<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 24, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO
Commission File Number 0-25372
U.S. OFFICE PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 52-1906050
(State of other jurisdiction (I.R.S. Employer
incorporation or organization.) Identification No.)
</TABLE>
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 March 9, 1998, there were 133,174,586 shares of common stock
outstanding.
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet......................................................................... 3
January 24, 1998 (unaudited ) and April 26, 1997
Consolidated Statement of Income................................................................... 4
For the three months ended January 24, 1998 (unaudited) and
January 25, 1997 (unaudited) and for the nine months ended
January 24, 1998 (unaudited) and January 25, 1997 (unaudited)
Consolidated Statement of Cash Flows............................................................... 5
For the nine months ended January 24, 1998 (unaudited) and
January 25, 1997 (unaudited)
Notes to Consolidated Financial Statements......................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 13
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................ 23
Signatures.............................................................................................. 24
Exhibit Index........................................................................................... 25
</TABLE>
Page 2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
<TABLE>
<CAPTION>
JANUARY 24,
1998 APRIL 26,
ASSETS (UNAUDITED) 1997
- ----------- ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 45,258 $ 44,026
Accounts receivable, less allowance for doubtful
accounts of $9,110 and $7,337, respectively......................................... 324,976 283,751
Inventories......................................................................... 239,043 225,998
Short-term receivable from discontinued operations.................................. 26,918 51,977
Prepaid expenses and other current assets........................................... 103,624 74,580
------------ ------------
Total current assets.............................................................. 739,819 680,332
Property and equipment, net........................................................... 217,228 182,633
Intangible assets, net................................................................ 903,722 611,474
Other assets.......................................................................... 174,549 113,407
Long-term receivable from discontinued operations..................................... 88,041 59,914
Net assets of discontinued operations................................................. 346,083 59,231
------------ ------------
Total assets...................................................................... $ 2,469,442 $ 1,706,991
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt..................................................................... $ 332,636 $ 144,125
Accounts payable.................................................................... 164,229 153,915
Accrued compensation................................................................ 41,262 32,515
Other accrued liabilities........................................................... 67,654 63,814
------------ ------------
Total current liabilities......................................................... 605,781 394,369
Long-term debt........................................................................ 381,844 380,209
Deferred income taxes................................................................. 2,845 2,458
Other long-term liabilities and minority interests.................................... 6,050 8,807
------------ ------------
Total liabilities................................................................. 996,520 785,843
------------ ------------
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, 133,041,979 and 104,479,004 shares
issued and outstanding, respectively............................................... 133 104
Additional paid-in capital.......................................................... 1,405,883 809,399
Cumulative translation adjustment................................................... (113,022) (5,583)
Retained earnings................................................................... 179,928 117,228
------------ ------------
Total stockholders' equity.......................................................... 1,472,922 921,148
------------ ------------
Total liabilities and stockholders' equity........................................ $ 2,469,442 $ 1,706,991
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
U.S. OFFICE PRODUCTS
COMPANY CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ --------------------------
JANUARY 24, JANUARY 25, JANUARY 24, JANUARY 25,
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues.................................................... $ 665,959 $ 596,790 $ 1,930,113 $ 1,498,320
Cost of revenues............................................ 476,739 427,461 1,390,855 1,077,408
----------- ----------- ------------ ------------
Gross profit............................................. 189,220 169,329 539,258 420,912
Selling, general and administrative expenses................ 146,497 136,480 436,037 344,474
Amortization expense........................................ 5,434 3,642 13,830 8,072
Non-recurring acquisition costs............................. 3,539 7,316
----------- ----------- ------------ ------------
Operating income......................................... 37,289 25,668 89,391 61,050
Interest expense............................................ 9,480 10,882 27,534 27,540
Interest income............................................. (417) (724) (1,545) (6,048)
Other (income) expense...................................... 149 (287) (6,369) (4,073)
----------- ----------- ------------ ------------
Income from continuing operations before provision for
income taxes and extraordinary item....................... 28,077 15,797 69,771 43,631
Provision for income taxes.................................. 12,646 7,030 32,535 18,238
----------- ----------- ------------ ------------
Income from continuing operations before extraordinary
item...................................................... 15,431 8,767 37,236 25,393
Income from discontinued operations, net of income taxes.... 3,085 1,997 25,464 20,411
----------- ----------- ------------ ------------
Income before extraordinary item............................ 18,516 10,764 62,700 45,804
Extraordinary item--loss on early termination of credit
facility, net of income tax benefit....................... 612
----------- ----------- ------------ ------------
Net income.................................................. $ 18,516 $ 10,764 $ 62,700 $ 45,192
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Basic income per share data:
Income from continuing operations before extraordinary
item..................................................... $ 0.12 $ 0.10 $ 0.32 $ 0.30
Income from discontinued operations....................... 0.03 0.02 0.23 0.24
Extraordinary item........................................ (0.01)
----------- ----------- ------------ ------------
Net income................................................ $ 0.15 $ 0.12 $ 0.55 $ 0.53
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Diluted income per share data:
Income from continuing operations before extraordinary
item..................................................... $ 0.12 $ 0.10 $ 0.32 $ 0.29
Income from discontinued operations....................... 0.02 0.02 0.22 0.23
Extraordinary item........................................ (0.01)
----------- ----------- ------------ ------------
Net income................................................ $ 0.14 $ 0.12 $ 0.54 $ 0.51
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Pro forma income from continuing operations before
extraordinary item (see Note 4)........................... $ 15,431 $ 7,650 $ 37,236 $ 22,153
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Pro forma basic income per share from continuing operations
before extraordinary item................................. $ 0.12 $ 0.09 $ 0.32 $ 0.26
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Pro forma diluted income per share from continuing
operations before extraordinary item...................... $ 0.12 $ 0.08 $ 0.32 $ 0.25
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
U.S. OFFICE PRODUCTS
COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
JANUARY 24, JANUARY 25,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................................. $ 62,700 $ 45,192
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Income from discontinued operations.................................................. (25,464) (20,411)
Depreciation and amortization........................................................ 41,787 23,233
Non-recurring acquisition costs...................................................... 7,316
Unrealized foreign currency gain..................................................... (3,420)
Deferred income taxes................................................................ 73 3,600
Extraordinary loss................................................................... 612
Equity in net income of affiliate.................................................... (878) (265)
Gain on sale of investment........................................................... (1,059)
Changes in assets and liabilities (net of assets acquired
and liabilities assumed in business combinations):
Accounts receivable................................................................. (29,940) (32,154)
Inventory........................................................................... (14,417) (6,718)
Prepaid expenses and other current assets........................................... (3,909) (1,539)
Accounts payable.................................................................... 2,245 (22,922)
Accrued liabilities................................................................. 5,699 (1,771)
----------- -----------
Net cash provided by (used in) operating activities................................ 36,837 (9,247)
----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received....................................... (33,642) (323,813)
Payments of acquisition and restructuring costs....................................... (5,771) (4,094)
Additions to property and equipment, net of disposals................................. (28,200) (15,891)
Investment in affiliate............................................................... (40,773) (41,270)
Proceeds from sale of investment...................................................... 5,729
Other................................................................................. 3,190 (5,476)
----------- -----------
Net cash used in investing activities............................................. (99,467) (390,544)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock................................................ 8,239 41,868
Proceeds from issuance of long-term debt.............................................. 457 224,080
Payments on long-term debt............................................................ (10,647) (163,112)
Net advances to discontinued operations............................................... (99,213) (76,021)
Proceeds from short-term debt, net.................................................... 172,000 259,705
Payments to terminate credit facility................................................. (261)
Payments of dividends at Pooled Companies............................................. (6,122)
Capital contributed by stockholders of Pooled Companies............................... 1,814
Adjustment to conform fiscal year-ends of certain Pooled Companies.................... 286
----------- -----------
Net cash provided by financing activities......................................... 70,836 282,237
----------- -----------
Effect of exchange rates on cash and cash equivalents................................... (3,159) (345)
----------- -----------
Cash used in discontinued operations.................................................... (3,815) (3,170)
----------- -----------
Net increase (decrease) in cash and cash equivalents.................................... 1,232 (121,069)
Cash and cash equivalents at beginning of period........................................ 44,026 183,483
----------- -----------
Cash and cash equivalents at end of period.............................................. $ 45,258 $ 62,414
----------- -----------
----------- -----------
</TABLE>
(Continued)
Page 5
<PAGE>
U.S. OFFICE PRODUCTS
COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)(Unaudited)(Continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
JANUARY 24, JANUARY 25,
1998 1997
----------- -----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid......................................................................... $ 26,962 $ 28,980
Income taxes paid..................................................................... $ 24,017 $ 18,852
</TABLE>
The Company issued common stock and cash in connection with certain
business combinations accounted for under the purchase method for the nine
months ended January 24, 1998 and January 25, 1997. The fair values of the
assets and liabilities at the dates of the acquisitions are presented as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
JANUARY 24, JANUARY 25,
1998 1997
----------- -----------
<S> <C> <C>
Accounts receivable..................................................................... $ 27,284 $ 88,202
Inventory............................................................................... 18,970 119,584
Prepaid expenses and other current assets............................................... 15,806 13,559
Property and equipment.................................................................. 52,695 107,202
Intangible assets....................................................................... 371,606 432,219
Other assets............................................................................ 34,759 5,174
Short-term debt......................................................................... (8,755) (12,819)
Accounts payable........................................................................ (20,058) (89,338)
Accrued liabilities..................................................................... (13,870) (81,506)
Long-term debt.......................................................................... (20,320) (115,017)
Other long-term liabilities and minority interests...................................... (357) (8,262)
----------- -----------
Net assets acquired................................................................. $ 457,760 $ 458,998
----------- -----------
----------- -----------
</TABLE>
The acquisitions accounted for under the purchase method were funded as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
JANUARY 24, JANUARY 25,
1998 1997
----------- -----------
<S> <C> <C>
Common stock............................................................................ $ 424,118 $ 135,185
Cash.................................................................................... 33,642 323,813
----------- -----------
Total................................................................................ $ 457,760 $ 458,998
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 24, 1998
(In thousands, except 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 and give retroactive effect to the results of the companies
acquired in business combinations accounted for under the pooling-of-interests
method during the fiscal year ended April 26, 1997 (the "Pooled Companies") for
all periods presented.
