification of non-compliant systems and test compliance. The
Company has scheduled completion of this phase for July 1999.
The Company's Trinity system, which is the core operations system for its
NAOPG operations, is year 2000 compliant. The Company is installing this
system throughout its NAOPG operations, but does not expect to complete
installation before the end of 1999. Therefore, the Company is assessing the
compliance of systems used by its NAOPG operating subsidiaries. The Company
has determined that some of the systems used by its NAOPG subsidiaries are
not currently Year 2000 compliant, but the Company believes that it is highly
likely that these systems will be made compliant without material expense by
the middle of 1999. The Company has determined that the systems used by its
MBE operations are 80% compliant and MBE is in the process of reprogramming
the balance of the systems. The Company believes that this process will be
completed without material expense. The Company also expects that systems
used by the Blue Star Group in New Zealand will be compliant within a safe
time frame and without material expense. An initial assessment of the systems
of Dudley Stationery Limited, the Company's UK affiliate, indicates that
there are no significant Year 2000 issues within that system.
The Company's assessment plan includes assessment of Year 2000 compliance of
non-information technology (non-IT) components, including the Company's
bindery machinery, coffee roasting facilities, office furniture manufacturing
facilities, security systems, credit card processing devices and freight
elevators. The Company believes there are no significant uses of
micro-processing oriented equipment within its manufacturing systems and will
complete assessment of other non-IT components by November 1998.
The Company has received compliance statements from approximately 77% of its
supply vendors. Based on these statements, the Company believes that 95% of
supply vendors who have responded will be year 2000 compliant by the end of
June 1999. The Company has identified eight vendors as fitting a "concerned"
profile due to late compliance dates or because responses indicate some
possibility of poor planning. The Company is working with each of these
vendors to remediate these concerns.
If the Company fails to achieve year 2000 compliance in all its systems, the
Company could lose the ability to process certain of its customers' orders
until compliance is achieved or a means to work around the failure is
implemented. The Company's systems are not now uniform across all operations
and the Company does not expect uniformity by the end of 1999. Therefore, any
failure would not be system wide. The Company believes that in a worst case
scenario, at most 20% of its orders would be affected. A failure to fill
orders would not, however, necessarily result in a complete loss of the
order. An order could be filled through alternative methods within a
relatively short period. Nevertheless, any disruption in order fulfillment
could result in some loss of revenue. If this disruption is the result of
noncompliance that is greater than anticipated, the loss of revenue could be
material. The Company intends to establish by the middle of 1999 contingency
plans to deal with possible failures in order fulfillment systems or other
systems.
The Company's assessment and remediation of Year 2000 compliance issues has a
budget of less than $1.0 million, and expenses have been less than expected. The
Company does not currently expect that future expenses for assessment or
remediation will be material.
Page 28
<PAGE>
Fluctuations in Quarterly Results of Operations
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
revenues and profitability of the Company's operations in New Zealand and
Australia and at MBE have generally been higher in the Company's third quarter.
As the Company's mix of businesses evolves through future acquisitions, these
seasonal fluctuations may continue to change. Therefore, results for any quarter
are not necessarily indicative of the results that the Company may achieve for
any subsequent fiscal quarter or for a full fiscal year.
Quarterly results also may be affected by the timing and magnitude of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold, and general economic conditions. Moreover, the operating
margins of companies acquired by the Company may differ substantially from those
of the Company, which could contribute to the further fluctuation in its
quarterly operating results. Therefore, results for any quarter are not
necessarily indicative of the results that the Company may achieve for any
subsequent fiscal quarter or for a full fiscal year.
Inflation
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1998 or the first quarter of fiscal 1999.
Factors Affecting the Company's Business
A number of factors, including those discussed below, may affect the Company's
future operating results.
Change in Strategic Focus and Business and Growth Strategies. The Company was
founded in October 1994 and conducted no operations prior to the acquisition of
its founding companies in February 1995. Since that time, the Company has grown
primarily through an aggressive acquisition strategy. The Company is now
transitioning into a new stage of development, less reliant on acquisitions and
more focused on operational efficiencies, organic growth and improved profit
margins. The Company's ability to achieve these objectives will depend on a
number of factors, including its generation of increased revenues and margins in
existing businesses through, among other things, expansion into new markets and
additional "cross selling" activities; ability to continue to integrate existing
operations and new acquisitions without substantial delays or other problems;
and achievement of operating improvements and cost reductions, such as volume
purchasing arrangements, consolidation of general and administrative functions
and elimination of redundant facilities, and improvement of technology and
operating and distribution systems. In particular, the Company's ability to
achieve operating improvements will depend on successful implementation of its
plans to establish DFCs in the United States. There can be no assurance that
these efforts to achieve operating improvements will be successful or will
result in anticipated levels of cost savings and efficiencies or growth in
revenues and margins.
Page 29
<PAGE>
Challenges of Business Integration. Historically, the Company has grown
substantially through acquisitions. The Company's aggressive acquisition program
has produced a significant increase in revenues, employees, facilities and
distribution systems. While the Company's decentralized management strategy,
together with operating efficiencies resulting from the elimination of
duplicative functions and economies of scale, may present opportunities to
reduce costs, such strategies may initially require additional costs and
expenditures to expand operational and financial systems and corporate
management administration. Because of the various costs and possible
cost-savings strategies, historical operating results may not be indicative of
future performance. There also can be no assurance that the pace of the
Company's acquisitions will not adversely affect efforts to implement
cost-savings and integration strategies and to manage operations and
acquisitions profitably. Additionally, attempts to achieve economies of scale
through cost cutting and lay-offs of existing personnel may, at least in the
short term, have an adverse impact upon the Company. Delays in implementing
planned integration and consolidation strategies, or the failure of such
strategies to achieve anticipated cost savings, also could adversely affect the
Company's results of operations and financial condition. In addition, there can
be no assurance that the Company's management and financial controls, personnel,
computer systems and other corporate support systems will be adequate to manage
the increasing size and scope of its operations and its continuing acquisition
activity.
Operations Outside of the United States. Management also intends to continue to
focus significant attention and resources on international operations and
expects foreign revenues to continue to represent a significant portion of the
Company's total revenues. In general, the factors described in this "Factors
Affecting the Company's Business" section that apply to the Company's domestic
operations may also affect the Company's foreign operations. In addition, the
Company's foreign operations are subject to a number of other risks, including
fluctuations in currency exchange rates; new and different legal and regulatory
requirements in local jurisdictions; tariffs and trade barriers; potential
difficulties in staffing and managing local operations; credit risk of local
customers and distributors; potential difficulties in protecting intellectual
property; potential imposition of restrictions on investments; potentially
adverse tax consequences, including imposition or increase of withholding and
other taxes on remittances and other payments by subsidiaries; and local
economic, political and social conditions, including the possibility of
hyper-inflationary conditions, in certain countries. There can be no assurance
that one or a combination of these factors will not have a material adverse
impact on the Company's ability to maintain or increase its foreign revenues or
on its business, financial condition or results of operations. Declines in the
value of the New Zealand and Australian dollars relative to the USD have
adversely affected the Company's reported results. The Company cannot predict
whether these currencies will, in the future, continue to decline or will
increase in value relative to the USD. For a discussion of the impact of recent
declines in the value of these currencies on the Company's financial condition
and results of operations, see "--Results of Operations" and "--Liquidity and
Capital Resources."