In January 1998, the Company's Board of Directors (the "Board") approved a
comprehensive restructuring plan (the "Strategic Restructuring Plan"). The
principal elements of the Strategic Restructuring Plan are (1) a self-tender
offer by the Company (the "Tender Offer") to purchase 37,037 shares of
Company common stock at $27.00 per share and the incurrence of significant
additional debt to pay a portion of the purchase price of the shares in the
Tender Offer; (2) after acceptance of shares in the Tender Offer, the pro
rata distribution to U.S. Office Products shareholders of shares of four
companies (the "Spin-Off Companies") that will conduct the Company's current
print management, technology solutions, educational supplies and corporate
travel services businesses (the "Distributions"); and (3) following
acceptance of shares in the Tender Offer and the record date for the
Distributions, the sale to an affiliate of Clayton, Dubilier & Rice, Inc.
("CD&R") of equity interests in U.S. Office Products (the "Equity
Investment"). In these transactions, CD&R will not acquire any equity
interest in the Spin-Off Companies. The Distributions are expected to be
tax-free to both the Company and its stockholders (except for any cash in
lieu of fractional shares received by stockholders). The Company expects the
Strategic Restructuring Plan to be completed in the second calendar quarter
of 1998. The transactions are subject to a number of conditions, including
financing, approval of the Company's shareholders and receipt of regulatory
approvals. 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. In addition, as a result
of adoption of the Strategic Restructuring Plan and as required by generally
accepted accounting principles, the Company has restated its consolidated
financial statements to reclassify 22 business combinations completed during
the nine months ended January 24, 1998 (include three during the three months
ended January 24, 1998), which originally were accounted for, or were
expected to be accounted for, under the pooling-of-interests method, to the
purchase method. These 22 acquisitions include the Company's acquisition of
Mail Boxes Etc. in November 1997.
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 26, 1997 and the Company's pro forma combined
financial statements, and the related notes to each thereto, included in a
Current Report on Form 8-K that the Company expects to file with the
Securities and Exchange Commission on March 11, 1998. The audited
consolidated financial statements have been restated to reflect (i) the
Spin-Off Companies as discontinued operations; and (ii) the change in
accounting treatment of the 22 business combinations completed during the
nine months ended January 24, 1998, from the pooling-of-interests method to
the purchase method.
NOTE 2--DISCONTINUED OPERATIONS
As a result of the Board's approval of the Strategic Restructuring Plan in
January 1998, the Spin-Off Companies are reflected as discontinued operations
for all periods presented in the Company's consolidated financial statements.
7
<PAGE>
The income from discontinued operations included in the consolidated
statement of income represents the sum of the results of the Spin-Off
Companies for the periods presented and is summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Three months ended January 24, 1998:
Revenues....................................... $ 86,730 $ 34,150 $ 49,391 $ 62,907 $ 233,178
Operating income (loss)........................ 4,655 1,284 (3,247) 5,104 7,796
Income (loss) before provision for (benefit
from) income taxes........................... 4,137 1,122 (5,058) 5,104 5,305
Provision for (benefit from) income taxes...... 1,851 564 (2,403) 2,208 2,220
Income (loss) from discontinued operations, net
of income taxes.............................. 2,286 558 (2,655) 2,896 3,085
Three months ended January 25, 1997:
Revenues....................................... $ 82,966 $ 12,514 $ 29,304 $ 35,133 $ 159,917
Operating income (loss)........................ 4,015 (212) (1,537) 3,311 5,577
Income (loss) before provision for (benefit
from) income taxes........................... 2,396 (225) (2,199) 2,962 2,934
Provision for (benefit from) income taxes...... 541 (16) (1,140) 1,552 937
Income (loss) from discontinued operations, net
of income taxes.............................. 1,855 (209) (1,059) 1,410 1,997
Nine months ended January 24, 1998:
Revenues....................................... $ 260,077 $ 80,707 $ 247,880 $ 142,512 $ 731,176
Operating income............................... 14,028 5,719 21,349 11,630 52,726
Income before provision for income taxes....... 12,577 5,522 16,916 11,644 46,659
Provision for income taxes..................... 5,629 2,794 7,734 5,038 21,195
Income from discontinued operations, net of
income taxes................................. 6,948 2,728 9,182 6,606 25,464
Nine months ended January 25, 1997:
Revenues....................................... $ 244,764 $ 41,527 $ 159,977 $ 101,295 $ 547,563
Operating income............................... 14,750 3,105 10,839 8,448 37,142
Income before provision for income taxes....... 10,259 3,031 7,878 8,182 29,350
Provision for income taxes..................... 2,249 551 4,085 2,054 8,939
Income from discontinued operations, net of
income taxes................................. 8,010 2,480 3,793 6,128 20,411
</TABLE>
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.
8
<PAGE>
The net assets of the discontinued operations included in the Company's
consolidated balance sheet represents the sum of the net assets of the
Spin-Off Companies for the periods presented and are summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
January 24, 1998:
Current assets................................. $ 85,326 $ 22,609 $ 86,676 $ 64,618 $ 259,229
Property, plant and equipment, net............. 31,063 19,406 20,489 5,074 76,032
Intangible assets, net......................... 5,369 85,525 94,651 63,891 249,436
Other assets................................... 5,099 1,002 2,595 508 9,204
Current liabilities............................ (58,449) (20,236) (35,529) (31,252) (145,466)
Long-term liabilities ......................... (10,530) (15,957) (63,307) (12,558) (102,352)
------------ ----------- ------------ ----------- ------------
Net assets of discontinued operations.......... $ 57,878 $ 92,349 $ 105,575 $ 90,281 $ 346,083
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
April 26, 1997:
Current assets................................. $ 81,310 $ 6,935 $ 55,709 $ 30,542 $ 174,496
Property, plant and equipment, net............. 34,175 7,953 14,478 2,164 58,770
Intangible assets, net......................... 705 7,112 20,824 28,641
Other assets................................... 7,807 581 359 2,005 10,752
Current liabilities............................ (66,413) (11,886) (39,712) (20,530) (138,541)
Long-term liabilities.......................... (31,399) (5,218) (35,052) (3,218) (74,887)
------------ ----------- ------------ ----------- ------------
Net assets of discontinued operations.......... $ 26,185 $ 5,477 $ 16,606 $ 10,963 $ 59,231
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
</TABLE>
NOTE 3--STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the nine months ended January 24,
1998 were as follows:
<TABLE>
<S> <C>
Stockholders' equity balance at April 26, 1997.................................. $ 921,148
Issuances of common stock in conjunction with:
Business combinations........................................................... 585,537
Exercise ofstock options, including tax benefits................................ 7,601
Employee stock purchase plan, net of expenses................................... 2,805
Repayment of debt............................................................... 570
Cumulative translation adjustments.............................................. (107,439)
Net income...................................................................... 62,700
---------
Stockholders' equity balance at January 24, 1998................................ $1,472,922
---------
---------
</TABLE>
On November 6, 1997, the Company effected a 3-for-2 split of its common
stock whereby each two shares of common stock were exchanged for three shares 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.
As part of the Strategic Restructuring Plan, it is expected that CD&R
will acquire shares of U.S. Office Products common stock representing 24.9% of
the outstanding shares of the Company's common stock after giving effect to the
issuance of such shares. CD&R also will purchase various warrants that give it
the right to acquire additional shares of common stock in the future.
9
<PAGE>
NOTE 4-UNAUDITED PRO FORMA INCOME TAX INFORMATION The following unaudited pro
forma income tax information is presented in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," as if certain Pooled Companies related to continuing operations which
were subchapter S corporations prior to their business combinations with the
Company, had been subject to federal income taxes throughout the periods
presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
JANUARY 24, JANUARY 25, JANUARY 24, JANUARY 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income from continuing operations before extraordinary item
per the consolidated statement of income.................... $ 15,431 $ 8,767 $ 37,236 $ 25,393
Provision for income taxes.................................... 1,117 3,240
----------- ----------- ----------- -----------
Pro forma income from continuing operations before
extraordinary item.......................................... $ 15,431 $ 7,650 $ 37,236 $ 22,153
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
NOTE 5 -- EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 requires the dual
presentation of basic and diluted EPS on the face of the statement of income.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company has adopted SFAS No. 128 during the three months
ended January 24, 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 item for the periods presented in the
consolidated statement of income.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -------------
<S> <C> <C> <C>
Three months ended January 24, 1998:
Basic EPS.............................................................. $ 15,431 127,626 $ .12
---------
---------
Effect of dilutive employee stock options.............................. 2,512
------------ -------------
Diluted EPS............................................................ $ 15,431 130,138 $ .12
------------ ------------- ---------
------------ ------------- ---------
Three months ended January 25, 1997:
Basic EPS.............................................................. $ 8,767 89,565 $ .10
---------
---------
Effect of dilutive employee stock options.............................. 1,821
------------ -------------
Diluted EPS............................................................ $ 8,767 91,386 $ .10
------------ ------------- ---------
------------ ------------- ---------
Nine months ended January 24, 1998:
Basic EPS.............................................................. $ 37,236 114,758 $ .32
---------
---------
Effect of dilutive employee stock options.............................. 2,427
------------ -------------
Diluted EPS............................................................ $ 37,236 117,185 $ .32
------------ ------------- ---------
------------ ------------- ---------
Nine months ended January 25, 1997:
Basic EPS.............................................................. $ 25,393 85,978 $ .30
---------
---------
Effect of dilutive employee stock options.............................. 1,846
------------ -------------
Diluted EPS............................................................ $ 25,393 87,824 $ .29
------------ ------------- ---------
------------ ------------- ---------
</TABLE>
10
<PAGE>
The Company had additional employee stock options and two series of
convertible debt securities outstanding during the periods presented that were
not included in the computation of diluted EPS because they were anti-dilutive.