Substantially all of the Company's indebtedness is denominated in U.S. dollars.
As a result, declines relative to the U.S. dollar in the value of the currencies
in which the Company's revenues are generated may materially adversely affect
the Company's business, financial condition and results of operations and the
ability of the Company to meet its obligations under agreements relating to
indebtedness.
Page 30
<PAGE>
Substantial Leverage; Ability to Service Debt. The Company incurred substantial
indebtedness in connection with the Strategic Restructuring Plan and the
Financing Transactions. As a result, total indebtedness at September 4, 1998 was
approximately $1,227 million. See "--Liquidity and Capital Resources." Subject
to limitations in its existing debt agreements, the Company could incur
additional indebtedness in the future. The Company's high leverage could have
material consequences to the Company, including, but not limited to, the
following: (i) the Company's ability to obtain additional financing in the
future for acquisitions, working capital, capital expenditures, general
corporate or other purposes may be impaired or any such financing may not be
available on terms favorable to the Company; (ii) a substantial portion of the
Company's cash flow will be required for debt service and, as a result, will not
be available for its operations and other purposes; (iii) a substantial decrease
in net operating cash flows or an increase in expenses could make it difficult
for the Company to meet its debt service requirements or force it to modify its
operations or sell assets; (iv) the Company's ability to withstand competitive
pressures may be limited; and (v) the Company's level of indebtedness could make
it more vulnerable to economic downturns, and reduce its flexibility in
responding to changing business and economic conditions. In addition, a portion
of the Company's borrowings under the Credit Facility are and will continue to
be at variable rates of interest, which exposes the Company to the risk of
increased interest rates. The ability of the Company to meet its debt service
and other obligations (including compliance with financial covenants) will be
dependent upon the future performance of the Company and its cash flows from
operations, which will be subject to prevailing economic conditions and
financial, business and other factors, certain of which are beyond the Company's
control. These factors could include general economic conditions, operating
difficulties, increased operating costs, product pricing pressures, potential
revenue instability arising from cost savings initiatives or other factors,
labor relations, the response of competitors or customers to the Company's
business strategy or projects and delays in implementation of the Company's
business strategy. If the Company is unable to service its indebtedness, it may
be forced to pursue one or more alternative strategies, such as selling assets,
restructuring or refinancing its indebtedness, or seeking additional equity
capital. There can be no assurances that the Company would be able to take
actions or be able to service such indebtedness. Even it additional financing
could be obtained, there can be no assurance that it would be on terms that are
acceptable to the Company. In addition, the pledge of substantially all of the
Company's assets as collateral under the Credit Facility could impair the
Company's ability to obtain financing on terms favorable to the Company. If the
Company were unable to repay its indebtedness to the lenders under the Credit
Facility, such lenders could proceed against the collateral securing such
indebtedness, including substantially all of the Company's assets, and the
Company could be prohibited from making any payments on the 2008 Notes. The
indenture to the 2008 Notes also contains a number of restrictive covenants
relating to the Company.
Risks Related to Acquisitions. The Company intends to pursue selected
acquisition opportunities; however, no assurance can be given that the Company
will be able to identify, finance and complete additional suitable acquisitions
on acceptable terms, or that future acquisitions, if completed, will be
successful. The Company will likely incur additional debt to finance any
additional acquisitions. Certain limitations under Section 355 of the Internal
Revenue Code of 1986, as amended (the "Code"), may restrict the Company's
ability to issue capital stock for a period of time after the Distributions.
These limitations may restrict the Company's ability to undertake transactions
involving issuances of capital stock of the Company that management otherwise
believes would be beneficial. See "--Potential Limitations on Stock Issuances."
Acquired companies may not achieve future revenues and profitability levels that
justify the prices that the Company paid to acquire them. Acquisitions also may
involve a number of risks that could have a material adverse effect on future
operations and financial performance, including diversion of 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.
Page 31
<PAGE>
Highly Competitive Markets. The Company operates in a highly competitive
environment. It generally competes with a large number of smaller, independent
companies, many of which are well-established in their markets. In addition, in
the United States, the NAOPG competes with five large office products companies,
each of which may have greater financial resources than the Company. Several of
the Company's large competitors operate in many of its geographic and product
markets, and other competitors may choose to enter its geographic and product
markets in the future. In addition, as a result of this competition, the Company
may lose customers or have difficulty acquiring new customers. As a result of
competitive pressures in the pricing of products, the Company's revenues or
margins may decline. The highly leveraged nature of the Company after the
transactions related to the Strategic Restructuring Plan and the Financing
Transactions could limit the Company's ability to continue to make necessary or
desirable investments or capital expenditures to compete effectively and to
respond to market conditions.
The Company faces significant competition to acquire additional businesses as
the office products industry undergoes continuing consolidation. Competition is
expected to increase in the domestic and international markets that the Company
serves or is planning to enter as consolidation occurs (or accelerates) in those
markets. A number of the Company's major competitors are actively pursuing
acquisitions on a global basis.
Franchise Operations of Mail Boxes Etc. MBE conducts its business principally
through franchisees or licensees, with the result that MBE has limited control
over franchisee operations and is subject to significant government regulation
of its legal relationships with franchisees that limits the control that MBE has
over its franchisees.
Ability of Investor to Influence Management. As part of the Strategic
Restructuring Plan, Investor acquired shares, amounting to 24.9% of the
outstanding shares of the common stock after giving effect to the issuance of
such shares. Investor also acquired various warrants that give it the right to
acquire additional shares of common stock in the future that in certain
circumstances could increase its ownership to as much as 39.9% of the common
stock (if no currently outstanding stock options are exercised). Investor has,
among other things, the right (subject to certain conditions) to nominate three
of the nine members of the Company's Board of Directors (the "Board"), including
the Chairman of the Board. Investor will retain this right until Investor's
level of ownership of common stock declines by more than one-third. In addition,
certain Board decisions will be subject to super-majority voting provisions
that, in certain circumstances, may require the concurrence of at least one
director nominated by Investor. The super-majority voting provisions require the
affirmative vote of three-fourths of the Board for certain decisions such as the
sale of certain equity securities; any merger, tender offer involving the
Company's equity securities or sale, lease or disposition of all or
substantially all of the Company's assets or other business combination
involving the Company; any dissolution or partial liquidation of the Company;
and certain changes to the Company's charter and by-laws. These super-majority
Board voting requirements may give Investor the ability to block the approval of
certain actions requiring the super-majority vote of the Board. In addition,
Investor's significant ownership of the common stock may permit Investor to
influence significantly matters requiring the approval of the Company's
stockholders.