NOTE 6--BUSINESS COMBINATIONS
In fiscal 1997, the Company completed a total of 117 business combinations
(96 related to continuing operations and 21 related to discontinued operations),
40 of which were accounted for under the pooling-of-interests method (25 related
to continuing operations and 15 related to discontinued operations) and 77 of
which were accounted for under the purchase method (71 related to continuing
operations and 6 related to discontinued operations). During the nine months
ended January 24, 1998, the Company completed a total of 60 business
combinations (40 related to continuing operations and 20 related to discontinued
operations), all of which were accounted for under the purchase method. During
the three months ended January 24, 1998, the Company completed a total of 18
business combinations (16 related to continuing operations and two related to
discontinued operations). In addition, in December 1997 the Company invested an
additional $40.8 million in Dudley Stationery Limited ("Dudley"), the largest
independent office products dealer in the United Kingdom. This investment
represented the Company's remaining commitment to Dudley in conjunction with the
Company's acquisition of a 49% equity interest in Dudley in November 1996. The
Company's total investment in Dudley equals $82.1 million.
The Company's consolidated financial statements give retroactive effect to
the acquisitions of the Pooled Companies for all periods presented. The
following data presents the separate results from continuing operations, in each
of the periods presented, of U.S. Office Products (excluding the results of the
Pooled Companies prior to the dates on which they were acquired) and the Pooled
Companies up to the dates on which they were acquired. The results of the Pooled
Companies include all non-recurring acquisition costs.
<TABLE>
<CAPTION>
U.S. OFFICE
PRODUCTS POOLED
COMPANY COMPANIES COMBINED
------------ ----------- ------------
<S> <C> <C> <C>
Three months ended January 24, 1998:
Revenues................................................................. $ 665,959 $ $ 665,959
Income from continuing operations........................................ $ 15,431 $ $ 15,431
Three months ended January 25, 1997:
Revenues................................................................. $ 559,590 $ 37,200 $ 596,790
Income from continuing operations........................................ $ 9,477 $ (710) $ 8,767
Nine months ended January 24, 1998:
Revenues................................................................. $ 1,930,113 $ $ 1,930,113
Income from continuing operations........................................ $ 37,236 $ $ 37,236
Nine months ended January 25, 1997:
Revenues................................................................. $ 1,300,421 $ 197,899 $ 1,498,320
Income from continuing operations........................................ $ 19,677 $ 5,716 $ 25,393
</TABLE>
11
<PAGE>
The following presents the unaudited pro forma results of operations of the
Company for the three and nine month periods ended January 24, 1998 and
January 25, 1997, as if the Strategic Restructuring Plan and all of the
purchase acquisitions related to continuing operations completed since the
beginning of fiscal 1997 had been consummated at the beginning of fiscal
1997. The pro forma results of operations reflect certain pro forma
adjustments including (i) substantially higher amortization expenses as
compared to prior periods (as a result of reclassifying 12 business
combinations as purchase acquisitions (including the Company's acquisition of
Mail Boxes Etc.), rather than under the pooling-of-interests method, as the
Company had expected when it completed those acquisitions); (ii)
substantially higher interest expense, as a result of increased borrowing
that the Company expects to incur to help finance the cost of the Tender
Offer; and (iii) higher effective income tax rates, due to increased
non-deductible goodwill expense and the Company's inability to acquire
subchapter S corporations in pooling-of-interests transactions.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ --------------------------
JANUARY 24, JANUARY 25, JANUARY 24, JANUARY 25,
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues.................................................... $ 691,364 $ 721,743 $ 2,070,655 $ 2,087,861
Income from continuing operations........................... $ 5,470 $ 5,384 $ 11,644 $ 9,685
Basic income per share from continuing operations........... $ 0.04 $ 0.04 $ 0.09 $ 0.08
Diluted income per share from continuing operations......... $ 0.04 $ 0.04 $ 0.09 $ 0.07
</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 1997 or the results that may
occur in the future.
NOTE 7--SUBSEQUENT EVENTS
Subsequent to January 24, 1998 and through March 9, 1998, the Company has
completed three business combinations related to continuing operations for an
aggregate cash purchase price of $18.3 million and one business combination
related to discontinued operations for a cash purchase price of $13.3 million.
12
<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 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 26, 1997 and the Company's pro forma combined financial
statements, and the related notes to each thereto, included in a Current
Report on Form 8-K that the Company expects to file with the Securities and
Exchange Commission on March 11, 1998. The Company's audited consolidated
financial statements have been restated to reflect (i) the results of the
businesses to be spun off to shareholders in the Company's recently announced
strategic restructuring plan as discontinued operations; and (ii) the change
in accounting treatment of the 22 business combinations completed during the
nine months ended January 24, 1998, from the pooling-of-interests method to
the purchase method. See Note 1 of the Company's Notes to Consolidated
Financial Statements. In January 1998, the Company's Board of Directors (the
"Board") approved a comprehensive restructuring plan (the "Strategic
Restructuring Plan"). See Note 1 of the Company's Notes to Consolidated
Financial Statements for a summary of the elements of the Strategic
Restructuring Plan. When used in the discussion that follows, the terms
"Tender Offer," "Spin-Off Companies," "Distributions," "CD&R," and "Equity
Investment" shall each have the respective meanings assigned to them in the
summary of the Strategic Restructuring Plan that is included in Note 1.
As a result of the Strategic Restructuring Plan, the Company's
consolidated financial statements reflect the results of those companies to
be owned by the Spin-Off Companies (and thus included in the Distributions)
as discontinued operations. Assuming completion of the transactions
contemplated by the Strategic Restructuring Plan, the Company's continuing
operations will consist of its North American Office Products Group (which
includes office supply, office furniture, and coffee, beverage, and vending
service businesses), its Mail Boxes Etc. subsidiary (acquired in late
November 1997), its operations in New Zealand and Australia, and its 49%
interest in Dudley Stationery Limited, a U.K. contract stationer ("Dudley").
See Note 6 of the Company's Notes to Consolidated Financial Statements for
information about the Company's equity interest in Dudley. The Company's
North American Office Products Group operates primarily in the United States;
it includes three coffee and beverage businesses located in Canada.
Except where specifically noted, the discussion of financial condition
and results of operations that appears below covers only the Company's
continuing operations, assuming completion of the transactions contemplated
by the Strategic Restructuring Plan. For additional information about the
results of discontinued operations, see Note 2 of the Company's Notes to
Consolidated Financial Statements
The Company's continuing operations derived revenues primarily from the
sale of a wide variety of office supplies, office furniture, and other office
products (including coffee, beverage, and vending products and services) to
corporate, commercial and industrial customers. Cost of revenues represents
the purchase price for office supplies, office furniture and other office
products and includes occupancy and delivery costs and is reduced by rebates
and discounts on purchases.
The Company's financial condition and results of operations have changed
dramatically from the Company's inception in October 1994 to January 24, 1998
as a result of the Company's aggressive acquisition program. The Company
completed 165 business combinations (144 related to continuing operations and
21 related to discontinued operations) from its inception through the end of
fiscal 1997, 54 of which were accounted for under the pooling-of-interests
method (39 related to continuing operations and 15 related to discontinued
operations). During the nine months ended January 24, 1998, the Company
completed an additional 60
Page 13
<PAGE>
business combinations (40 related to continuing operations and 20 related to
discontinued operations). As a result of the Board's adoption of the
Strategic Restructuring Plan, all 60 business combinations completed during
the nine months ended January 24, 1998 are accounted for under the purchase
method. See Note 1 of the Company's Notes to Consolidated Financial
Statements (regarding the change in accounting treatment for 22 of these
acquisitions). The Company's consolidated financial statements give
retroactive effect to the business combinations accounted for under the
pooling-of-interests method during the fiscal year ended April 26, 1997 and
include the results of companies acquired in business combinations accounted
for under the purchase method from their respective acquisition dates.
Due to the Company's growth through acquisitions, year-to-year
comparisons of the historical results of the Company's operations have been
affected primarily by the addition of acquired companies. In most instances,
these dollar increases in the various revenues and expense components of the
Company's results are due primarily to growth from acquisitions. Neither the
magnitude nor the source of such year-to-year changes is necessarily
indicative of changes that will occur in the future. As a result of the
Strategic Restructuring Plan, the Company expects to focus more on improving
and expanding existing operations, and less on acquisitions as a means of
growth. In any event, the Company expects that 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 January 24, 1998 Compared to Three Months Ended
January 25, 1997
Consolidated revenues increased 11.6%, from $596.8 million for the three
months ended January 25, 1997, to $666.0 million for the three months ended
January 24, 1998. This increase was primarily due to acquisitions. Revenues
for the three months ended January 24, 1998 include revenues from 71
companies acquired in business combinations accounted for under the purchase
method after the beginning of the third quarter of fiscal 1997 (the
"Purchased Companies"). Revenues for the three months ended January 25, 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 reported
consolidated revenues (in U.S. dollar terms) by approximately 6.3%.
International revenues decreased 5.2%, from $236.6 million, or 39.7% of
consolidated revenues, for the three months ended January 25, 1997, to $224.2
million, or 33.7% of consolidated revenues, for the three months ended
January 24, 1998. International revenues consisted primarily of revenues from
New Zealand and Australia, with the balance from Canada. This decrease is due
exclusively to the devaluation of the New Zealand and Australian dollars
against the USD. The following table details the declines in the average
Page 14
<PAGE>
exchanges rates of the New Zealand and Australian dollars versus the USD for
the three months ended January 24, 1998 and January 25, 1997:
<TABLE>
<CAPTION>
AVERAGE EXCHANGE RATES
FOR THE THREE MONTHS ENDED
----------------------------
<S> <C> <C> <C>
JANUARY 24, JANUARY 25,
1998 1997 DECLINE
------------- ------------- -----------
New Zealand dollar............................................................. $ .60 $ .70 $ (.10)
Australian dollar.............................................................. $ .68 $ .79 $ (.11)
</TABLE>
International revenues in New Zealand and Australia, calculated in their
local currencies, increased 10.7% for the three months ended January 24,
1998, as compared to the three months ended January 25, 1997. This increase
was due primarily to the inclusion, in the revenues for the three months
ended January 24, 1998, of revenues from 22 companies that were acquired in
business combinations accounted for under the purchase method after the
beginning of the third quarter of fiscal 1997. Revenues from five such
companies were included in revenues for a portion of the three months ended
January 25, 1997.
Gross profit increased 11.7%, from $169.3 million for the three months
ended January 25, 1997, to $189.2 million for the three months ended January
24, 1998. The increase in gross profit is directly related to the increase in
revenues. As a percentage of revenues, gross profit remained constant at
28.4% for the three months ended January 25, 1997 and three months ended
January 24, 1998.
Selling, general and administrative expenses increased 7.3%, from $136.5
million for the three months ended January 25, 1997, to $146.5 million for
the three months ended January 24, 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 22.9% for the three
months ended January 25, 1997, to 22.0% for the three months ended January
24, 1998. The decrease in selling, general and administrative expenses as a
percentage of revenues was due to several factors, including (i) a shift in
revenue mix, primarily as a result of acquisitions, to revenues from products
and services traditionally having lower selling, general and administrative
expenses; (ii) reductions in selling, general and administrative expenses by
the Company through the consolidation of certain redundant facilities and job
functions; and (iii) reductions in the costs of many general and
administrative expenses incurred by the Company 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 49.2%, from $3.6 million for the three
months ended January 25, 1997, to $5.4 million for the three months ended
January 24, 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, that are included in the results
for the three months ended January 24, 1998 versus the three months ended
January 25, 1997.
The Company incurred non-recurring acquisition costs of $3.5 million
during the three months ended January 25, 1997, in conjunction with business
combinations accounted for under the pooling-of-interests method. These
non-recurring acquisition costs included accounting, legal and investment
banking fees, real estate and environmental assessments and appraisals,
various regulatory fees and recognition of transaction related obligations.
Generally accepted accounting principles require the Company to expense all
acquisition costs (both those paid by the Company and those paid by the
sellers of the acquired companies) related to business combinations accounted
for under the pooling-of-interests method. In accordance with generally
accepted accounting principles, the Company will be unable to utilize the
pooling-of-interests method to account for acquisitions for a period of up to
6-9 months following the completion of the Strategic Restructuring Plan.
During this period, the Company will not reflect any non-recurring
acquisition costs in its results of operations, as all costs incurred of this
nature would be related to acquisitions accounted for under the purchase
method and would, therefore, be capitalized as a portion of the purchase
consideration.
Interest expense, net of interest income, decreased 10.8%, from $10.2
million for the three months ended January 25, 1997, to $9.1 million for the
three months ended January 24, 1998. This decrease in net interest expense is
the net effect of a number of factors, including the refinancing of higher
interest rate debt outstanding in New Zealand during the three months ended
January 25, 1997 with funds from the Company's
Page 15
<PAGE>
existing $500 million credit facility, declining interest rates and the
repayment of outstanding debt with the proceeds from a public stock offering
in January 1997. The cost of increased borrowings after the January 1997
public offering partially offset these factors. As discussed below under
"--Liquidity and Capital Resources," the Company expects to incur substantial
additional borrowings to help finance the cost of the Tender Offer. As a
result, interest expense is likely to be significantly higher following
completion of the Strategic Restructuring Plan. See "--Factors Affecting the
Company's Business."
Other (income) expense decreased from $287,000 of other
income, for the three months ended January 25, 1997, to $149,000 of other
expense, for the three months ended January 24, 1998. Other income includes
the Company's 49% share of the net income of Dudley, in which the Company has
a 49% equity investment, and miscellaneous other income and expense items.
Provision for income taxes increased from $7.0 million for the three
months ended January 25, 1997 to $12.7 million for the three months ended
January 24, 1998, reflecting effective income tax rates of 44.5% and 45.0%,
respectively. During both periods, the effective income tax rates reflect the
recording of tax provisions at the federal statutory rate of 35.0%, plus
appropriate state and local taxes. In addition, the effective tax rates were
increased to reflect the incurrence of non-deductible goodwill amortization
expense. The provision for income taxes for the three months ended January
25, 1997 also was increased to reflect the incurrence of non-deductible,
non-recurring acquisition costs, and was decreased because several of the
companies included in the results for such period, which were acquired in
business combinations accounted for under the pooling-of-interests method,
were not subject to federal income taxes on a corporate level as they had
elected to be treated as subchapter S corporations prior to being acquired by
the Company. As discussed above, the Company does not expect that it will be
able to complete poolings in the near future. The Company's effective tax
rate, therefore, may be higher in future periods than it has been previously,
because the effect of acquiring subchapter S corporations in business
combinations accounted for under the pooling-of-interests method will not be
available to the Company for a period of time.
Income from discontinued operations increased 54.5%, from $2.0 million
for the three months ended January 25, 1997, to $3.1 million for the three
months ended January 24, 1998. See Note 2 of the Company's Notes to
Consolidated Financial Statements.
Nine Months Ended January 24, 1998 Compared to Nine Months Ended January
25, 1997
Consolidated revenues increased 28.8%, from $1,498.3 million for the nine
months ended January 25, 1997, to $1,930.1 million for the nine months ended
January 24, 1998. This increase was primarily due to acquisitions. Revenues
for the nine months ended January 24, 1998 include revenues from 111
companies acquired in business combinations accounted for under the purchase
method after the beginning of fiscal 1997 (the "Fiscal 1997 and 1998
Purchased Companies"). Revenues for the nine months ended January 25, 1997
include revenues from 54 of the Fiscal 1997 and 1998 Purchased Companies for
a portion of such period. This increase was partially offset by a reduction
in the increase in international revenues due to the devaluation of the New
Zealand and Australian dollars versus the USD. Because revenues generated in
New Zealand and Australia contributed approximately one-third of the
Company's consolidated revenues during this period, management estimates that
currency devaluation had the effect of reducing the Company's reported
consolidated revenues (in U.S. dollar terms) by approximately 3.8%.
International revenues increased 36.5%, from $488.8 million, or 32.6% of
consolidated revenues, for the nine months ended January 25, 1997, to $667.4
million, or 34.6% of consolidated revenues, for the nine months ended January
24, 1998. The increase in international revenues was primarily due to the
inclusion, in the revenues for the nine months ended January 24, 1998, of
revenues from 31 companies that were acquired in business combinations
accounted for under the purchase method after the beginning of fiscal 1997,
the most significant of which was Whitcoulls Group Limited, which the
Company's wholly-owned subsidiary Blue Star Group Limited acquired in July
1996. Revenues from 14 of such companies were included in international
revenues for a portion of the nine months ended January 25, 1997.
The growth in international revenues was partially reduced by a decline in
the exchange rates of the New Zealand and Australian dollars against the USD.
The following table details the declines in the average exchange rates of the
New Zealand and Australian dollars versus the USD for the nine months ended
January 24, 1998 and January 25, 1997:
Page 16
<PAGE>
<TABLE>
<CAPTION>
AVERAGE EXCHANGE RATES
FOR THE NINE MONTHS ENDED
----------------------------
<S> <C> <C> <C>
JANUARY 24, JANUARY 25,
1998 1997 DECLINE
------------- ------------- -----------
New Zealand dollar............................................................. $ .64 $ .70 $ (.06)
Australian dollar.............................................................. $ .72 $ .79 $ (.07)
</TABLE>
International revenues in New Zealand and Australia, calculated in their
local currencies, increased 49.4% for the nine months ended January 24, 1998,
as compared to the nine months ended January 25, 1997. This increase was due
primarily to the inclusion, in the revenues for the nine months ended January
24, 1998, of revenues from the acquired companies discussed above.
Gross profit increased 28.1%, from $420.9 million for the nine months
ended January 25, 1997, to $539.3 million for the nine months ended January
24, 1998. Gross profit as a percentage of revenues decreased from 28.1% for
the nine months ended January 25, 1997 to 27.9% for the nine months ended
January 24, 1998. The slight decrease in gross profit as a percentage of
revenues was due primarily to a shift in revenue mix, primarily as a result
of acquisitions, to revenues from traditionally lower margin products and
services, partially offset by improved purchasing and rebate programs
negotiated with vendors.
Selling, general and administrative expenses increased 26.6%, from $344.5
million for the nine months ended January 25, 1997, to $436.0 million for the
nine months ended January 24, 1998, primarily due to the inclusion of the
results of the Fiscal 1997 and 1998 Purchased Companies. Selling, general and
administrative expenses as a percentage of revenues decreased from 23.0% for
the nine months ended January 25, 1997 to 22.6% for the nine months ended
January 24, 1998. The decrease in selling, general and administrative
expenses as a percentage of revenues was due to several factors, including
(i) a shift in revenue mix, primarily as a result of acquisitions, to
revenues from products and services traditionally having lower selling,
general and administrative expenses; (ii) reductions in selling, general and
administrative expenses by the Company through the consolidation of certain
redundant facilities and job functions; and (iii) reductions in the costs of
many general and administrative expenses incurred by the Company through the
negotiation of national or other large-scale contracts with the providers of
certain services affecting these general and administrative expenses.
Amortization expense increased 71.3%, from $8.1 million for the nine
months ended January 25, 1997, to $13.8 million for the nine months ended
January 24, 1998. This increase is due exclusively to the increase in the
number of purchase acquisitions, including the 12 acquisitions that were
originally planned to be accounted for under the pooling-of-interest method
but were restated as purchase acquisitions as a result of the Strategic
Restructuring Plan, included in the results for the nine months ended January
24, 1998 versus the nine months ended January 25, 1997.