Intangible Assets. As of July 25, 1998, approximately $903.3 million, or 44.3%
of the Company's total assets, represented intangible assets, the substantial
majority of which was goodwill. As a result, a substantial portion of the value
of the Company's assets may not be available to repay creditors in the event of
a bankruptcy or dissolution of the Company. As a result of the Equity Tender and
the Distributions, the Company may be precluded from completing business
combinations accounted for under the pooling-of-interests method for a period of
up to six to nine months. Any business combinations that the Company completes
during this period will have to be accounted for under the purchase method. As a
result, the amount of goodwill reflected on the Company's balance sheet will
increase to the extent that the Company acquires additional companies under the
purchase method of accounting.
Page 32
<PAGE>
Effect of Shares Eligible for Future Sale. Sales of a substantial number of
shares of common stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for shares of common stock. Investor
holds shares of common stock representing 24.9% of shares outstanding and
warrants to purchase an equal number of shares (plus additional shares in
certain circumstances). An investment agreement with Investor restricts
Investor's ability to sell these shares or warrants, but when these restrictions
expire (or if they are waived) Investor may sell these shares or warrants.
Additional shares may be issued either in connection with acquisitions by the
Company, upon exercise of outstanding options, options that may be issued in the
future, and warrants, and upon maturity or exercise of other rights to acquire
stock. The sale of shares upon exercise of options or by Investor, or the
perception that such sales could occur, may have an adverse effect on the
trading price of the common stock if a significant number of shares become
available over a limited period of time.
Current Limitation on Option Issuances. In connection with the Strategic
Restructuring Plan, and pursuant to the terms of the anti-dilution provisions
of the Company's option plans, adjustments were made to the number of shares
covered by employee stock options outstanding after completion of the
Strategic Restructuring Plan. As a result of these adjustments, the Company
is not able to grant additional stock options to employees, as the Company's
stock option plan prohibits additional grants to be made if such additional
grants would cause the total number of shares covered by stock options
outstanding to exceed 20% of total shares outstanding. The Company is
currently reviewing its cash and non-cash compensation programs to ensure
that they remain competitive and to assess what approach it should take to
future long-term incentive awards (including stock options and other
equity-based awards), in light of employment market conditions, recent
volatility in the price of the Company's common stock, and the current terms
of the Company's long-term incentive plans. The Company believes that it
offers market competitive cash compensation packages and does not expect that
the current limit on its ability to issue stock options will have a material
adverse impact on its ability to attract and retain qualified employees,
although there can be no assurances in this regard.
Potential Liability for Certain Liabilities of the Spin-Off Companies. As part
of the Strategic Restructuring Plan, the Spin-Off Companies are expected to
indemnify the Company for certain liabilities that the Company could incur
relating to the Distributions, the operations of the Spin-Off Companies and
other matters. There can be no assurance that the Spin-Off Companies will be
able to satisfy any such indemnities, and the Company may therefore incur such
liabilities even if they arose out of the activities of the Spin-Off Companies.
The Company could be adversely affected if in the future the Spin-Off Companies
are unable to satisfy these obligations. In addition, the Company had agreed to
indemnify Investor and its affiliates against losses resulting from any of the
Spin-Off Companies failing to satisfy their indemnity obligations to the
Company.
Potential Liability for Taxes Related to the Distributions. In connection with
the Strategic Restructuring Plan, the Company received an opinion of counsel
that the Distributions qualify as tax-free spin-offs under Section 355 of the
Code, and that the Distributions are not taxable under Section 355(e) of the
Code. That opinion was subject to certain assumptions and limitations and is
not, in any event, binding upon either the Internal Revenue Service or any
court.
If a Distribution fails to qualify as a tax-free spin-off under Section 355 of
the Code, the Company will recognize a gain equal to the difference between the
fair market value of the Spin-Off Company's common stock on the date of the
Distribution and the Company's adjusted tax basis in the Spin-Off Company's
common stock on the date of the Distribution. In addition, each stockholder of
the Company will be treated as having received a taxable corporate distribution
in an amount equal to the fair market value (on the date of the Distribution) of
the Spin-Off Company's common stock distributed to such stockholder. If the
Company were to recognize gain on one or more Distributions, such gain would
likely be substantial. If the Distribution is taxable under Section 355(e), but
otherwise satisfies the requirements of a tax-free spin-off, the Company will
recognize gain equal to the difference between the fair market value of the
Spin-Off Company's common stock on the date of the Distribution and the
Company's adjusted tax basis in the Spin-Off Company's common stock on the date
of the Distribution. However, no gain or loss will be recognized by holders of
common stock (except with respect to cash received in lieu of fractional
shares). If the Company were to recognize gain on one or more Distributions,
such gain would likely be substantial.
Page 33
<PAGE>
Potential Limitations on Stock Issuances. Certain limitations under Section 355
of the Code may restrict the Company's ability to issue capital stock after the
Distributions. These limitations will generally prevent the Company from issuing
capital stock to the extent the issuance is part of a plan or series of related
transactions that includes one or more of the Distributions and pursuant to
which one or more persons acquire capital stock of the Company that represents
50% or more of the voting power or 50% or more of the value of the Company's
capital stock. These limitations may restrict the Company's ability to undertake
transactions involving issuances of capital stock of the Company that management
otherwise believes would be beneficial.
Page 34
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
A special meeting of the Company's stockholders was held on May 22, 1998.
At the special meeting, the stockholders approved, pursuant to the following
votes (as adjusted for the reverse stock split that became effective after
the date of the special meeting), the sale by the Company of common stock and
warrants to CDR-PC Acquisition, L.L.C., an affiliate of an investment fund
managed by Clayton, Dubilier & Rice, Inc., a private investment firm:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
23,943,822 83,189 89,525 0
At the special meeting, the stockholders authorized, pursuant to the
following votes (as adjusted for the reverse stock split that became
effective after the date of the special meeting), the Company's amendment of
its Certificate of Incorporation to effect a one-for-four reverse stock split
of the Common Stock:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
21,661,074 2,404,647 50,827 0
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.2 Second Amended and Restated Bylaws of U.S. Office Products Company.
11.1 Statement regarding computation of net income per share.
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the period covered by this report, the Company filed the
following Current Reports on Form 8-K:
i. Form 8-K dated June 30, 1997 and filed with the Commission on
May 26, 1998 reporting information under Item 5.
Financial statements filed:
(a) The financial statements of Sax Arts and Crafts, Inc. as of
December 16, 1995, December 25, 1996 and June 29, 1997
(unaudited), for the years ended December 17, 1994, December
16, 1995 and December 25, 1996 and for the six months ended
June 30, 1996 (unaudited) and June 29, 1997 (unaudited).
(b) The financial statements of Evans Travel Group, Inc. and
Evans Consulting Services, Inc. as of July 25, 1997 and
for the year ended July 25, 1997.
(c) The combined financial statements of Travel Consultants,
Inc. and Envision Vacations, Inc. as of October 24, 1997 and
for the year ended October 24, 1997.
Page 35
<PAGE>
(d) The financial statements of Compel Corporation as of
December 31, 1995 and 1996 and September 30, 1997
(unaudited), for the years ended December 31, 1994, 1995 and
1996 and for the nine months ended September 30, 1996
(unaudited) and 1997 (unaudited).