The Company incurred non-recurring acquisition costs of approximately
$7.3 million during the nine months ended January 25, 1997, in conjunction
with business combinations that were accounted for under the
pooling-of-interests method.
Interest expense, net of interest income, increased 20.9% from $21.5
million for the nine months ended January 25, 1997, to $26.0 million for the
nine months ended January 24, 1998. This was due primarily to a reduction in
interest income during the nine months ended January 24, 1998. The Company
earned interest income on the proceeds from the issuance of an aggregate of
$230.0 million of convertible subordinated notes in May and June of 1996 (the
first quarter of fiscal 1997). These proceeds were subsequently used to fund
a portion of the cash consideration used in business combinations. Interest
expense has remained relatively consistent, as steadily increasing borrowings
and a declining cash position have been offset by the repayment of debt from
the proceeds of a stock offering in January 1997 and declining interest rates.
Other income increased 56.4%, from $4.1 million for the nine months ended
January 25, 1997, to $6.4 million for the nine months ended January 24, 1998.
Other income for the nine months ended January 24, 1998 of $6.4 million
consisted primarily of a $4.7 million marketing fee, a gain on the sale of an
investment and the Company's 49% share of the net income of the Company's 49%
equity investment in Dudley. The Company acquired its 49% interest in Dudley
in November 1996. Other income for the nine months ended January 25,
Page 17
<PAGE>
1997 of $4.1 million consisted primarily of a foreign currency gain of $3.4
million. Although management is pursuing additional opportunities to generate
other income from arrangements with third parties that desire access to the
Company's distribution network and customer base, management cannot predict
whether or when such opportunities will be realized, or what amount of other
income might be available to the Company.
Provision for income taxes increased from $18.2 million for the nine
months ended January 25, 1997 to $32.5 million for the nine months ended
January 24, 1998, reflecting effective income tax rates of 41.8% and 46.6%,
respectively. The increase in the provision for income taxes is primarily the
result of income from continuing operations before extraordinary item
increasing from $43.6 million for the nine months ended January 25, 1997 to
$69.8 million for the nine months ended January 24, 1998. During both
periods, the effective income tax rates reflect the recording of tax
provisions at the federal statutory rate of 35.0%, plus appropriate state and
local taxes. In addition, the effective tax rates were increased to reflect
the incurrence of non-deductible goodwill amortization expense. The provision
for income taxes for the nine months ended January 25, 1997 was also
increased to reflect the incurrence of non-deductible, non-recurring
acquisition costs, and was decreased because several of the companies
included in the results for such period, which were acquired in business
combinations accounted for under the pooling-of-interests method, were not
subject to federal income taxes on a corporate level as they had elected to
be treated as subchapter S corporations prior to being acquired by the
Company.
Income from discontinued operations increased 24.8%, from $20.4 million
for the nine months ended January 25, 1997, to $25.5 million for the nine
months ended January 24, 1998. See Note 2 of the Company's Notes to
Consolidated Financial Statements.
During the nine months ended January 25, 1997, the Company incurred an
extraordinary item of $612,000, which represents the aggregate expenses, net
of the expected income tax benefit, associated with the early termination of
the Company's $50 million credit facility with First Bank National
Association.
LIQUIDITY AND CAPITAL RESOURCES
At January 24, 1998, the Company had cash of $45.3 million and working
capital of $134.0 million. The Company's capitalization, defined as the sum
of long-term debt and stockholders' equity, at January 24, 1998, was
approximately $1.9 billion. On a pro forma basis, at January 24, 1998, the
Company (reflecting only continuing operations) had working capital of $64.9
million, long-term debt of $1.0 billion and capitalization of $1.4 billion.
Such pro forma amounts give effect to the Strategic Restructuring Plan and
purchase acquisitions completed subsequent to January 24, 1998 as if such
transactions had occurred on January 24, 1998.
The Company anticipates that after the Strategic Restructuring Plan is
completed, its cash on hand, cash flow from operations and borrowings
available from its expected refinancing of its existing bank credit facility
(the "Credit Facility") will be sufficient to meet its liquidity requirements
for its operations (including anticipated capital expenditures) and for its
additional debt service obligations for the remainder of the calendar year.
The Credit Facility provides the Company with a $500 million line of
credit, bearing interest, at the Company's option, at the bank's base rate
plus an applicable margin of up to 1.25%, or a eurodollar rate plus an
applicable margin of up to 2.5%. At March 9, 1998, the Company had
approximately $357.4 million outstanding under the Credit Facility, at an
annual interest rate of approximately 6.5%, and $142.6 million available
under the Credit Facility for acquisition and working capital purposes.
Because certain elements of the Strategic Restructuring Plan would violate
covenants in the Credit Facility, that facility will either have to be
modified with the lenders' consent or refinanced. The Company currently
expects to finance the aggregate cost of purchasing shares in the Tender
Offer (approximately $1 billion) with the net proceeds of the Equity
Investment, additional senior secured bank debt, and the net proceeds from
the issuance of subordinated debt securities. The Company is currently
engaged in discussions with potential lenders and investment banks regarding
financing for the Tender Offer and refinancing of the Credit Facility. The
Company expects that it will be able to obtain the necessary financing on
acceptable terms. However, to date, no commitments have been obtained and
there can be no assurance that financing for the Tender Offer will be
obtained on acceptable terms. In connection with the completion of the
Strategic Restructuring Plan, the Company expects to incur approximately $800
million of additional indebtedness. The Company also expects to incur
significant transaction (including financing) costs and expenses. If the
Company were unable to refinance its Credit
Page 18
<PAGE>
Facility, the Company would be forced to pursue alternative strategies to
complete the Strategic Restructuring Plan. See "--Factors Affecting the
Company's Business."
During the nine months ended January 24, 1998, net cash provided by
operating activities was $36.8 million. Net cash used in investing activities
was $99.5 million, including $33.6 million used for acquisitions, $28.2
million used for additions to property and equipment and $40.8 million paid
to Dudley to satisfy the remaining commitment related to the Company's 49%
equity investment in Dudley. Net borrowings increased $62.6 million during
the nine months ended January 24, 1998, primarily to fund the purchase prices
of acquisitions, to repay higher-cost debt assumed in acquisitions and to
fund the remaining equity investment in Dudley. Discontinued operations used
$3.8 million of cash during the nine months ended January 24, 1998.
During the nine months ended January 25, 1997, net cash used in operating
activities was $9.2 million, which resulted primarily from a decrease in
accounts payable due to the Company's aggressive policy of taking negotiated
cash discounts. Net cash used in investing activities was $390.5 million,
including $323.8 million used for acquisitions, $15.9 million used for
additions to property and equipment and $41.3 million paid to Dudley as the
initial payment related to the Company 49% equity investment in Dudley. Net
borrowings increased $244.7 million during the nine months ended January 25,
1997, primarily to fund the purchase prices of acquisitions, to repay
higher-cost debt assumed in acquisitions and to fund the initial equity
investment in Dudley. The Company also received $41.9 million in cash as a
result of the sale of common stock during the period. Discontinued operations
used $3.2 million of cash during the nine months ended January 25, 1997.
During the nine months ended January 24, 1998, the New Zealand and
Australian dollars weakened against the USD. The New Zealand exchange rate
declined from $0.69 USD at April 27, 1997 to $0.58 USD at January 24, 1998.
The Australian exchange rate declined from $.78 USD at April 27, 1997 to $.66
USD at January 24, 1998. This resulted in a reduction in stockholders'
equity, through a cumulative translation adjustment, of approximately $105.5
million, reflecting the impact of the declining exchange rate on the
Company's investments in its New Zealand and Australian subsidiaries.
Subsequent to January 24, 1998 and through March 9, 1998, the Company has
completed three business combinations related to continuing operations for an
aggregate cash purchase price of $18.3 million and one business combination
related to discontinued operations for a cash purchase price of $13.3 million
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business
have been lower in the first two quarters of its fiscal year, primarily due
to the lower level of business activity in North America during the summer
months. The seasonality of the core office products business, however, is
expected to be impacted by the seasonality of the Company's other operations,
which have expanded through acquisitions. For example, the revenues and
profitability of the Company's operations in New Zealand and Australia have
generally been higher in the Company's third quarter. As the Company's mix of
businesses evolves through future acquisitions, these seasonal fluctuations
may continue to change.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the
mix of products sold, general economic conditions, and the retroactive
restatement in accordance with generally accepted accounting principles of
the Company's consolidated financial statements for acquisitions accounted
for under the pooling-of-interests method. Moreover, the operating margins of
companies acquired by the Company may differ substantially from those of the
Company, which could contribute to the further fluctuation in its quarterly
operations. 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 1997 or the first three quarters of
fiscal 1998.
Page 19
<PAGE>
FACTORS AFFECTING THE COMPANY'S BUSINESS
A number of factors, including those discussed below, may affect the
Company's future operating results. Where indicated, the following discussion
addresses factors that management believes will be applicable to the
Company's business upon completion of the Strategic Restructuring Plan.
U.S. Office Products' aggressive acquisition program has produced a
significant increase in sales, employees, facilities and distribution
systems. While the Company's decentralized management strategy, together with
operating efficiencies resulting from the elimination of duplicative
functions and economies of scale, may present opportunities to reduce costs,
such strategies may initially require additional costs and expenditures to
expand operational and financial systems and corporate management
administration. Because of the various costs and possible cost-savings
strategies, historical operating results may not be indicative of future
performance. There also can be no assurance that the pace of the Company's
acquisitions will not adversely affect efforts to implement cost-savings and
integration strategies and to manage operations and acquisitions profitably.
Delays in implementing planned integration and consolidation strategies, or
the failure of such strategies to achieve anticipated cost savings, also
could adversely affect the Company's results.
U.S. Office Products has historically depended upon both acquisitions and
internal growth to increase its earnings. Management expects that in the
future, the Company will continue to pursue an aggressive acquisition
program, although it is expected that future growth will be driven more
significantly by expansion and improvement of existing operations. See
"--Introduction." There can be no assurance that U.S. Office Products will be
successful in completing future acquisitions or in implementing its internal
growth strategies. In addition, acquired companies may not achieve future
sales and profitability levels that justify the prices that the Company paid
to acquire them. Acquisitions also may involve a number of special risks that
could have a material adverse effect on future operations and financial
performance, including diversion of management's attention; unanticipated
declines in revenues or profitability following acquisition; difficulties
with the retention, hiring and training of key personnel; risks associated
with unanticipated business problems or legal liabilities; and the
amortization of acquired intangible assets, such as goodwill.
As a result of the Tender Offer and the Distributions, U.S. Office
Products will be precluded from completing business combinations under the
pooling-of-interests accounting method for a period up to 6-9 months. Any
business combinations that U.S. Office Products completes during this period
will have to be accounted for under the purchase method. Under the purchase
method of accounting, U.S. Office Products will have to record goodwill for
each such acquisition, in an amount equal to any excess of the purchase price
paid for the acquired company over the fair market value of the acquired
company's net assets. Under the pooling-of-interests method, no goodwill is
recorded in connection with the acquisition of a pooled company, and there is
no corresponding expense associated with the amortization of such goodwill.
Approximately $917.0 million, or 45.4% of the Company's pro forma total
assets as of January 24, 1998, represents intangible assets, the substantial
majority of which is goodwill. This amount will increase to the extent that
U.S. Office Products acquires additional companies under the purchase method
of accounting. The Company amortizes goodwill on a straight-line method over
a period of up to 40 years. The amount amortized in a particular fiscal
period is a non-cash expense that reduces the Company's net income. As a
result of the accounting for the acquisition of Mail Boxes Etc. ("MBE") under
the purchase method (rather than the pooling-of-interests method that had
been intended at the time of the acquisition), the Company's amortization
charge will increase by approximately $6.5 million annually. The substantial
majority of goodwill also is not a deductible expense for U.S. federal income
tax purposes. The Company expects that its effective tax rate will be higher
than the federal statutory rate, because its net earnings will be reduced by
a significant amount of non-deductible goodwill charges.
The Company is currently reviewing the year 2000 compliance of software
that it uses in its business. The Company's Trinity system, which it is
currently installing throughout its North American Office Products Group
operations as the core operations system, is year 2000 compliant. However,
the Company's operating subsidiaries are, in some cases, using billing or
other software that is not year 2000 compliant. Based upon information that
the Company has collected from its operating subsidiaries, it expects to be
able to achieve year 2000 compliance in 1999 and does not expect that the
cost of making necessary adaptations will be material to the Company. If
Page 20
<PAGE>
the Company cannot make the necessary adaptations on a timely basis, or if
the costs are greater than expected, the Company's business could be
adversely affected.
Management intends to continue to focus significant attention and
resources on international operations and expects foreign revenues to
continue to represent a significant portion of the Company's total revenues.
The factors described in this section that apply to U.S. Office Products'
domestic operations also may affect the Company's foreign operations. In
addition, the Company's foreign operations are subject to a number of other
risks, including currency exchange rates, new and different legal, regulatory
and competitive requirements, difficulties in staffing and managing foreign
operations, and risks specific to different business lines that the Company
may enter.
U.S. Office Products expects to incur substantial additional borrowings
in connection with the Tender Offer. See Note 1 of the Company's Notes to
Consolidated Financial Statement and "--Liquidity and Capital Resources."
This substantial increase in U.S. Office Products' leverage could have
material consequences to U.S. Office Products and the holders of common
stock, including, but not limited to, the following: (i) U.S. Office
Products' ability to obtain additional financing in the future for
acquisitions, working capital, capital expenditures, and general corporate or
other purposes may be impaired, (ii) a substantial portion of U.S. Office
Products' cash flow will be required for debt service and, as a result, will
not be available for other purposes; and (iii) U.S. Office Products' level of
indebtedness could make it more vulnerable to economic downturns, limit its
ability to withstand competitive pressures and reduce its flexibility in
responding to changing business and economic conditions. In addition, it is
expected that the Company's financing agreements will contain covenants that
may restrict its ability to take certain actions (such as buying or selling
assets, paying dividends, making capital expenditures, or engaging in other
transactions). If U.S. Office Products is unable to service its indebtedness,
it will be forced to pursue one or more alternative strategies, such as
selling assets, restructuring or refinancing its indebtedness, or seeking
additional equity capital. The Company's management does not have experience
operating a business with a substantial amount of leverage. CD&R has
substantial experience supporting management in operating in a leveraged
environment.
U.S. Office Products operates in a highly competitive environment. It
generally competes with a large number of smaller, independent companies,
many of which are well-established in their markets. In addition, in North
America, the North American Office Products Group competes with five large
office products companies, each of which has significant financial resources.
No assurances can be give that competition will not have an adverse effect on
the Company's business.
U.S. Office Products acquired MBE in November 1997. Various factors may
affect MBE's business, including recent changes in MBE's senior management,
the reliance of MBE franchisees on United Parcel Service for ground shipping
services, the limited control that MBE has over its franchisees, the impact
of government regulation of MBE as a franchisor, the historically litigious
nature of franchise relationships and the growing competition from the United
States Postal Service.
Page 21
<PAGE>
As part of the Strategic Restructuring Plan, it is expected that CD&R
will acquire shares of U.S. Office Products common stock representing 24.9%
of the outstanding shares of the Company's common stock after giving effect
to the issuance of such shares. CD&R also will purchase warrants that give it
the right to acquire additional shares of common stock in the future. Under
the Investment Agreement that CD&R and the Company signed on January 12, 1998
(the "Investment Agreement"), CD&R will have, among other things, the right
(subject to certain conditions) to nominate three of the nine members of the
U.S. Office Products Board of Directors, including the Chairman of the Board,
and certain Board decisions will be subject to super-majority voting
provisions that, in certain circumstances, may require the concurrence of at
least one director nominated by CD&R. Matters subject to super-majority Board
approval include (i) the issuance of new shares in excess of certain amounts
specified in the Investment Agreement, (ii) certain business combinations,
(iii) a disposition by the Company of all or substantially all of its assets,
(iv) a major recapitalization, dissolution, or liquidation of the Company, or
(v) an amendment of the Company's Charter or By-Laws that is inconsistent
with the terms of the Investment Agreement. CD&R's significant ownership of
U.S. Office Products common stock may permit CD&R to influence significantly
matters requiring the approval of the Company's stockholders. The
super-majority Board voting requirements may give CD&R the ability to block
the approval of certain actions requiring the super-majority vote of the
Board. Together, this ownership position and the Board voting requirements
may have the effect of discouraging (or possibly preventing) a future change
in control of U.S. Office Products.
In addition, the super-majority Board voting requirement may have the
effect of limiting the Company's future use of equity to acquire businesses,
raise capital, or provide employees with long-term incentives.
The Distributions involve complex tax considerations. The Company will
receive an opinion from its counsel that for U.S. federal income tax
purposes, the Distributions should qualify as tax-free spin-offs under
Section 355 of the Internal Revenue Code of 1986, as amended (the "Code").
The Company will not seek a ruling from the Internal Revenue Service (the
"IRS") with respect to the U.S. federal income tax consequences of the
Distributions. The IRS could take the position that the Distributions do not
qualify as tax-free spin-offs. If the Distributions fail to qualify under
Section 355 of the Code as tax-free spin-offs, both the Company and those
persons who hold U.S. Office Products common stock on the record date of the
Distributions will be subject to U.S. federal income tax liabilities as a
result of the Distributions.
In connection with the Distributions, the Company will enter into an
agreement with the Spin-Off Companies to allocate responsibility for the tax
liabilities to U.S. Office Products if the Distributions fail to qualify as
tax-free spin-offs. This agreement is expected to provide that if any
Spin-Off Company does (or fails to do) something that materially contributes
to the Distributions being deemed taxable, the Spin-Off Companies will
jointly and severally indemnify U.S. Office Products for losses resulting
from the additional tax liabilities. If the Distributions are found to be
taxable, but if neither the actions nor the inactions of the Company and the
Spin-Off Companies has caused such a result, the Company and the Spin-Off
Companies will share the resulting tax liabilities on a pro rata basis, based
on the value of each company's common stock after the Distributions. There can
be no assurance that the Company, if it needs to seek indemnification from
the Spin-Off Companies, will be successful in recovering the full amount of
the losses caused by the Distributions being deemed to be taxable
transactions.
Page 22
<PAGE>
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Services Agreement, dated January 13, 1998, between the
Company and Jonathan J. Ledecky
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 November 5, 1997 and filed with the Commission on
November 16, 1997 reporting information under Item 5.
ii. Form 8-K dated November 20, 1997 and filed with the Commission
on November 24, 1997 reporting information under Item 5.
Financial statements filed:
(a) Consolidated financial statements of the Company as of
April 30, 1996, April 26, 1997 and July 26, 1997 (unaudited)
and for the fiscal years ended April 30, 1995 and 1996,
April 26, 1997 and for the three months ended July 27, 1996
(unaudited) and July 26, 1997 (unaudited.)
(b) Supplemental consolidated financial statements of the Company
as of April 30, 1996, April 26, 1997 and July 26, 1997
(unaudited) and for the fiscal years ended April 30, 1995 and
1996, April 26, 1997 and for the three months ended July 27,
1996 (unaudited) and July 26, 1997 (unaudited.)
(c) Financial statements of McCollam Printers Limited and
Subsidiaries as of March 31, 1997 and 1996 and for the
fiscal years ended March 31, 1997 and 1996.
i. Form 8-K dated December 24, 1997 and filed with the Commission
on December 24, 1997 reporting information under Item 5.