(e) The financial statements of Astrid Offset Corporation as of
July 31, 1997 and October 31, 1997 (unaudited), for the year
ended July 31, 1997 and for the three months ended October
31, 1996 (unaudited) and October 31, 1997.
ii. Form 8-K dated June 5, 1998 and filed with the Commission on
June 17, 1998 reporting information under Items 5 and 7.
iii. Form 8-K dated June 9, 1998 and filed with the Commission on
June 25, 1998 reporting information under Items 5 and Item 7.
Page 36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. OFFICE PRODUCTS COMPANY
September 8, 1998 By: /s/ Thomas I. Morgan
-------------------- ------------------------
Date Thomas I. Morgan
Chief Executive Officer
September 8, 1998 By: /s/ Joseph T. Doyle
-------------------- -----------------------
Date Joseph T. Doyle
Chief Financial Officer
Page 37
<PAGE>
EXHIBIT INDEX
No. Exhibit
3.2 Second Amended and Restated Bylaws of U.S. Office Products Company
11.1 Statement regarding computation of net income per share
27 Financial Data Schedule
Page 38
<PAGE>
Exhibit 3.2
SECOND AMENDED AND RESTATED
BY-LAWS
OF
U.S. OFFICE PRODUCTS COMPANY
Effective As of June 10, 1998
ARTICLE I
Stockholders
SECTION 1. Annual Meeting. The annual meeting of the stockholders of
the Corporation shall be held on such date, at such time and at such place
within or without the State of Delaware as may be designated by the Board of
Directors, for the purpose of electing Directors and for the transaction of such
other business as may be properly brought before the meeting.
SECTION 2. Special Meetings. Except as otherwise provided in the
Certificate of Incorporation, a special meeting of the stockholders of the
Corporation may be called at any time by the Board of Directors, the Chairman of
the Board or the President and shall be called by the Chairman of the Board, at
the request in writing of the stockholders holding together at least twenty-five
percent of the number of shares of stock outstanding and entitled to vote at
such meeting. Any special meeting of the stockholders shall be held on such
date, at such time and at such place within or without the State of Delaware as
the Board of Directors or the officer calling the meeting may designate. At a
special meeting of the stockholders, no business shall be transacted and no
corporate action shall be taken other than that stated in the notice of the
meeting unless all of the stockholders are present in person or by proxy, in
which case any and all business may be transacted at the meeting even though the
meeting is held without notice.
SECTION 3. Notice of Meetings. Except as otherwise provided in these
ByLaws or by law, a written notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of the Corporation entitled to vote at such
meeting at his address as it appears on the records of the Corporation. The
notice shall state the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
SECTION 4. Quorum. At any meeting of the stockholders, the holders of a
majority in number of the total outstanding shares of stock of the Corporation
entitled to vote at such meeting, present in person or represented by proxy,
shall constitute a quorum of the stockholders for all purposes, unless the
representation of a larger number of shares shall be required by law, by the
Certificate of Incorporation or by these By-Laws, in which case the
representation of the number of shares so required shall constitute a quorum;
provided that at any meeting of the stockholders at which the holders of any
class of stock of the Corporation shall be
<PAGE>
entitled to vote separately as a class, the holders of a majority in number of
the total outstanding shares of such class, present in person or represented by
proxy, shall constitute a quorum for purposes of such class vote unless the
representation of a larger number of shares of such class shall be required by
law, by the Certificate of Incorporation or by these By-Laws.
SECTION 5. Adjourned Meetings. Whether or not a quorum shall be present
in person or represented at any meeting of the stockholders, the holders of a
majority in number of the shares of stock of the Corporation present in person
or represented by proxy and entitled to vote at such meeting may adjourn from
time to time; provided, however, that if the holders of any class of stock of
the Corporation are entitled to vote separately as a class upon any matter at
such meeting, any adjournment of the meeting in respect of action by such class
upon such matter shall be determined by the holders of a majority of the shares
of such class present in person or represented by proxy and entitled to vote at
such meeting. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the stockholders, or the holders of any class of stock entitled to vote
separately as a class, as the case may be, may transact any business which might
have been transacted by them at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the adjourned meeting.
SECTION 6. Organization. The Chairman of the Board or, in his absence,
the President or any Vice President shall call all meetings of the stockholders
to order, and shall act as Chairman of such meetings. In the absence of the
Chairman of the Board, the President and all of the Vice Presidents, the holders
of a majority in number of the shares of stock of the Corporation present in
person or represented by proxy and entitled to vote at such meeting shall elect
a Chairman.
The Secretary of the Corporation shall act as Secretary of all meetings
of the stockholders; but in the absence of the Secretary, the Chairman may
appoint any person to act as Secretary of the meeting. It shall be the duty of
the Secretary to prepare and make, at least ten days before every meeting of
stockholders, a complete list of stockholders entitled to vote at such meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held, for the ten days next
preceding the meeting, to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, and shall be produced
and kept at the time and place of the meeting during the whole time thereof and
subject to the inspection of any stockholder who may be present.
2
<PAGE>
SECTION 7. Voting. Except as otherwise provided in the Certificate of
Incorporation or by law, each stockholder shall be entitled to one vote for each
share of the capital stock of the Corporation registered in the name of such
stockholder upon the books of the Corporation. Each stockholder entitled to vote
at a meeting of stockholders or to express consent or dissent to corporate
action in writing without a meeting may authorize another person or persons to
act for him by proxy, but no such proxy shall be voted or acted upon after three
years from its date, unless the proxy provides for a longer period. When
directed by the presiding officer or upon the demand of any stockholder, the
vote upon any matter before a meeting of stockholders shall be by ballot. Except
as otherwise provided by law or by the Certificate of Incorporation, Directors
shall be elected by a plurality of the votes cast at a meeting of stockholders
by the stockholders entitled to vote in the election and, whenever any corporate
action, other than the election of Directors is to be taken, it shall be
authorized by a majority of the votes cast at a meeting of stockholders by the
stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be counted
for quorum purposes.
SECTION 8. Inspectors. When required by law or directed by the
presiding officer or upon the demand of any stockholder entitled to vote, but
not otherwise, the polls shall be opened and closed, the proxies and ballots
shall be received and taken in charge, and all questions touching the
qualification of voters, the validity of proxies and the acceptance or rejection
of votes shall be decided at any meeting of the stockholders by two or more
Inspectors who may be appointed by the Board of Directors before the meeting, or
if not so appointed, shall be appointed by the presiding officer at the meeting.
If any person so appointed fails to appear or act, the vacancy may be filled by
appointment in like manner.
SECTION 9. Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided in the Certificate of Incorporation, any action required to be taken or
which may be taken at any annual or special meeting of the stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of any such corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
3
<PAGE>
ARTICLE II
Board of Directors
SECTION 1. Number and Term of Office. The business and affairs of the
Corporation shall be managed by or under the direction of a Board of Directors,
none of whom need be stockholders of the Corporation. The number of Directors
constituting the Board of Directors shall be nine. The Directors shall, except
as hereinafter otherwise provided for filling vacancies, be elected at the
annual meeting of stockholders, and shall hold office until their respective
successors are elected and qualified or until their earlier resignation or
removal.
SECTION 2. Nomination of Investor Directors. CDR-PC Acquisition, L.L.C.
("Investor") shall have the right to nominate three Directors ("Investor
Directors") for election by the stockholders, provided,
(a) if the total number of shares of common stock of the
Corporation owned by Investor or issuable pursuant to special warrants
and warrants held by Investor ("Investor's Total Securities") declines
by more than 33 1/3% but less than 66 2/3% from Investor's Total
Securities at June 10, 1998 by reason of sales or other dispositions of
common stock, warrants or special warrants by Investor, Investor shall
have the right to nominate two Investor Directors;
(b) if Investor's Total Securities decline by 66 2/3% or more
from Investor's Total Securities at June 10, 1998, but Investor's
Percentage Interest (as defined below) remains at least 5% of the
outstanding Voting Securities of the Corporation, by reason of sales or
other dispositions of common stock, warrants or special warrants by
Investor, Investor shall have the right to nominate one Investor
Director;
(c) in the event that the size of the Board of Directors shall
be increased, Investor shall have the right to at least proportionate
representation on the Board of Directors following such increase based
on the composition of the Board of Directors as between Investor
Directors and non-Investor Directors immediately prior to such
increase; and
(d) if the Chief Executive Officer of the Corporation is not
then a member of the Board of Directors or a nominee for election as a
Director, Investor shall be entitled to approve an additional nominee
to the Board of Directors.
For purposes hereof, "Investor's Percentage Interest" shall have the meaning
given the term "Purchaser's Percentage Interest" in that certain Investment
Agreement dated January 12, 1998, as amended, between Investor and the
Corporation (the "Investment Agreement"), and "Voting Securities" shall have the
meaning given that term in the Investment Agreement.
4
<PAGE>
SECTION 3. Removal, Vacancies and Additional Directors. The
stockholders may, at any special meeting the notice of which shall state that it
is called for that purpose, remove, with or without cause, any Director and fill
the vacancy; provided that whenever any Director shall have been elected by the
holders of any class of stock of the Corporation voting separately as a class
under the provisions of the Certificate of Incorporation, such Director may be
removed and the vacancy filled only by the holders of that class of stock voting
separately as a class; provided, further, that Investor shall have the right to
nominate the person to fill any vacancy as necessary to maintain the number of
Investor Dirctors at the number Investor is entitled to nominate pursuant to
Section 2 of this Article II. Vacancies caused by any such removal and not
filled by the stockholders at the meeting at which such removal shall have been
made, or any vacancy caused by the death or resignation of any Director or for
any other reason, and any newly created directorship resulting from any increase
in the authorized number of Directors, may be filled by the affirmative vote of
a majority of the Directors then in office, although less than a quorum, and any
Director so elected to fill any such vacancy or newly created directorship shall
hold office until his successor is elected and qualified or until his earlier
resignation or removal; provided, that Investor shall have the right to
designate the person to fill any vacancy as necessary to maintain the number of
Investor Directors at the number Investor is entitled to nominate pursuant to
Section 2 of this Article II.
When one or more Directors shall resign effective at a future date, a
majority of the Directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office as herein provided in connection with the
filling of other vacancies; provided, that Investor shall have the right to
designate the persons to fill any such vacancies as necessary to maintain the
number of Investor Directors at the number Investor is entitled to nominate
pursuant to Section 2 of this Article II
SECTION 4. Place of Meeting. The Board of Directors may hold its
meetings in such place or places in the State of Delaware or outside the State
of Delaware as the Board from time to time shall determine.
SECTION 5. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as the Board from time to time by
resolution shall determine. No notice shall be required for any regular meeting
of the Board of Directors; but a copy of every resolution fixing or changing the
time or place of regular meetings shall be mailed to every Director at least
five days before the first meeting held in pursuance thereof.
SECTION 6. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by direction of the Chairman of the Board, the
President or by any two of the Directors then in office.
Notice of the day, hour and place of holding of each special meeting
shall be given by mailing the same at least two days before the meeting or by
causing the same to be
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transmitted by telegraph, cable or wireless at least one day before the meeting
to each Director. Unless otherwise indicated in the notice thereof, any and all
business other than an amendment of these By-Laws may be transacted at any
special meeting, and an amendment of these By-Laws may be acted upon if the
notice of the meeting shall have stated that the amendment of these ByLaws is
one of the purposes of the meeting. At any meeting at which every Director shall
be present, even though without any notice, any business may be transacted,
including the amendment of these By-Laws.
SECTION 7. Quorum. Subject to the provisions of Section 3 and Section 9
of this Article II, a majority of the members of the Board of Directors in
office (but in no case less than one-third of the total number of Directors nor
less than two Directors) shall constitute a quorum for the transaction of
business and the vote of the majority of the Directors present at any meeting of
the Board of Directors at which a quorum is present shall be the act of the
Board of Directors. If at any meeting of the Board there is less than a quorum
present, a majority of those present may adjourn the meeting from time to time.
SECTION 8. Organization. So long as Investor has the right to nominate
at least two directors under Section 2 of this Article II, Investor may
designate the Chairman of the Board, provided, that the Chairman of the Board,
if designated by Investor, shall be an Investor Director. The Chairman of the
Board shall preside at all meetings of the Board of Directors. In the absence of
the Chairman of the Board, an acting Chairman shall be elected from the
Directors present to preside at such meeting. The Secretary of the Corporation
shall act as Secretary of all meetings of the Directors; but in the absence of
the Secretary, the Chairman may appoint any person to act as Secretary of the
meeting.
SECTION 9. Supermajority Voting Provisions. So long as Investor has the
right to designate at least two nominees to the Board of Directors pursuant to
Section 2 of this Article II, the following actions shall require the
affirmative vote of not less than three-fourths of the Directors:
(a) any issuance of Equity Securities (as defined below) other
than (i) issuances pursuant to employee stock option or incentive
compensation plans of Equity Securities (other than in respect of
options outstanding as of January 12, 1998) in an aggregate amount not
to exceed 5% of the common stock outstanding on June 10, 1998 on a
fully diluted basis ("Permitted Options"), or (2) issuances pursuant to
acquisitions or in public offerings, such issuances not to exceed 5% of
the common stock outstanding on June 10, 1998 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;
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(b) (1) any merger, consolidation or other business
combination to which the Corporation is a party or any decision whether
to approve a tender offer involving the Equity Securities, in a case
other than a Cash Transaction (as defined below) or a Permitted
Securities Transaction (as defined below) or (2) any amendment of any
shareholder rights plan (or "poison pill") maintained by the
Corporation and any redemption of the rights issued thereunder, except
to permit a Cash Transaction or a Permitted Securities Transaction;
(c) 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 Corporation, in any case other than a Cash
Transaction or a Permitted Securities Transaction;
(d) any major recapitalization or similar transaction
involving the Corporation;
(e) any dissolution or complete or partial liquidation of the
Corporation; or
(f) any amendment or modification of the Certificate of
Incorporation or these By-Laws that is inconsistent with the terms of
the Investment Agreement and the rights afforded to Investor
thereunder.