Financial statements filed:
(a) Consolidated financial statements of the Company as of April
30, 1996, April 26, 1997 and October 25, 1997 (unaudited)
and for the fiscal years ended April 30, 1995 and 1996,
April 26, 1997 and for the six months ended October 26, 1996
(unaudited) and October 25, 1997 (unaudited.)
(b) Supplemental consolidated financial statements of the Company
as of April 30, 1996, April 26, 1997 and October 25, 1997
(unaudited) and for the fiscal years ended April 30, 1995
and 1996, April 26, 1997 and for the six months ended
October 26, 1996 (unaudited) and October 25, 1997 (unaudited.)
iv. Form 8-K dated January 12, 1998 and filed with the Commission on
January 16, 1998 reporting information under Items 5 and 7.
Page 24
<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 COMPANYMARCH 10, 1998
MARCH 10, 1998 BY:/s/ Thomas I. Morgan
- --------------------- --------------------------
Date Thomas I. Morgan
Chief Executive Officer
MARCH 10, 1998 BY:/s/ Donald H. Platt
- --------------------- --------------------------
Date Donald H. Platt
Chief Financial Officer
Page 25
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. EXHIBIT Page
- ----- ---------------------------------------------------------- -------
<S> <C>
10.1 Services Agreement, dated January 13, 1998,
between the Company and Jonathan J. Ledecky
11.1 Statement regarding computation of net income per share
27 Financial Data Schedule
</TABLE>
Page 26
<PAGE>
Services Agreement
To Jonathan J. Ledecky:
This Agreement establishes the terms of your continuing employment with
U.S. Office Products Company, a Delaware corporation (the "Company"). You and
the Company agree that your changing role with the Company and expected role
with the entities proposed (as of January 13, 1998) to be distributed to the
Company's shareholders in spinoffs (the "Spincos") warrant a replacement of your
amended and restated employment agreement with the Company dated as of November
4, 1997 (the "1997 Agreement"). This Agreement is contingent on and subject to
the closing of the distributions (the "Distributions") of the Spincos (or such
subset of the Spincos as the Company completes in accordance with the plan
approved by the Company's Board of Directors (the "Board") on January 12, 1998).
If the Distributions do not close by September 30, 1998, this Agreement will
have no force or effect and your 1997 Agreement will remain in place and in
effect.
Duties You agree to serve as consultant to the Company to
provide mutually agreed services. You are resigning
from the Board effective as of and contingent on the
Distributions.
Term The term of this Agreement runs from the closing date
of the Distributions (the "Closing Date") through June
30, 2001, unless earlier terminated as provided in this
Agreement for breach of the No Competition provision.
Salary You will receive an annual salary of $48,000 from the
Closing Date.
Company Your Company options will continue to vest and be
Options exercisable on their current schedules while the
Company employs you. All unvested options will vest
and be exercisable at your death.
The Company will adjust the exercise price of your
options consistent with adjustments for substantially
all of the other optionholders' options.
Your existing Company options will not convert into
Spinco options.
The Company will accelerate your options if and to the
extent that the Company accelerates the exercisability
of options for substantially all management
optionholders.
You waive any claim to participate in any matching or
reload program that may apply to other employees of the
Company.
<PAGE>
The unexercised portions of your Company options will
expire if you violate the No Competition provision as
it applies to the Company.
Moving You agree to relocate out of your current office space,
and the Company will reimburse your moving expenses
(not to exceed $5,000).
Spinco Compensation You will receive options in the Spincos in
consideration for noncompetition protection and certain
mutually agreed advisory services as an employee of
each Spinco. You will not receive any other
compensation unless separately agreed.
Option Your Spinco options will cover 7.5% of the outstanding
common stock of each Spinco determined as of the
Distribution Date, with no anti-dilution provisions in
the event of issuance of additional shares of common
stock (other than with respect to stock splits or
reverse stock splits).
Term Each Spinco option will expire ten years from Closing
Date.
Price Each Spinco option will have a per share exercise price
equal to the fair market value of each Spinco company's
stock, determined based on the initial trading price on
the day each Spinco stock is first publicly traded (the
"First Trade Date").
Schedule Each Spinco option will be fully exercisable and vested
as to 5% of the stock when granted, with the 5%
determined as of the Distribution Date and with no
anti-dilution provisions in the event of issuance of
additional shares of common stock (other than with
respect to stock splits or reverse stock splits). It
will vest and be exercisable as to the remaining
portions of the option as follows:
(i) as of the 18-month anniversary of the First
Trade Date if the average closing trading price
over the 15 business days preceding that
anniversary date exceeds the initial trading price
(with the price adjusted for stock splits or
reverse stock splits or other corporate events
that cause Spinco to adjust substantially all
outstanding options) by at least 25% or
(ii) as of the sixth anniversary of the First
Trade Date if the first clause condition is not
met and if you are still employed by the Spinco.
Page 2 of 9
<PAGE>
Your Spinco options with respect to a particular Spinco
will accelerate if and to the extent the relevant
Spinco accelerates the options for substantially all
management optionholders.
All unexercised portions of Spinco options with respect
to a particular Spinco will expire if you violate the
No Competition provision as it applies to the
respective Spinco.
All unexpired options will vest and be exercisable at
your death.
Termination The Company can terminate your employment under this
Agreement only if you violate the No Competition
provision.
Severance If your employment terminates for any reason, you will
not receive severance or termination pay. Except to
the extent the law or the terms of an applicable plan
requires otherwise, neither you nor your beneficiary or
estate will have any rights or claims under this
Agreement or otherwise to receive severance or any
other compensation or to participate in any other plan,
arrangement, or benefit, after your termination of
employment, other than with respect to your options.
No Competition The Company agrees to release you from the obligation
under your 1997 Agreement to notify the Company
regarding corporate opportunities.
Consistent with certain of your prior obligations under
the 1997 Agreement, you will not, until after the
fourth anniversary of the Closing Date, for any reason
whatsoever, directly or indirectly, for yourself or on
behalf of or in conjunction with any other person,
persons, company, partnership, corporation, or business
of whatever nature:
(i) engage, as an officer, director, shareholder,
owner, partner, joint venturer, or in a managerial
capacity, whether as an employee, independent
contractor, consultant, or advisor, or as a sales
representative, in any business selling any
products or services in direct competition with
the Company within 100 miles of where the Company
or where any of the Company's subsidiaries or
affiliates conducts business, including any
territory serviced by the Company or any of such
subsidiaries (the "Territory"), where "products or
services" are determined for this clause with
respect to products or services offered on or
before the date of this Agreement by the Company
and/or any of the Spincos;
Page 3 of 9
<PAGE>
(ii) call upon any person who is, at that time,
within the Territory, an employee of the Company
(including the respective subsidiaries and/or
affiliates thereof) in a managerial capacity for
the purpose or with the intent of enticing such
employee away from or out of the Company's employ
(including the respective subsidiaries and/or
affiliates thereof) other than a member of your
immediate family; or
(iii) call upon any person or entity that is, at
that time, or that has been, within one year prior
to that time, a customer of the Company (including
the respective subsidiaries and/or affiliates
thereof) within the Territory for the purpose of
soliciting or selling products or services in
direct competition with the Company (including the
respective subsidiaries and/or affiliates thereof)
within the Territory.
In addition to (and not in lieu of) the restriction
contained in clause (ii) above, you agree that, during the
period that the restrictions contained in this No
Competition remain in effect, and so long as you are
employed by, or otherwise affiliated with, Consolidation
Capital Corporation ("CCC"), you will not, directly or
indirectly, offer employment with CCC to, or otherwise allow
CCC to employ, any person who
is employed by the Company or a subsidiary of the
Company at the time; or
was so employed by the Company or a subsidiary of
the Company within one year prior to such time; or
provides (or within the prior year provided)
substantial service to the Company or a subsidiary
of the Company as part of an entity that is or was
a vendor or other outside service provider to the
Company or any subsidiary; provided, however, that
this provision regarding vendors and outside
service providers will not apply after the Closing
Date. In addition, the Company specifically
agrees that you may hire Jackie Scott and Amy
Blodgett, notwithstanding anything to the contrary
in the 1997 Agreement.
Notwithstanding the above, the foregoing covenant shall not
be deemed to prohibit you from acquiring capital stock in
CCC or serving as an officer, director or employee or
consultant to CCC, or acquiring as an investment not more
than one percent (1%) of the capital stock of a competing
business, whose stock is traded on a national securities
exchange or over-
Page 4 of 9
<PAGE>
the-counter; provided that such actions do not otherwise
breach your obligations hereunder.
Because of the difficulty of measuring economic losses to
the Company as a result of a breach of the foregoing
covenant, and because of the immediate and irreparable
damage that could be caused to the Company for which it
would have no other adequate remedy, you agree that the
Company may enforce the No Competition provisions by
injunctions and restraining orders.
You and the Company agree that the No Competition provisions
impose a reasonable restraint on you in light of the
Company's activities and business (including the Company's
subsidiaries and/or affiliates) on the date of the execution
of this Agreement (including the Company's subsidiaries).
You and the Company further agree that, if you cease to be
employed hereunder and enter into a business or pursue other
activities not in competition with the Company (including
the Company's other subsidiaries), or similar activities or
business in locations the operation of which, under such
circumstances, does not violate clause (i) of this No
Competition provision, and in any event such new business,
activities, or location are not in violation of this No
Competition provision or of your obligations under this No
Competition provision, if any, you will not be chargeable
with a violation of this provision if the Company (including
the Company's subsidiaries) shall thereafter enter the same,
similar, or a competitive (i) business, (ii) course of
activities or (iii) location, as applicable.
The covenants in this No Competition provision are severable
and separate, and the unenforceability of any specific
covenant does not affect the provisions of any other
covenant. Moreover, in the event any court of competent
jurisdiction shall determine that the scope, time, or
territorial restrictions set forth are unreasonable, then it
is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems
reasonable, and the Agreement shall thereby be reformed.