For purposes hereof, the terms "Equity Securities," "Cash Transaction" and
"Permitted Securities Transaction" shall have the meaning given such terms in
the Investment Agreement.
SECTION 10. Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the Directors of the Corporation. The
Board may designate one or more Directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Subject to any law or stock exchange
rule prohibiting committee membership by affiliates of the Corporation, any
committee designated by the Board of Directors shall have at least proportionate
representation by Investor Directors, based on the composition of the Board of
Directors as between Investor Directors and Non-Investor Directors, and
Directors shall be designated as alternates or to replace absent or disqualified
members in such a manner to preserve such proportionate representation. Any such
committee, to the extent provided by resolution passed by a majority of the
whole Board, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and the affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may
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require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending these By-Laws; unless such resolution, these By-Laws,
or the Certificate of Incorporation expressly so provide, no such committee
shall have the power or authority to declare a dividend or to authorize the
issuance of stock; and in no event shall any such committee have the power or
authority to take any action which would require the affirmative vote of not
less than three-fourths of the Directors pursuant to Section 9 of this Article
II.
SECTION 11. Conference Telephone Meetings. Unless otherwise restricted
by the Certificate of Incorporation or by these By-Laws, the members of the
Board of Directors or any committee designated by the Board, may participate in
a meeting of the Board or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute presence in person at such meeting.
SECTION 12. Consent of Directors or Committee in Lieu of Meeting.
Unless otherwise restricted by the Certificate of Incorporation or by these
By-Laws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.
ARTICLE III
Officers
SECTION 1. Officers. The officers of the Corporation shall be a
President, one or more Vice Presidents, a Secretary and a Treasurer, and such
additional officers, if any, as shall be elected by the Board of Directors
pursuant to the provisions of Section 7 of this Article III. The President, one
or more Vice Presidents, the Secretary and the Treasurer shall be elected by the
Board of Directors at its first meeting after each annual meeting of the
stockholders. The failure to hold such election shall not of itself terminate
the term of office of any officer. All officers shall hold office at the
pleasure of the Board of Directors. Any officer may resign at any time upon
written notice to the Corporation. Officers may, but need not, be Directors. Any
number of offices may be held by the same person.
All officers, agents and employees shall be subject to removal, with or without
cause, at any time by the Board of Directors. The removal of an officer without
cause shall be without prejudice to his contract rights, if any. The election or
appointment of an officer shall not of itself create contract rights. All agents
and employees other than officers elected by the Board of Directors
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shall also be subject to removal, with or without cause, at any time by the
officers appointing them.
Any vacancy caused by the death of any officer, his resignation, his removal, or
otherwise, may be filled by the Board of Directors, and any officer so elected
shall hold office at the pleasure of the Board of Directors.
In additional to the powers and duties of the officers of the Corporation as set
forth in these ByLaws, the officers shall have such authority and shall perform
such duties as from time to time may be determined by the Board of Directors.
SECTION 2. Powers and Duties of the President. Unless otherwise
specified by the Board of Directors, the President shall be the Chief Executive
Officer of the Corporation and, subject to the control of the Board of
Directors, shall have general charge and control of all the Corporation's
business and affairs, and shall have all powers and perform all duties incident
to the office of President. In the absence of the Chairman of the Board, he
shall preside at all meetings of the stockholders and at all meetings of the
Board of Directors and shall have such other powers and perform such other
duties as may from time to time be assigned to him by these By-Laws or by the
Board of Directors.
SECTION 3. Powers and Duties of the Vice Presidents. Each Vice
President shall have all powers and shall perform all duties incident to the
office of Vice President and shall have such other powers and perform such other
duties as may from time to time be assigned to him by these By-Laws or by the
Board of Directors or the President.
SECTION 4. Powers and Duties of the Secretary. The Secretary shall keep
the minutes of all meetings of the Board of Directors and the minutes of all
meetings of the stockholders in books provided for that purpose; he shall attend
to the giving or serving of all notices of the Corporation; he shall have
custody of the corporate seal of the Corporation and shall affix the same to
such documents and other papers as the Board of Directors or the President shall
authorize and direct; he shall have charge of the stock certificate books,
transfer books and stock ledgers and such other books and papers as the Board of
Directors or the President shall direct, all of which shall at all reasonable
times be open to the examination of any Director, upon application, at the
office of the Corporation during business hours; and he shall have all powers
and shall perform all duties incident to the office of Secretary and shall also
have such other powers and shall perform such other duties as may from time to
time be assigned to him by these By-Laws or by the Board of Directors or the
President.
SECTION 5. The Powers and Duties of the Treasurer. The Treasurer shall
have custody of, and when proper shall pay out, disburse or otherwise dispose
of, all funds and securities of the Corporation which may have come into his
hands; he may endorse on behalf of the Corporation for collection checks, notes
and other obligations and shall deposit the same to the credit of the
Corporation in such bank or banks or depositary or depositaries as the Board of
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Directors may designate; he shall sign all receipts and vouchers for payments
made to the Corporation; he shall enter or cause to be entered regularly in the
books of the Corporation kept for the purpose full and accurate accounts of all
moneys received or paid or otherwise disposed of by him and whenever required by
the Board of Directors or the President shall render statements of such
accounts; he shall, at all reasonable times, exhibit his books and accounts to
any Director of the Corporation upon application at the office of the
Corporation during business hours; and he shall have all powers and he shall
perform all duties incident to the office of Treasurer and shall also have such
other powers and shall perform such other duties as may from time to time be
assigned to him by these By-Laws or by the Board of Directors or the President.
SECTION 6. Additional Officers. The Board of Directors may from time to
time elect such other officers (who may but need not be Directors), including a
Controller, Assistant Treasurers, Assistant Secretaries and Assistant
Controllers, as the Board may deem advisable and such officers shall have such
authority and shall perform such duties as may from time to time be assigned to
them by the Board of Directors or the President.
The Board of Directors may from time to time by resolution delegate to
any Assistant Treasurer or Assistant Treasurers any of the powers or duties
herein assigned to the Treasurer; and may similarly delegate to any Assistant
Secretary or Assistant Secretaries any of the powers or duties herein assigned
to the Secretary.
SECTION 7. Giving of Bond by Officers. All officers of the Corporation,
if required to do so by the Board of Directors, shall furnish bonds to the
Corporation for the faithful performance of their duties, in such penalties and
with such conditions and security as the Board shall require.
SECTION 8. Voting Upon Stocks. Unless otherwise ordered by the Board of
Directors, the President or any Vice President shall have full power and
authority on behalf of the Corporation to attend and to act and to vote, or in
the name of the Corporation to execute proxies to vote, at any meeting of
stockholders of any corporation in which the Corporation may hold stock, and at
any such meetings shall possess and may exercise, in person or by proxy, any and
all rights, powers and privileges incident to the ownership of such stock. The
Board of Directors may from time to time, by resolution, confer like powers upon
any other person or persons.
SECTION 9. Compensation of Officers. The officers of the Corporation
shall be entitled to receive such compensation for their services as shall from
time to time be determined by the Board of Directors.
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ARTICLE IV
Indemnification of Directors and Officers
SECTION 1. Nature of Indemnity. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was or has agreed to become a Director or officer of the Corporation, or is or
was serving or has agreed to serve at the request of the Corporation as a
Director or officer of another corporation, partnership, joint venture, trust or
other enterprise, or by reason of any action alleged to have been taken or
omitted in such capacity, and may indemnify any person who was or is a party or
is threatened to be made a party to such an action, suit or proceeding by reason
of the fact that he is or was or has agreed to become an employee or agent of
the Corporation, or is or was serving or has agreed to serve at the request of
the Corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or on his behalf in connection with such action, suit or
proceeding and any appeal therefrom, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; except that in the case of
an action or suit by or in the right of the Corporation to procure a judgment in
its favor (1) such indemnification shall be limited to expenses (including
attorneys' fees) actually and reasonably incurred by such person in the defense
or settlement of such action or suit, and (2) no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
SECTION 2. Successful Defense. To the extent that a Director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section 1
of this Article IV or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
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SECTION 3. Determination that Indemnification is Proper. Any
indemnification of a Director or officer of the Corporation under Section 1 of
this Article IV (unless ordered by a court) shall be made by the Corporation
unless a determination is made that indemnification of the Director or officer
is not proper in the circumstances because he has not met the applicable
standard of conduct set forth in Section 1. Any indemnification of an employee
or agent of the Corporation under Section 1 (unless ordered by a court) may be
made by the Corporation upon a determination that indemnification of the
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 1. Any such determination
shall be made (1) by the Board of Directors by a majority vote of a quorum
consisting of Directors who were not parties to such action, suit or proceeding,
or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested Directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
SECTION 4. Advance Payment of Expenses. Unless the Board of Directors
otherwise determines in a specific case, expenses incurred by a Director or
officer in defending a civil or criminal action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of the Director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article IV.
Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate. The
Board of Directors may authorize the Corporation's legal counsel to represent
such Director, officer, employee or agent in any action, suit or proceeding,
whether or not the Corporation is a party to such action, suit or proceeding.
SECTION 5. Survival; Preservation of Other Rights. The foregoing
indemnification provisions shall be deemed to be a contract between the
Corporation and each Director, officer, employee and agent who serves in any
such capacity at any time while these provisions as well as the relevant
provisions of the Delaware General Corporation Law are in effect and any repeal
or modification thereof shall not affect any right or obligation then existing
with respect to any state of facts then or previously existing or any action,
suit, or proceeding previously or thereafter brought or threatened based in
whole or in part upon any such state of facts. Such a contract right may not be
modified retroactively without the consent of such Director, officer, employee
or agent.
The indemnification provided by this Article IV shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person. The
corporation may enter into an agreement with any of its Directors, officers,
employees or agents providing for indemnification and advancement of expenses,
including attorneys' fees, that may change, enhance, qualify or limit any right
to indemnification or advancement of expenses created by this Article IV.
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SECTION 6. Severability. If this Article IV or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Director or officer and may
indemnify each employee or agent of the Corporation as to costs, charges, and
expenses (including attorneys' fees), judgment, fines and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Corporation, to the fullest extent permitted by any applicable
portion of this Article IV that shall not have been invalidated and to the
fullest extent permitted by applicable law.
SECTION 7. Subrogation. In the event of payment of indemnification to a
person described in Section 1 of this Article IV, the Corporation shall be
subrogated to the extent of such payment to any right of recovery such person
may have and such person, as a condition of receiving indemnification from the
Corporation, shall execute all documents and do all things that the Corporation
may deem necessary or desirable to perfect such right of recovery, including the
execution of such documents necessary to enable the Corporation effectively to
enforce any such recovery.
SECTION 8. No Duplication of Payments. The Corporation shall not be
liable under this Article IV to make any payment in connection with any claim
made against a person described in Section 1 of this Article IV to the extent
such person has otherwise received payment (under any insurance policy, by-law
or otherwise) of the amounts otherwise indemnified hereunder.
ARTICLE V
Stock-Seal-Fiscal Year
SECTION 1. Certificates For Shares of Stock. The certificates for
shares of stock of the Corporation shall be in such form, not inconsistent with
the Certificate of Incorporation, as shall be approved by the Board of
Directors. All certificates shall be signed by the President or a Vice President
and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, and shall not be valid unless so signed.
In case any officer or officers who shall have signed any such
certificate or certificates shall cease to be such officer or officers of the
Corporation, whether because of death, resignation or otherwise, before such
certificate or certificates shall have been delivered by the Corporation, such
certificate or certificates may nevertheless be issued and delivered as though
the person or persons who signed such certificate or certificates had not ceased
to be such officer or officers of the Corporation.
All certificates for shares of stock shall be consecutively numbered as
the same are issued. The name of the person owning the shares represented
thereby with the number of such shares and the date of issue thereof shall be
entered on the books of the Corporation.
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Except as hereinafter provided, all certificates surrendered to the
Corporation for transfer shall be canceled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered and canceled.
SECTION 2. Lost, Stolen or Destroyed Certificates. Whenever a person
owning a certificate for shares of stock of the Corporation alleges that it has
been lost, stolen or destroyed, he shall file in the office of the Corporation
an affidavit setting forth , to the best of his knowledge and belief, the time,
place and circumstances of the loss, theft or destruction, and, if required by
the Board of Directors, a bond of indemnity or other indemnification sufficient
in the opinion of the Board of Directors to indemnify the Corporation and its
agents against any claim that may be made against it or them on account of the
alleged loss, theft or destruction of any such certificate or the issuance of a
new certificate in replacement therefor. Thereupon the Corporation may cause to
be issued to such person a new certificate in replacement for the certificate
alleged to have been lost, stolen or destroyed. Upon the stub of every new
certificate so issued shall be noted the fact of such issue and the number, date
and the name of the registered owner of the lost, stolen or destroyed
certificate in lieu of which the new certificate is issued.
SECTION 3. Transfer of Shares. Shares of stock of the Corporation shall
be transferred on the books of the Corporation by the holder thereof, in person
or by his attorney duly authorized in writing, upon surrender and cancellation
of certificates for the number of shares of stock to be transferred, except as
provided in Section 2 of this Article IV.
SECTION 4. Regulations. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 5. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting or to receive payment of any dividend or other distribution or
allotment, of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
as the case may be, the Board of Directors may fix, in advance, a record date,
which shall not be (i) more than sixty (60) nor less than ten (10) days before
the date of such meeting, or (ii) in the case of corporate action to be taken by
consent in writing without a meeting, prior to, or more than ten (10) days
after, the date upon which the resolution fixing the record date is adopted by
the Board of Directors, or (iii) more than sixty (60) days prior to any other
action.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; the record date for determining
stockholders entitled to express consent to corporate action in writing without
a meeting, when no prior action by the Board or Directors is necessary, shall be
the day on which the first written
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consent is delivered to the Corporation; and the record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
SECTION 6. Dividends. Subject to the provisions of the Certificate of
Incorporation, and dividends declared upon the stock of the Corporation shall be
payable on such date or dates as the Board of Directors shall determine. If the
date fixed for the payment of any dividend shall in any year fall upon a legal
holiday, then the dividend payable on such date shall be paid on the next day
not a legal holiday.