All of the covenants in this No Competition provision shall
be construed as an agreement independent of any other
provision in this Agreement, and the existence of any claim
or cause of action by you against the Company, whether
predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Company of
such covenants. It is specifically agreed that the period
of four years stated at the beginning of
Page 5 of 9
<PAGE>
this No Competition provision, during which your agreements
and covenants made in this provision shall be effective, are
computed by excluding from such computation any time during
which you are in violation of any provision of the No
Competition provision.
Notwithstanding any of the foregoing, if any applicable law
reduces the time period during which you are prohibited from
engaging in any competitive activity described in this
provision, you agree that the period for prohibition shall
be the maximum time permitted by law.
You specifically agree that the Company and the Spincos have
provided you with sufficient consideration for the extension
of your existing No Competition obligations to four years
and for the assignment of this provision to the Spincos.
After the Distributions, you agree that the Company will
assign to each Spinco the ability to enforce the
noncompetition provisions as to its own business.
Other The Company acknowledges that you are also employed by other
Employment entities, including Consolidation Capital Corporation, and
agrees that such dual employment does not breach this
Agreement, unless and to the extent that you thereby
violate the No Competition provisions.
Return of All records, designs, patents, business plans, financial
Company statements, manuals, memoranda, lists and other property
Property delivered to or compiled by you by or on behalf of the
Company (including the respective subsidiaries thereof) or
their representatives, vendors, or customers that pertain to
the business of the Company (including the respective
subsidiaries thereof) shall be and remain the property of
the Company, and be subject at all times to its discretion
and control. Likewise, you must deliver all correspondence,
reports, records, charts, advertising materials and other
similar data pertaining to the business, activities, or
future plans of the Company that you have collected or
obtained promptly to the Company without request by it upon
your cessation of employment.
Trade Secrets You agree that you will not, during or after the term of
this Agreement with the Company, disclose the specific terms
of the Company's (including the respective subsidiaries
thereof) relationships or agreements with its or their
respective significant vendors or customers or any other
significant and material trade secret of the Company
(including the respective subsidiaries thereof) whether in
existence or proposed, to any
Page 6 of 9
<PAGE>
person, firm, partnership, corporation or business for any
reason or purpose whatsoever.
Indemnification If you are made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an
action by the Company against you), by reason of the fact
that you are or were performing services under this
Agreement or the 1997 Agreement then the Company must
indemnify you against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, as
actually and reasonably incurred by you in connection
therewith to the fullest extent provided by Delaware law and
in accordance with the Company's Bylaws. Further, while you
are expected at all times to use your best efforts to
faithfully discharge your duties under this Agreement, the
Company will not hold you liable to itself for errors or
omissions made in good faith where you have not exhibited
gross, willful, or wanton negligence or misconduct or
performed criminal or fraudulent acts that materially damage
the business of the Company; provided, however, that this
sentence shall not apply to acts or omissions between the
effective date of the 1997 Agreement and the Closing Date.
No Prior Agreements You hereby represent and warrant to the Company that your
execution of this Agreement, your employment by the
Company, and the performance of your agreements hereunder
will not violate or be a breach of any agreement with a
former or current employer, client, or any other person or
entity. Further, you agree to indemnify the Company for any
claim, including, but not limited to, attorneys' fees and
expenses of investigation, by any such third party that such
third party may now have or may hereafter come to have
against the Company based upon or arising out of any
non-competition agreement, invention, or secrecy agreement
between you and such third party that was in existence as of
the date of this Agreement.
Complete This Agreement is not a promise of future employment. You
Agreement have no oral representations, understandings, oragreements
with the Company or any of its officers, directors, or
representatives cover ing the same subject matter as this
Agreement. This written Agreement is the final,
complete, and exclusive state ment and expression of the
agreement between the Company and you with respect to all
the terms of this Agreement, and it cannot be varie d,
contradicted, or supplemented by evidence of any prior or
contemporaneous oral or written agree ments. This
written Agreement may not be later modified except by a
further writing signed by a duly authorized officer of
the Company and you, and no term of this Agreement
Page 7 of 9
<PAGE>
may be waived except by writing signed by the party waiving
the benefit of such term.
Notice Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
To the Company: U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600
Washington, D.C. 20007
Attention: General Counsel
To Employee: Jonathan J. Ledecky
1400 34th St., N.W.
Washington, D.C. 20007
Notice shall be deemed given and effective three days after
the deposit in the U.S. mail of a writing addressed as above
and sent first class mail, certified, return receipt
requested, or when actually received. Either party may
change the address for notice by notifying the other party
of such change in accordance with this Notice provision.
Severability If any portion of this Agreement is held invalid or
inoperative, the other portions of this Agreement shall be
deemed valid and operative and, so far as is reasonable and
possible, effect shall be given to the intent manifested by
the portion held invalid or inoperative. This severability
provision shall be in addition to, and not in place of, the
comparable provisions in the No Competition provision.
Governing Law This Agreement shall in all respects be construed according
to the laws of the State of Delaware, other than those
relating to conflicts of laws. Any decision as to breaches
of this Agreement or any provision herein shall be made
pursuant to a final, nonappealable decision of a court.
Binding Effect This Agreement binds and benefits the Company and each of
and Assignment the Spincos, each of their respective successors or assigns,
and your heirs and the personal representatives of your
estate. Without the Company's prior written consent, you
may not assign or delegate this Agreement or any or all
rights, duties, obligations, or interests under it. You
specifically agree that the Company may assign its rights
under No Competition, in whole or in part, to each Spinco
with respect to such Spinco's business.
Superseding Contingent upon the Closing and effective only in that
event,
Page 8 of 9
<PAGE>
Effect this Agreement supersedes any prior oral or written
employment or severance agreements between you and the
Company (including specifically your 1997 Agreement
(including but not limited to its Change of Control
provisions) but specifically excluding your options to
purchase Company stock). Contingent upon the Closing and
effective only in that event, the 1997 Agreement will
terminate as of the Closing Date. Except as set forth
above, this Agreement supersedes all prior or
contemporaneous negotiations, commitments, agreements, and
writings with respect to the subject matter of this
Agreement. All such other negotiations, commitments,
agreements, and writings will have no further force or
effect; and the parties to any such other negotiation,
commitment, agreement, or writing will have no further
rights or obligations thereunder.
Negotiated You agree that you have consulted with counsel of your own
Agreement selection and have negotiated the terms of this Agreement
with the Company. You and the Company agree that this
Agreement should not be construed against either party as
the "drafter."
U.S. Office Products Company
Date: January 13, 1998 By: /s/ Thomas Morgan
-------------------- --------------------------------
Thomas Morgan
President and Chief Executive Officer
I agree to and accept these terms:
Date: January 13, 1998 /s/ Jonathan J. Ledecky
-------------------- ---------------------------------
Jonathan J. Ledecky
Page 9 of 9
<PAGE>
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 NINE MONTHS ENDED
------------------------ ------------------------
JANUARY 24, JANUARY 25, JANUARY 24, JANUARY 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic earnings per share:
Income from continuing operations before extraordinary item... $ 15,431 $ 8,767 $ 37,236 $ 25,393
Income from discontinued operations, net of income taxes...... 3,085 1,997 25,464 20,411
Extraordinary item--loss on early termination of credit
facility.................................................... 612
----------- ----------- ----------- -----------
Net income.................................................... $ 18,516 $ 10,764 $ 62,700 $ 45,192
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding........................... 127,626 89,565 114,758 85,978
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic income per share:
Income from continuing operations before extraordinary item... $ 0.12 $ 0.10 $ 0.32 $ 0.30
Income from discontinued operations, net of income taxes...... 0.03 0.02 0.23 0.24
Extraordinary item............................................ (0.01)
----------- ----------- ----------- -----------
Net income.................................................... $ 0.15 $ 0.12 $ 0.55 $ 0.53
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings per share:
Income from continuing operations before extraordinary item... $ 15,431 $ 8,767 $ 37,236 $ 25,393
Income from discontinued operations, net of income taxes...... 3,085 1,997 25,464 20,411
Extraordinary item--loss on early termination of credit
facility.................................................... 612
----------- ----------- ----------- -----------
Net income.................................................... $ 18,516 $ 10,764 $ 62,700 $ 45,192
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding........................... 127,626 89,565 114,758 85,978
Common stock equivalents from stock options................... 2,512 1,821 2,427 1,846
----------- ----------- ----------- -----------
Total weighted average shares outstanding..................... 130,138 91,386 117,185 87,824
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted income per share:
Income from continuing operations before extraordinary item... $ .12 $ .10 $ .32 $ .29
Income from discontinued operations, net of income taxes...... .02 .02 .22 .23
Extraordinary item............................................ (.01)
----------- ----------- ----------- -----------
Net income.................................................... $ .14 $ .12 $ .54 $ .51
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements 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> 9-MOS
<FISCAL-YEAR-END> APR-25-1998
<PERIOD-START> APR-27-1997
<PERIOD-END> JAN-24-1998
<CASH> 45,258
<SECURITIES> 0
<RECEIVABLES> 334,086
<ALLOWANCES> (9,110)
<INVENTORY> 239,043
<CURRENT-ASSETS> 739,819
<PP&E> 217,228
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,469,442
<CURRENT-LIABILITIES> 605,781
<BONDS> 381,844
0
0
<COMMON> 133
<OTHER-SE> 1,472,789
<TOTAL-LIABILITY-AND-EQUITY> 1,472,922
<SALES> 1,930,113
<TOTAL-REVENUES> 1,930,113
<CGS> 1,390,855
<TOTAL-COSTS> 1,390,855
<OTHER-EXPENSES> 449,867
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,534
<INCOME-PRETAX> 69,711
<INCOME-TAX> 32,535
<INCOME-CONTINUING> 37,236
<DISCONTINUED> 25,464
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,700
<EPS-PRIMARY> .55
<EPS-DILUTED> .54
</TABLE>