SECTION 7. Corporate Seal. The Board of Directors shall provide a
suitable seal, containing the name of the Corporation, which seal shall be kept
in the custody of the Secretary. A duplicate of the seal may be kept and be used
by any officer of the Corporation designated by the Board of Directors or the
President.
SECTION 8. Fiscal Year. The fiscal year of the Corporation shall be
such fiscal year as the Board of Directors from time to time by resolution shall
determine.
ARTICLE VI
Miscellaneous Provisions
SECTION 1. Checks, Notes, Etc. All checks, drafts, bills of exchange,
acceptance, notes or other obligations or orders for the payment of money shall
be signed and, if so required by the Board of Directors, countersigned by such
officers of the Corporation and/or other persons as the Board of Directors from
time to time shall designate.
Checks, drafts, bills of exchange, acceptance, notes, obligations and
orders for the payment of money made payable to the Corporation may be endorsed
for deposit to the credit of the Corporation with a duly authorized depository
by the Treasurer and/or such other officers or persons as the Board of Directors
from time to time may designate.
SECTION 2. Loans. No loans and no renewals of any loans shall be
contracted on behalf of the Corporation except as authorized by the Board of
Directors. When authorized to do so, any officer or agent of the Corporation may
effect loans and advances for the Corporation from any bank, trust company or
other institution or from any firm, corporation or individual, and for such
loans and advances may make, execute and deliver promissory notes, bond or other
evidences of indebtedness of the Corporation. When authorized so to do, any
officer or agent of the Corporation may pledge, hypothecate or transfer, as
security for the payment of any and all loans, advances, indebtedness and
liabilities of the Corporation, any and all stocks, securities and
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other personal property at any time held by the Corporation, and to that end may
endorse, assign and deliver the same. Such authority may be general or confined
to specific instances.
SECTION 3. Contracts. Except as otherwise provided in these By-Laws or
by law or as otherwise directed by the Board of Directors, the President or any
Vice President shall be authorized to execute and deliver, in the name and on
behalf of the Corporation, all agreements, bonds, contracts, deeds, mortgages,
and other instruments, either for the Corporation's own account or in a
fiduciary or other capacity, and the seal of the Corporation, if required, shall
be affixed thereto by any of such officers or the Secretary or an Assistant
Secretary. The Board of Directors, the President or any Vice President
designated by the Board of Directors or the President may authorize any other
officer, employee or agent to execute and deliver, in the name and on behalf of
the Corporation, agreements, bonds, contracts, deeds, mortgages, and other
instruments, either for the Corporation's own account or in a fiduciary or other
capacity, and, if appropriate, to affix the seal of the Corporation thereto. The
grant of such authority by the Board or any such officer may be general or
confined to specific instances.
SECTION 4. Waivers of Notice. Whenever any notice whatever is required
to be given by law, by the Certificate of Incorporation or by these By-Laws to
any person or persons, a waiver thereof in writing, signed by the person or
persons entitled to the notice, whether before or after the time stated therein,
shall be deemed equivalent thereto.
SECTION 5. Offices Outside of Delaware. Except as otherwise required by
the laws of the State of Delaware, the Corporation may have an office or offices
and keep its books, documents and papers outside of the State of Delaware at
such place or places as from time to time may be determined by the Board of
Directors or the President.
ARTICLE VII
Amendments
Subject to Section 9 of Article II, these By-Laws and any amendment
thereof may be altered, amended or repealed, or new By-Laws may be adopted, by
the Board of Directors at any regular or special meeting by the affirmative vote
of a majority of all of the members of the Board, provided in the case of any
special meeting at which all of the members of the Board are not present, that
the notice of such meeting shall have stated that the amendment of these ByLaws
was one of the purposes of the meeting; but these By-Laws and any amendment
thereof may be altered, amended or repealed or new By-Laws may be adopted by the
holders of a majority of the total outstanding stock of the Corporation entitled
to vote at any annual meeting or at any special meeting, provided, in the case
of any special meeting, that notice of such proposed alteration, amendment,
repeal or adoption is included in the notice of the meeting. Notwithstanding any
provision herein to the contrary, these By-Laws may not be amended in any way
that would cause them to be inconsistent with the provisions of the Investment
Agreement.
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EXHIBIT 11.1
U.S. OFFICE PRODUCTS COMPANY
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
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July 25, July 26,
1998 1997
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<S> <C> <C>
Basic income (loss) per share:
Income (loss) from continuing operations
before extraordinary items $ (83,543) $ 9,035
Income (loss) from discontinued operations,
net of income taxes (1,294) 10,951
Extraordinary items - net loss on early
termination of debt instruments 269
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Net income (loss) $ (85,106) $ 19,986
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Weighted average shares outstanding 35,073 26,579
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Basic income (loss) per share:
Income (loss) from continuing operations
before extraordinary items $ (2.38) $ .34
Income (loss) from discontinued operations,
net of income taxes (0.04) .41
Extraordinary items (0.01)
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Net income (loss) $ (2.43) $ .75
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Diluted income (loss) per share:
Income (loss) from continuing operations
before extraordinary items $ (83,543) $ 9,035
Income (loss) from discontinued operations,
net of income taxes (1,294) 10,951
Extraordinary items - loss on early
termination of debt instruments 269
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Net income (loss) $ (85,106) $ 19,986
----------- -----------
----------- -----------
Weighted average shares outstanding 35,073 26,579
Common stock equivalents from stock options 459
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Total weighted average shares outstanding 35,073 27,038
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Diluted income (loss) per share:
Income (loss) from continuing operations
before extraordinary item $ (2.38) $ .33
Income (loss) from discontinued operations,
net of income taxes (0.04) .41
Extraordinary items (0.01)
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Net income (loss) $ (2.43) $ .74
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-24-1999
<PERIOD-START> APR-26-1998
<PERIOD-END> JUL-25-1998
<CASH> 27,447
<SECURITIES> 0
<RECEIVABLES> 321,432
<ALLOWANCES> 9,556
<INVENTORY> 224,322
<CURRENT-ASSETS> 693,691
<PP&E> 227,116
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,037,012
<CURRENT-LIABILITIES> 303,945
<BONDS> 1,200,016
0
0
<COMMON> 37
<OTHER-SE> 515,211
<TOTAL-LIABILITY-AND-EQUITY> 2,037,012
<SALES> 651,949
<TOTAL-REVENUES> 651,949
<CGS> 474,285
<TOTAL-COSTS> 474,285
<OTHER-EXPENSES> 261,010<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,888
<INCOME-PRETAX> (101,458)
<INCOME-TAX> (17,915)
<INCOME-CONTINUING> (83,543)
<DISCONTINUED> (1,294)
<EXTRAORDINARY> 269
<CHANGES> 0
<NET-INCOME> (85,106)
<EPS-PRIMARY> (2.43)
<EPS-DILUTED> (2.43)
<FN>
<F1>Includes $97,503 of one-time charges related to the completion of the
Strategic Restructuring Plan and $8,726 of one time operating restructuring
costs.
</TABLE>
